20-F 1 y39936e20vf.htm FORM 20-F 20-F
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2007
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                          to                                         
OR
     
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report                                         
Commission File Number: 1-15182
DR. REDDY’S LABORATORIES LIMITED
(Exact name of Registrant as specified in its charter)
     
Not Applicable
(Translation of Registrant’s name
into English)
  ANDHRA PRADESH, INDIA
(Jurisdiction of incorporation or
organization)
7-1-27, Ameerpet
Hyderabad, Andhra Pradesh 500 016, India
+91-40-23731946

(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
     
Title of Each Class   Name of Each Exchange on which Registered
     
American depositary shares, each representing one equity share

Equity Shares*
  New York Stock Exchange

New York Stock Exchange
*Not for trading, but only in connection with the registration of American depositary shares, pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act. None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
167,912,180 Equity Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes     þ                    No     o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes     o                    No     þ
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YesYes     þ                    No     o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
Large accelerated filerYes     þ                    Accelerated filer     o                    Non-accelerated filer     o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17     o                    Item 18     þ
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes     o                    No     þ
 
 

 


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Currency of Presentation and Certain Defined Terms
     In this annual report on Form 20-F, references to “$” or “U.S.$” or “dollars” or “U.S. dollars” are to the legal currency of the United States and references to “Rs.” or “rupees” or “Indian rupees” are to the legal currency of India. Our financial statements are presented in Indian rupees and translated into U.S. dollars and are prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”). References to “Indian GAAP” are to Indian Generally Accepted Accounting Principles. References to a particular “fiscal” year are to our fiscal year ended March 31 of such year. References to our “ADSs” are to our American Depositary Shares.
     References to “U.S.” or “United States” are to the United States of America, its territories and its possessions. References to “India” are to the Republic of India. References to “EU” are to the European Union. All references to “we,” “us”, “our”, “DRL”, “Dr. Reddy’s” or the “Company” shall mean Dr. Reddy’s Laboratories Limited and its subsidiaries. “Dr. Reddy’s” is a registered trademark of Dr. Reddy’s Laboratories Limited in India. Other trademarks or trade names used in this annual report on Form 20-F are trademarks registered in the name of Dr. Reddy’s Laboratories Limited or are pending before the respective trademark registries.
     Except as otherwise stated in this report, all translations from Indian rupees to U.S. dollars are based on the noon buying rate in the City of New York on March 30, 2007 for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York, which was Rs.43.10 per U.S.$1.00. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate. As of September 24, 2007, that rate was Rs.39.50 per U.S.$1.00.
     Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.
     Information contained in our website, www.drreddys.com, is not part of this Annual Report and no portion of such information is incorporated herein.
Forward-looking and Cautionary Statement
     IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN 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 “EXCHANGE ACT”). THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN 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 SECTIONS ENTITLED “RISK FACTORS” AND “OPERATING AND FINANCIAL REVIEW AND PROSPECTS” AND ELSEWHERE IN THIS REPORT. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT’S ANALYSIS ONLY AS OF THE DATE HEREOF. IN ADDITION, READERS SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS ANNUAL REPORT AND IN OUR PERIODIC REPORTS AND OTHER DOCUMENTS FILED AND/OR FURNISHED WITH THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) FROM TIME TO TIME.

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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
ITEM 4. INFORMATION ON OUR COMPANY
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8. FINANCIAL INFORMATION
ITEM 9. THE OFFER AND LISTING
ITEM 10. ADDITIONAL INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16. [RESERVED]
ITEM 16.A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16.B. CODE OF ETHICS
ITEM 16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16.D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
ITEM 16.E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
PART III
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
SIGNATURES
EX-8: SUBSIDIARIES
EX-23.1: CONSENT OF KPMG
EX-99.1: CERTIFICATION
EX-99.2: CERTIFICATION
EX-99.3: CERTIFICATION
EX-99.4: CERTIFICATION


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PART I
ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
     Not applicable.
ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE
     Not applicable.
ITEM 3.   KEY INFORMATION
3.A. Selected financial data
     The selected consolidated financial data should be read in conjunction with the consolidated financial statements, the related notes and operating and financial review and prospects, which are included elsewhere in this annual report. The selected consolidated statements of income data for the five years ended March 31, 2007 and selected consolidated balance sheet data as of March 31, 2003, 2004, 2005, 2006 and 2007 have been prepared and presented in accordance with U.S. GAAP and have been derived from our audited consolidated financial statements and related notes except for cash dividend per share. The selected consolidated financial data presented below for fiscal year 2006 reflects the acquisition of Industrias Quimicas Falcon de Mexico effective December 30, 2005 and beta Holding GmbH effective March 3, 2006. The selected consolidated financial data presented below for fiscal year 2006 reflects the acquisition of Industrias Quimicas Falcon de Mexico effective December 30, 2005 and beta Holding GmbH effective March 3, 2006 and therefore the results for fiscal year 2006 are not comparable to the results for prior fiscal years. The selected consolidated financial data presented below for fiscal year 2007 reflects the acquisition of Industrias Quimicas Falcon de Mexico and beta Holding GmbH for the full year and hence is not comparable with results for prior fiscal years.
                                                 
    Fiscal Year Ended March 31,  
    2003**     2004**     2005**     2006     2007  
    (Rs.in millions, U.S.$ in thousands, except share and per share data)  
                                            Convenience  
                                            translation into  
                                            U.S.$
(unaudited)
 
Income Statement Data:
                                               
Product sales
  Rs. 18,069.8     Rs. 20,081.2     Rs. 19,126.2     Rs. 24,077.2     Rs. 64,185.4     U.S.$ 1,489,220  
License fees
                345.7       47.5       27.5       639  
Services income
    3.9       22.3       47.5       142.3       882.2       20,468  
 
                                   
Total revenues
    18,073.7       20,103.5       19,519.4       24,267.0       65,095.1       1,510,327  
Cost of revenues
    7,744.9       9,337.3       9,385.9       12,417.4       34,219.5       793,957  
 
                                   
Gross profit
    10,328.8       10,766.2       10,133.5       11,849.6       30,875.6       716,370  
Operating expenses:
                                               
Selling, general and administrative expenses
    5,103.2       6,542.5       6,774.6       8,028.9       14,051.1       326,012  
Research and development expenses, net
    1,411.8       1,991.6       2,803.3       2,153.0       2,462.7       57,138  
Amortization expenses
    419.5       382.9       349.9       419.9       1,570.9       36,448  
Write-down of intangible assets
                            1,770.2       41,072  
Foreign exchange (gain)/loss
    70.1       (282.5 )     488.8       126.3       (136.8 )     (3,173 )
Other operating (income) / expenses, net
    0.2       83.2       6.0       (320.4 )     (67.0 )     (1,555 )
 
                                   
Total operating expenses
    7,004.8       8,717.7       10,422.6       10,407.7       19,651.1       455,942  
 
                                   
Operating income/(loss)
    3,324.0       2,048.5       (289.1 )     1,441.9       11,224.5       260,428  
Equity in loss of affiliates
    (92.1 )     (44.4 )     (58.1 )     (88.2 )     (62.7 )     (1,454 )
Other (expense) / income, net
    576.8       535.9       454.2       533.6       (661.5 )     (15,348 )
 
                                   
Income before income taxes and minority interest
    3,808.7       2,540.0       107.0       1,887.3       10,500.3       243,626  
 
                                   
Income taxes (expense)/benefit
    (398.1 )     (69.2 )     94.3       (258.3 )     (1,176.9 )     (27,307 )
Minority interest
    (6.7 )     3.4       9.9       (0.1 )     3.5       81  
Net income
  Rs. 3,403.9     Rs. 2,474.2     Rs. 211.2     Rs. 1,628.9     Rs. 9,326.9     U.S.$ 216,400  
 
                                   
Earnings per equity share:
                                               
Basic
  Rs. 22.24     Rs. 16.17     Rs. 1.38     Rs. 10.64     Rs. 58.82     U.S.$ 1.36  
Diluted
  Rs. 22.24     Rs. 16.16     Rs. 1.38     Rs. 10.62     Rs. 58.56     U.S.$ 1.36  
Weighted average number of equity shares used in computing earnings per equity share:*
                                               
Basic***
    153,031,896       153,027,528       153,037,898       153,093,316       158,552,422       158,552,422  
Diluted***
    153,031,896       153,099,196       153,119,602       153,403,846       159,256,476       159,256,476  
Cash dividend per share (excluding dividend tax)
  Rs. 2.50     Rs. 5.00     Rs. 5.00     Rs. 5.00     Rs. 3.75     U.S.$ 0.09  
 
*   Each ADR represents one equity share.
 
**   Effective as of fiscal year 2004, we selected the retroactive modified method of adoption described in Statement of Financial Accounting Standards No. 148 Accounting for Stock Based Compensation – Transition and Disclosure. Accordingly, the operating results for the fiscal year ended March 31, 2003, which is the only prior period impacted, have been modified in accordance with the retroactive modified method of adoption.

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    The Company has reclassified certain expense/income for the fiscal years ended March 31, 2003, 2004 and 2005, between cost of revenues, operating expenses, revenues, other expense/income and other operating expense/income, to conform to the presentation for the year ended March 31, 2006. These reclassifications increased the previously reported gross profit of fiscal year 2003, 2004 and 2005 by Rs.106.6 million, Rs.31.1 million and Rs.47.4 million, respectively, and increased / (reduced) the previously reported operating income of fiscal years 2003 and 2004 by Rs.106.4 million and Rs.(31.7) million, respectively, and reduced the operating loss for the fiscal year 2005 by Rs.77.3 million. There is however, no change in the previously reported net income for the fiscal years 2003, 2004 and 2005.
 
***   On August 30, 2006, we distributed a stock dividend of one equity share for each equity share and ADS issued and outstanding as of August 29, 2006. The number of equity shares and per share information presented in the above select consolidated financial data reflect the effect of this stock dividend.
                                                 
    Fiscal Year Ended March 31,  
    2003     2004     2005     2006     2007  
    (Rs.in millions, U.S.$ in thousands)  
                                            Convenience  
                                            translation into  
                                            U.S.$(unaudited)  
Other Data:
                                               
Net cash provided by / (used in):
                                               
Operating activities
  Rs. 4,366.7     Rs. 3,999.2     Rs. 2,291.6     Rs. 1,643.1     Rs. 11,804.5       U.S.$273,887  
Investing activities
    (1,954.7 )     (6,506.1 )     632.9       (34,524.4 )     592.5       13,746  
Financing activities
    (153 )     (376.1 )     1,931.3       27,210.9       1,753.7       40,689  
Effect of exchange rate changes on cash
    (95 )     (14.2 )     55.8       95.1       118.2       2,741  
Expenditures on property, plant and equipment
    (1,515.7 )     (2,415.6 )     (1,749.2 )     (1,873.3 )     (4,477.2 )     (103,879 )
                                                 
    As of March 31,  
    2003     2004     2005     2006     2007  
    (Rs.in millions, U.S.$ in thousands)  
                                            Convenience  
                                            translation into  
                                            U.S.$(unaudited)  
Balance Sheet Data:
                                               
Cash and cash equivalents
  Rs. 7,273.4     Rs. 4,376.2     Rs. 9,287.9     Rs. 3,712.6     Rs. 17,981.4       U.S.$417,203  
Working capital
    12,023.5       11,103.3       10,770.9       1,345.1       18,933.0       439,280  
Total assets
    23,091.7       26,619.3       29,288.4       68,768.1       85,919.1       1,993,483  
Total long-term debt, excluding current portion
    40.91       31.0       25.1       20,937.1       17,871.0       414,640  
Net assets
    18,831.8       21,039.4       20,953.2       22,271.7       41,578.2       964,692  
Total stockholders’ equity
    18,831.8       21,039.4       20,953.2       22,271.7       41,578.2       964,692  
Exchange Rates
     The following table sets forth, for the fiscal years indicated, information concerning the number of Indian rupees for which one U.S. dollar could be exchanged based on the average of the noon buying rate in the City of New York on the last business day of each month during the period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York. The column titled “Average” in the table below is the average of the daily noon buying rate on the last business day of each month during the year.
                                 
Fiscal Year Ended                
March 31,   Period End   Average   High   Low
2003
    47.53       48.43       49.07       47.53  
2004
    43.40       45.96       47.46       43.40  
2005
    43.62       44.86       46.45       43.27  
2006
    44.48       44.17       46.26       43.05  
2007
    43.10       45.06       46.83       42.78  
     The following table sets forth the high and low exchange rates for the previous six months and is based on the average of the noon buying rate in the City of New York on the last business day of each month during the period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York:
                 
Month   High   Low
Mar 2007
    44.43       42.78  
April 2007
    43.05       40.56  
May 2007
    41.04       40.14  
June 2007
    40.27       40.90  
July 2007
    40.12       40.42  
August 2007
    41.15       40.25  
On September 24, 2007 the noon buying rate in the city of New York was Rs.39.50 per U.S. dollar.

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3.B. Capitalization and indebtedness
     Not applicable.
3.C. Reasons for the offer and use of proceeds
     Not applicable.
3.D. Risk factors
     You should carefully consider all of the information set forth in this Form 20-F and the following risk factors that we face and that are faced by our industry. The risks below are not the only ones we face. Additional risks not currently known to us or that we presently deem immaterial may also affect our business operations. Our business, financial condition or results of operations could be materially or adversely affected by any of these risks. This Form 20-F also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere. See “Forward-Looking Statements.”
RISKS RELATING TO OUR COMPANY AND OUR BUSINESS
Failure of our research and development efforts may restrict introduction of new products, which is critical to our business.
     Our future results of operations depend, to a significant degree, upon our ability to successfully commercialize additional products in our active pharmaceutical ingredients and intermediates, generics and formulations, critical care and biotechnology and drug discovery businesses, as well as our most recent business focus, specialty pharmaceuticals. We must develop, test and manufacture generic products as well as prove that our generic products are the bio-equivalent of their branded counterparts. All of our products must meet and continue to comply with regulatory and safety standards and receive regulatory approvals; we may be forced to withdraw a product from the market if health or safety concerns arise with respect to such product. The development and commercialization process, particularly with respect to innovative products, is both time consuming and costly and involves a high degree of business risk. Our products currently under development, if and when fully developed and tested, may not perform as we expect, necessary regulatory approvals may not be obtained in a timely manner, if at all, and we may not be able to successfully and profitably produce and market such products.
     To develop our products pipeline, we commit substantial efforts, funds and other resources to research and development, both through our own dedicated resources and our collaborations with third parties. Our ongoing investments in new product launches and research and development for future products could result in higher costs without a proportionate increase in revenues. Our overall profitability depends on our ability to continue developing commercially successful products.
     Our dependence on research and development makes it highly important that we recruit and retain high quality researchers and development specialists. Should we fail in our efforts, this could adversely affect our ability to continue developing commercially successful products and, thus, our overall profitability.
If we cannot respond adequately to the increased competition we expect to face in the future, we will lose market share and our profits will go down.
     Our products face intense competition from products commercialized or under development by competitors in all our business segments based in India and overseas. Many of our competitors have greater financial resources and marketing capabilities than we do. Some of our competitors, especially multinational pharmaceutical companies, have greater experience than we do in clinical testing and human clinical trials of pharmaceutical products and in obtaining regulatory approvals. Our competitors may succeed in developing technologies and products that are more effective, more popular or cheaper than any we may develop or license. These developments could render our technologies and products obsolete or uncompetitive, which would harm our business and financial results. We believe some of our competitors have broader product ranges, stronger sales forces and better segment positioning than us, which enables them to compete effectively.
     To the extent that we succeed in being the first to market a generic version of a significant product, and particularly if we obtain the 180-day period of market exclusivity provided under the Hatch-Waxman Act of 1984, as amended, our sales and profit can be substantially increased in the period following the introduction of such product and prior to a competitor’s introduction of the equivalent product or the launch of an authorized generic. Selling prices of generic drugs typically decline, sometimes dramatically, as additional companies receive approvals for a given product and competition intensifies. Our ability to sustain our sales and

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profitability of any product over time is dependent on both the number of new competitors for such product and the timing of their approvals.
     Our generics business is also facing increasing competition from brand-name manufacturers who do not face any significant regulatory approvals or barriers to entry into the generics market. These brand-name companies sell generic versions of their products to the market directly or by acquiring or forming strategic alliances with our competitor generic pharmaceutical companies or by granting them rights to sell “authorized generics.” Moreover, brand-name companies continually seek new ways to delay the introduction of generic products and decrease the impact of generic competition, such as filing new patents on drugs whose original patent protection is about to expire, developing patented controlled-release products, changing product claims and product labeling, or developing and marketing as over-the-counter products those branded products which are about to face generic competition.
If we cannot maintain our position in the Indian pharmaceutical industry in the future, we may not be able to attract co-development, outsourcing or licensing partners and may lose market share.
     In order to attract multinational corporations into co-development and licensing arrangements, it is necessary for us to maintain the position of a leading pharmaceutical company in India. Multinational corporations have been increasing their outsourcing of both active pharmaceutical ingredients and generic formulations to highly regarded companies that can produce high quality products at low cost that conform to standards set in developed markets. If we cannot maintain our current position in the market, we may not be able to attract outsourcing or licensing partners and may lose market share.
If we fail to comply fully with government regulations applicable to our research and development activities or regarding the manufacture of our products, it may delay or prevent us from developing or manufacturing our products.
     Our research and development activities are heavily regulated. If we fail to comply fully with applicable regulations, then there could be a delay in the submission or approval of potential new products for marketing approval. In addition, the submission of an application to a regulatory authority does not guarantee that a license to market the product will be granted. Each authority may impose its own requirements and/or delay or refuse to grant approval, even when a product has already been approved in another country. In the United States, as well as many of the international markets into which we sell our products, the approval process for a new product is complex, lengthy and expensive. The time taken to obtain approval varies by country but generally takes from six months to several years from the date of application. This registration process increases the cost to us of developing new products and increases the risk that we will not be able to successfully sell such new products.
     Also, governmental authorities, including the U.S. Food and Drug Administration (“U.S. FDA”), heavily regulate the manufacture of our products. If we or our third party suppliers fail to comply fully with such regulations, then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. A failure to comply fully with such regulations could also lead to a delay in the approval of new products.
Reforms in the health care industry and the uncertainty associated with pharmaceutical pricing, reimbursement and related matters could adversely affect the marketing, pricing and demand for our products.
     Increasing expenditures for health care have been the subject of considerable public attention in almost every jurisdiction where we conduct business. Both private and governmental entities are seeking ways to reduce or contain health care costs. In many countries in which we currently operate, including India, pharmaceutical prices are subject to regulation. The existence of price controls can limit the revenues we earn from our products. In the United States, numerous proposals that would effect changes in the United States health care system have been introduced or proposed in Congress and in some state legislatures, including the enactment in December 2003 of expanded Medicare coverage for drugs, which became effective in January 2006. In Germany, an important market for us, the government has introduced several healthcare reforms in order to control healthcare spending and promote the prescribing of generic drugs. As a result, the prices of generic pharmaceutical products in Germany have declined and may further decline in the future. Similar developments may take place in our other key markets. We cannot predict the nature of the measures that may be adopted or their impact on the marketing, pricing and demand for our products.
     In addition, governments throughout the world heavily regulate the marketing of our products. Most countries also place restrictions on the manner and scope of permissible marketing to physicians, pharmacies and other health care professionals. The effect of such regulations may be to limit the amount of revenue that we may be able to derive from a particular product. Moreover, if we fail to comply fully with such regulations, then civil or criminal actions could be brought against us.

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If a regulatory agency amends or withdraws existing approvals to market our products, this may cause our revenues to decline.
     Regulatory agencies may at any time reassess the safety and efficacy of our products based on new scientific knowledge or other factors. Such reassessments could result in the amendment or withdrawal of existing approvals to market our products, which in turn could result in a loss of revenue, and could serve as an inducement to bring lawsuits against us.
If we are sued by consumers for defects in our products, it could harm our reputation and thus our profits.
     Our business inherently exposes us to potential product liability. From time to time, the pharmaceutical industry has experienced difficulty in obtaining desired amounts of product liability insurance coverage. Although we have obtained product liability coverage with respect to products that we manufacture, if any product liability claim sustained against us were to be not covered by insurance or were to exceed the policy limits, it could harm our business and financial condition. This risk is likely to increase as we develop our own new-patented products in addition to making generic versions of drugs that have been in the market for some time.
     In addition, product liability coverage for pharmaceutical companies is becoming more expensive. As a result, we may not be able to obtain the type and amount of coverage we desire. Furthermore, the severity and timing of future claims are unpredictable. Our customers may also bring lawsuits against us for alleged product defects. The existence, or even threat of, a major product liability claim could also damage our reputation and affect consumers’ views of our other products, thereby negatively affecting our business, financial condition and results of operations.
If we are unable to patent new products and processes or to protect our intellectual property rights or proprietary information, or if we infringe on the patents of others, our business may be materially and adversely impacted.
     Our overall profitability depends, among other things, on our ability to continuously and timely introduce new generic as well as innovative products. Our success will depend, in part, on our ability in the future to obtain patents, protect trade secrets, intellectual property rights and other proprietary information and operate without infringing on the proprietary rights of others. Our competitors may have filed patent applications, or hold issued patents, relating to products or processes that compete with those we are developing, or their patents may impair our ability to successfully develop and commercialize new products.
     Our success with our innovative products depends, in part, on our ability to protect our current and future innovative products and to defend our intellectual property rights. If we fail to adequately protect our intellectual property, competitors may manufacture and market products similar to ours. We have been issued patents covering our innovative products and processes and have filed, and expect to continue to file, patent applications seeking to protect our newly developed technologies and products in various countries, including the United States. Any existing or future patents issued to or licensed by us may not provide us with any competitive advantages for our products or may even be challenged, invalidated or circumvented by competitors. In addition, such patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products.
     We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation that we seek to protect, in part by confidentiality agreements with licensees, suppliers, employees and consultants. It is possible that these agreements will be breached and we will not have adequate remedies for any such breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Furthermore, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors or we may not be able to maintain the confidentiality of information relating to such products.
Changes in the regulatory environment may prevent us from utilizing the exclusivity periods that are important to the success of our generic products.
     The policy of the U.S. FDA regarding the award of 180 days of market exclusivity to generic manufacturers who challenge patents relating to specific products continues to be the subject of extensive litigation in the United States. During this 180-day market exclusivity period, nobody other than the generic manufacturer who won exclusivity relating to the specific product can market that product. The U.S. FDA’s current interpretation of the Hatch-Waxman Act of 1984 is to award 180 days of exclusivity to the first generic manufacturer who files a Paragraph IV certification under the Hatch-Waxman Act challenging the patent of the branded product, regardless of whether that generic manufacturer was sued for patent infringement.
     The Medicare Prescription Drug, Improvement and Modernization Act of 2003 amended the Hatch-Waxman Act and provide that the 180-day market exclusivity period is triggered by the commercial marketing of the product, as opposed to the old rule under which

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the exclusivity period was triggered by a final, non-appealable court decision. However, the Medicare Prescription Drug Act also contains forfeiture provisions, which, if met, will deprive the first Paragraph IV filer of exclusivity. As a result, under certain circumstances, we may not be able to exploit our 180-day exclusivity period since it may be forfeited prior to our being able to market the product.
     In addition, legal and administrative disputes over triggering dates and shared exclusivities may also prevent us from fully utilizing the exclusivity periods.
If we are unable to defend ourselves in patent challenges, we could be subject to injunctions preventing us from selling our products, resulting in a decrease in revenues, or we could be subject to substantial liabilities that would lower our profits.
     There has been substantial patent related litigation in the pharmaceutical industry concerning the manufacture, use and sale of various products. In the normal course of business, we are regularly subject to lawsuits and the ultimate outcome of litigation could adversely affect our results of operations, financial condition and cash flow. Regardless of regulatory approval, lawsuits are periodically commenced against us with respect to alleged patent infringements by us, such suits often being triggered by our filing of an application for governmental approval, such as a new drug application. The expense of any such litigation and the resulting disruption to our business, whether or not we are successful, could harm our business. The uncertainties inherent in patent litigation make it difficult for us to predict the outcome of any such litigation.
     If we are unsuccessful in defending ourselves against these suits, we could be subject to injunctions preventing us from selling our products, resulting in a decrease in revenues, or to damages, which may be substantial. An injunction or substantial damages resulting from these suits could adversely effect our consolidated financial position, results of operations or liquidity.
If we elect to sell a generic product prior to the final resolution of outstanding patent litigation, we could be subject to liabilities for damages.
     At times we seek approval to market generic products before the expiration of patents for those products, based upon our belief that such patents are invalid, unenforceable, or would not be infringed by our products. As a result, we are involved in patent litigations, the outcome of which could materially adversely affect our business. Based upon a complex analysis of a variety of legal and commercial factors, we may elect to market a generic product even though litigation is still pending. This could be before any court decision is rendered or while an appeal of a lower court decision is pending. To the extent we elect to proceed in this manner, if the final court decision is adverse to us, we could be required to cease the sale of the infringing products and face substantial liability for patent infringement. These damages may be significant as they may be measured by a royalty on our sales or by the profits lost by the patent owner and not by the profits we earned. Because of the discount pricing typically involved with generic pharmaceutical products, patented brand products generally realize a significantly higher profit margin than generic pharmaceutical products. In the case of a willful infringer, the definition of which is unclear, these damages may even be trebled. In April 2006, we launched, and continue to sell, generic versions of Allegra® (fexofenadine) despite the fact that litigation with the company that holds the patents for and sells this branded product is still pending. This is the only product that we have launched prior to the resolution of outstanding patent litigation.
If we do not maintain and increase our arrangements for overseas distribution of our products, our revenues and net income could decrease.
     As of March 31, 2007, we market our products in over 86 countries. Our products are marketed in most of these countries through our subsidiaries as well as joint ventures. Since we do not have the resources to market and distribute our products ourselves in all our export markets, we also market and distribute our products through third parties by way of marketing and agency arrangements. These arrangements may be terminated by either party providing the other with notice of termination or when the contract regarding the arrangement expires. We may not be able to successfully negotiate these third party arrangements or find suitable joint venture partners in the future. Any of these arrangements may not be available on commercially reasonable terms. Additionally, our marketing partners may make important marketing and other commercialization decisions with respect to products we develop without our input. As a result, many of the variables that may affect our revenues and net income are not exclusively within our control when we enter into arrangements like these.
If we fail to comply with environmental laws and regulations or face environmental litigation, our costs may increase or our revenues may decrease.
     We may incur substantial costs complying with requirements of environmental laws and regulations. In addition, we may discover currently unknown environmental problems or conditions. In all countries in which we have production facilities, we are subject to significant environmental laws and regulations which govern the discharge, emission, storage, handling and disposal of a variety of substances that may be used in or result from our operations. If any of our plants or the operations of such plants are shut down, we

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may continue to incur costs in complying with regulations, appealing any decision to close our facilities, maintaining production at our existing facilities and continuing to pay labor and other costs which may continue even if the facility is closed. As a result, our overall operating expenses may increase and our profits may decrease.
Our equity shares and our ADSs may be subject to market price volatility, and the market price of our equity shares and ADSs may decline disproportionately in response to adverse developments that are unrelated to our operating performance.
     Market prices for the securities of Indian pharmaceutical companies, including our own, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as the following can have an adverse effect on the market price of our ADSs and equity shares:
    general market conditions,
 
    speculative trading in our shares and ADSs,
 
    changes in the weight given to our shares in the Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE) indices, and
 
    developments relating to our peer companies in the pharmaceutical industry.
If the world economy is affected due to terrorism, wars or epidemics, it may adversely affect our business and results of operations.
     Several areas of the world, including India, have experienced terrorist acts and retaliatory operations recently. For example, Mumbai was the target of serial railway bombings in July 2006. If the economy of our major markets is affected by such acts, our business and results of operations may be adversely affected as a consequence.
     In recent years, Asia has experienced outbreaks of avian influenza and Severe Acute Respiratory Syndrome, or SARS. If the economy of our major markets is affected by such outbreaks or other epidemics, our business and results of operations may be adversely affected as a consequence.
If we have difficulty in identifying acquisition candidates or consummating acquisitions, our competitiveness and our growth prospects may be harmed.
     In order to enhance our business, we frequently seek to acquire or make strategic investments in complementary businesses or products, or to enter into strategic partnerships or alliances with third parties. It is possible that we may not identify suitable acquisition, strategic investment or strategic partnership candidates, or if we do identify suitable candidates, we may not complete those transactions on terms commercially acceptable to us or at all. We compete with others to acquire companies, and we believe that this competition has intensified and may result in decreased availability or increased prices for suitable acquisition candidates. Even after we identify acquisition candidates and/or announce that we plan to acquire a company, we may ultimately fail to consummate the acquisition. For example, we may be unable to obtain necessary acquisition financing on terms satisfactory to us or may be unable to obtain necessary regulatory approvals, including the approval of antitrust regulatory bodies. The inability to identify suitable acquisition targets or investments or the inability to complete such transactions and the management and financial resources required to pursue such transactions may affect our competitiveness and our growth prospects.
If we acquire other companies, our business may be harmed by difficulties in integration and employee retention, unidentified liabilities of the acquired companies, or obligations incurred in connection with acquisition financings.
     All acquisitions involve known and unknown risks that could adversely affect our future revenues and operating results. For example:
    We may fail to successfully integrate our acquisitions in accordance with our business strategy.
 
    Integration of acquisitions may divert management’s attention away from our primary product offerings, resulting in the loss of key customers and/or personnel, and may expose us to unanticipated liabilities.
 
    We may not be able to retain the skilled employees and experienced management that may be necessary to operate the businesses we acquire. If we cannot retain such personnel, we may not be able to locate or hire new skilled employees and experienced management to replace them.
 
    We may purchase a company that has contingent liabilities that include, among others, known or unknown patent or product liability claims.
 
    Our acquisition strategy may require us to obtain additional debt or equity financing, resulting in additional leverage, or increased debt obligations as compared to equity, and   dilution of ownership.

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    We may purchase companies located in jurisdictions where we do not have operations and as a result we may not be able to anticipate local regulations and the impact such regulations have on our business.
     In addition, if we make one or more significant acquisitions in which the consideration includes the equity shares or other securities, equity interests in us held by holders of the equity shares may be significantly diluted. If we make one or more significant acquisitions in which the consideration includes cash, we may be required to use a substantial portion of our available cash or incur a significant amount of debt or otherwise arrange additional funds to complete the acquisition, which may result in a dilution of earnings per equity share.
Our principal shareholders control us and, if they take actions that are not in your best interests, the value of your investment in our ADSs may be harmed.
     Our full time directors together with members of their immediate families, in the aggregate, beneficially own 25.18% of our issued shares as at March 31, 2007. As a result, these people, acting in concert, are likely to have the ability to exercise significant control over most matters requiring approval by our shareholders, including the election and removal of directors and significant corporate transactions. This control by these directors and their family members could delay, defer or prevent a change in control of us, impede a merger, consolidation, takeover or other business combination involving us, or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, even if that was in our best interest. As a result, the value of your ADSs may be adversely affected or you might be deprived of a potential opportunity to sell your ADSs at a premium.
If we improperly handle any of the dangerous materials used in our business and accidents result, we could face significant liabilities that would lower our profits.
     We handle dangerous materials including explosive, toxic and combustible materials like sodium azide, acrolein and acetyl chloride. If improperly handled or subjected to the wrong conditions, these materials could hurt our employees and other persons, cause damage to our properties and harm the environment. This, in turn, could subject us to significant litigation, which could lower our profits in the event we were found liable.
If there is delay and/or failure in supplies of materials, services and finished goods from third parties, it may adversely affect our business and results of operations.
     In some of our businesses, we rely on third parties for the timely supply of active pharmaceutical ingredients (“API”), specified raw materials, equipment, formulation or packaging services and maintenance services. For instance, we rely on third party manufacturers for our entire supply of finished dosages sold in Germany. Although we actively manage these third party relationships to ensure continuity of supplies and services on time and to our required specifications, some events beyond our control could result in the complete or partial failure of supplies and services or in supplies and services not being delivered on time. Any such failure could adversely affect our results of business and results of operations.
     In the event that we experience a shortage in our supply of raw materials, we might be unable to fulfill all of the API needs of our generics and formulations segments, which could result in a loss of production capacity for these segments. In addition, this could result in a conflict between the API needs of our generics and formulations segments and the needs of customers of our active pharmaceutical ingredients and intermediates segment, some of whom are also our competitors in the formulations segment. In either case, we could potentially lose business from adversely affected customers and we could be subjected to lawsuits.

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If as we expand into new international markets we fail to adequately understand and comply with the local laws and customs , these operations may incur losses or otherwise adversely affect our business and results of operations.
     Currently, we operate our business through subsidiaries and equity investees in other countries. In those countries where we have limited experience in operating subsidiaries, such as Germany and Mexico, and in reviewing equity investees we are subject to additional risks related to complying with a wide variety of national and local laws, including restrictions on the import and export of certain intermediates, drugs, technologies and multiple and possibly overlapping tax structures. In addition, we may face competition in other countries from companies that may have more experience with operations in such countries or with international operations generally. We may also face difficulties integrating new facilities in different countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture. If we do not effectively manage our operations in these subsidiaries and review equity investees effectively, we may lose money in these countries and it may adversely affect our business and results of operations.
Fluctuations in exchange rates and interest rate movements may adversely affect our business and results of operations.
     Our principal subsidiaries are located in the United States, United Kingdom, Germany and Russia and each has significant local operations. A significant portion of our revenues are in other currencies, especially the U.S. dollar, Euro, Rouble and Pound Sterling, while a significant portion of our costs are in Indian rupees. As a result, if the value of the Indian rupee appreciates relative to these other currencies, our revenues measured in rupees may decrease.
     We have entered into borrowing arrangements in connection with our acquisition of betapharm. In the future, we may enter into additional borrowing arrangements in connection with acquisitions or for general working capital purposes. In the event interest rates increase, our costs of borrowing will increase and our results of operations may be adversely affected.
Our success depends on our ability to retain and attract key qualified personnel and, if we are not able to retain them or recruit additional qualified personnel, we may be unable to successfully develop our business
          We are highly dependent on the principal members of our management and scientific staff, the loss of whose services might significantly delay or prevent the achievement of our business or scientific objectives. In India, it is not our practice to enter employment agreements with our executive officers and key employees that are as extensive as are generally used in the United States, and each of those executive officers and key employees may terminate their employment upon notice and without cause or good reason. Currently we are not aware that any executive officer or key employee is planning to leave or retire. Competition among pharmaceutical companies for qualified employees is intense, and the ability to retain and attract qualified individuals is critical to our success. There can be no assurance that we will be able to retain and attract such individuals currently or in the future on acceptable terms, or at all, and the failure to do so would have a material adverse effect on our business, financial condition and results of operations. In addition, we do not maintain “key person” life insurance on any officer, employee or consultant.
We operate in a highly competitive and rapidly consolidating industry.
     We operate in a highly competitive and rapidly consolidating industry. Our competitors, which include major multinational corporations, are consolidating, and the strength of the combined companies could affect our competitive position in all of our business areas. Furthermore, if one of our competitors or their customers acquire any of our customers or suppliers, we may lose business from the customer or lose a supplier of a critical raw material.
RISKS RELATING TO INVESTMENTS IN INDIAN COMPANIES
          We are an Indian company and a substantial part of our operations are conducted, and most of our assets are located, in India. In addition, approximately 14.1% of our total revenues for fiscal 2007 were derived from sales in India. As a result, the following additional risk factors apply.
A slowdown in economic growth in India may adversely affect our business and results of operations.
     Our performance and the quality and growth of our business are necessarily dependent on the health of the overall Indian economy. The Indian economy has grown significantly over the past few years. Any future slowdown in the Indian economy could harm us, our customers and other contractual counterparties. In addition, the Indian economy is in a state of transition. The share of the services sector of the economy is rising while that of the industrial, manufacturing and agricultural sector is declining. It is difficult to gauge the impact of these fundamental economic changes on our business.

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A significant change in the Indian government or in its economic liberalization and deregulation policies may adversely affect the Indian economy, the health of which our business depends upon.
     The Indian government has traditionally exercised and continues to exercise a dominant influence over many aspects of the economy. The present government is a multi-party coalition and therefore there is no assurance that it will be able to generate sufficient cross-party support to implement economic policies or that the existing economic policies will continue. Any significant change in the government’s economic policies could have a significant effect on private-sector entities, including us, and on market conditions and prices of Indian securities, including our shares and our ADSs. India’s trade relationships with other countries can also influence Indian economic conditions, which in turn can affect our business.
If communal disturbances or riots erupt in India, or if regional hostilities increase, this would adversely affect the Indian economy, which our business depends upon.
     India has experienced communal disturbances, terrorist attacks and riots during recent years. If such disturbances continue or are exacerbated, our operational, sales and marketing activities may be adversely affected. Additionally, India has from time to time experienced hostilities with neighboring countries. The hostilities have continued sporadically. The hostilities between India and Pakistan are particularly threatening, because both India and Pakistan are nuclear powers. Hostilities and tensions may occur in the future and on a wider scale. These hostilities and tensions could lead to political or economic instability in India and harm our business operations, our future financial performance and the price of our shares and our ADSs.
If wage costs or inflation rise in India, it may adversely affect our competitive advantages over higher cost countries and our profits may decline.
     Wage costs in India have historically been significantly lower than wage costs in developed countries and have been one of our competitive strengths. However, wage increases in India may increase our costs, reduce our profit margins and adversely affect our business and results of operations.
     In addition, although India’s inflation levels were relatively moderate during fiscal 2007, its inflation levels have been much higher at times during the past decade. According to the monthly economic report for March 2007 released by the department of economic affairs, Ministry of Finance in India, the annual inflation rate in India, as measured by the benchmark wholesale price index (Base 1993-94=100), was 5.74% for the week ended March 31, 2007 as compared with 3.98% for the week ended April 1, 2006. The trend may continue and the rate of inflation may further rise. We may not be able to pass these costs on to our customers by increasing the price we charge for our products. If this occurs, our profits may decline.
In the event that a natural disaster should occur in India, including drought, floods and earthquakes, it could adversely affect our production operations and cause our revenues to decline.
     Our main facilities are situated around Hyderabad, India. This region has experienced earthquakes, floods and droughts in the past and has experienced droughts in recent years. In the event of a drought so serious that the drinking water in the region is limited, the government could cut the supply of water to all industries, including our facilities. This would adversely affect our production operations and reduce our revenues. Even if we take precautions to provide back-up support in the event of such a natural disaster, the disaster may nonetheless affect our facilities, harming production and ultimately our business.
Indian law imposes certain restrictions that limit a holder’s ability to transfer the equity shares obtained upon conversion of ADSs and repatriate the proceeds of such transfer, which may cause our ADSs to trade at a premium or discount to the market price of our equity shares.
     Under certain circumstances, the Reserve Bank of India must approve the sale of equity shares underlying ADSs by a non-resident of India to a resident of India. The Reserve Bank of India has given general permission to effect sales of existing shares or convertible debentures of an Indian company by a resident to a non-resident, subject to certain conditions, including the price at which the shares may be sold. Additionally, except under certain limited circumstances, if an investor seeks to convert the rupee proceeds from a sale of equity shares in India into foreign currency and then repatriate that foreign currency from India, he or she will have to obtain an additional approval from the Reserve Bank of India for each such transaction. Required approval from the Reserve Bank of India or any other government agency may not be obtained on terms favorable to a non-resident investor or at all.

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There are limits and conditions to the deposit of shares into the ADS facility.
     Indian legal restrictions may limit the supply of our ADSs. The only way to add to the supply of our ADSs will be through a primary issuance because the depositary is not permitted to accept deposits of our outstanding shares and issue ADSs representing those shares. However, an investor in our ADSs who surrenders an ADS and withdraws our shares will be permitted to redeposit those shares in the depositary facility in exchange for our ADSs. In addition, an investor who has purchased our shares in the Indian market will be able to deposit them in the ADS program, but only in a number that does not exceed the number of underlying shares that have been withdrawn from and not re-deposited into the depositary facility. Moreover, there are restrictions on foreign institutional ownership of our shares as opposed to our ADSs.
There may be less company information available in Indian securities markets than securities markets in developed countries.
     There is a difference between the level of regulation and monitoring of the Indian securities markets over the activities of investors, brokers and other participants, as compared to the level of regulation and monitoring of markets in the United States and other developed economies. The Securities and Exchange Board of India is responsible for improving disclosure and other regulatory standards for the Indian securities markets. The Securities and Exchange Board of India has issued regulations and guidelines on disclosure requirements, insider trading and other matters. There may, however, be less publicly available information about Indian companies than is regularly made available by public companies in developed countries, which could affect the market for our equity shares.
Indian stock exchange closures, broker defaults, settlement delays, and Indian government regulations on stock market operations could affect the market price and liquidity of our equity shares.
     The Indian securities markets are smaller than the securities markets in the United States and Europe and have experienced volatility from time to time. The regulation and monitoring of the Indian securities market and the activities of investors, brokers and other participants differ, in some cases significantly, from those in the United States and some European countries. Indian stock exchanges have at times experienced problems, including temporary exchange closures, broker defaults and settlement delays and if similar problems were to recur, they could affect the market price and liquidity of the securities of Indian companies, including our shares. Furthermore, any change in Indian government regulations of stock markets could affect the market price and liquidity of our shares.
Financial instability in other countries, particularly emerging market countries in Asia, could affect our business and the price and liquidity of our shares and our ADSs.
     The Indian markets and the Indian economy are influenced by economic and market conditions in other countries, particularly emerging market countries in Asia. Although economic conditions are different in each country, investors’ reactions to developments in one country can have adverse effects on the securities of companies in other countries, including India. Any worldwide financial instability or any loss of investor confidence in the financial systems of Asian or other emerging markets could increase volatility in Indian financial markets or adversely affect the Indian economy in general. Either of these results could harm our business, our future financial performance and the price of our shares and ADSs.
If you are not able to exercise preemptive rights available to other shareholders, your investment in our securities may be diluted.
     A company incorporated in India must offer its holders of shares preemptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages prior to the issuance of any shares, unless these rights have been waived by at least 75.0% of the company’s shareholders present and voting at a shareholders’ general meeting. U.S. investors in our ADSs may be unable to exercise preemptive rights for the shares underlying our ADSs unless a registration statement under the Securities Act of 1933 is effective with respect to the rights or an exemption from the registration requirements of the Securities Act is available. Our decision to file a registration statement will depend on the costs and potential liabilities associated with a registration statement as well as the perceived benefits of enabling U.S. investors in our ADSs to exercise their preemptive rights and any other factors we consider appropriate at the time. We might choose not to file a registration statement under these circumstances. If we issue any of these securities in the future, such securities may be issued to the depositary, which may sell them in the securities markets in India for the benefit of the investors in our ADSs. We cannot assure you as to the value, if any, the depositary would receive upon the sale of these securities. To the extent that you are unable to exercise preemptive rights, your proportional interests in us would be reduced.

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If there is a change in tax regulations, it may increase our tax liabilities and thus adversely affect our financial results.
     Currently, we enjoy various tax benefits and exemptions under Indian tax laws. Any changes in these laws, or their application in matters such as tax exemption on exportation income and transfer pricing, may increase our tax liability and thus adversely affect our financial results.
Stringent labor laws may adversely affect our ability to have flexible human resource policies.
     Labor laws in India are more stringent than in other parts of the world. These laws may restrict our ability to have human resource policies that would allow us to react swiftly to the needs of our business.
If we experience labor union problems our production capacity and overall profitability could be negatively affected.
     Approximately 10% of our employees belong to a number of different labor unions. If we experience problems with our labor unions, our production capacity and overall profitability could be negatively affected.
ITEM 4. INFORMATION ON OUR COMPANY
4.A. History and development of our company
     Dr. Reddy’s Laboratories Limited was incorporated in India under the Companies Act, 1956, by its promoter and our current Chairman, Dr. K. Anji Reddy as a Private Limited Company on February 24, 1984. We were converted to a Public Limited Company on December 6, 1985 and listed on the Indian Stock Exchanges in August 1986 and on the New York Stock Exchange on April 11, 2001. We are registered with the Registrar of Companies, Andhra Pradesh, Hyderabad, India as Company No. 4507 (Company Identification No. U85195AP1984PTC004507). Our registered office is situated at 7-1-27, Ameerpet, Hyderabad – 500 016, Andhra Pradesh, India and the telephone number of our registered office is +91-40-23731946. The name and address of our registered agent in the United States is Dr. Reddy’s Laboratories, Inc. 200 Somerset Corporate Boulevard (Bldg II), Bridgewater, New Jersey 08807.
     Key business developments:
     In April 2006, we launched sales of fexofenadine hydrochloride, the AB-rated generic equivalent of Allegra®, despite the fact that litigation was still pending with Sanofi-Aventis, the holder of patents for this branded product. We continue to sell this generic product. This is the only product that we have launched prior to the resolution of outstanding patent litigation. In September 2002, we filed an ANDA for fexofenadine hydrochloride tablets 30 mg, 60 mg and 180 mg with a Paragraph IV certification on all orange book patents. We were granted summary judgment with respect to three patents. Five patents remain in the litigation, which is pending in the United States District Court for the District of New Jersey.
     In May 2006, our wholly owned subsidiary, Reddy Pharma Iberia, S.A., acquired marketing authorizations and marketing authorization applications for certain specialty pharmaceutical products, along with the related trademark rights and physical inventories of the products, from Laboratorios Litaphar, S.A. (“Litaphar”) for a total consideration of Rs.218.9 million (Euro 3.7 million). As a result of this acquisition, we acquired an opportunity to sell those products using their existing brand names through our generics sales and marketing network.
     In June 2006, we launched sales of Proscar® and Zocor® as authorized generics pursuant to an agreement we entered into with Merck & Co., Inc. (“Merck”) in January 2006. This agreement permitted us to distribute and sell generic versions of finasteride and simvastatin (sold by Merck under the brand names Proscar® and Zocor®, respectively) upon the expiration of Merck’s patents covering these products, provided that one or more other companies obtain 180-day exclusivity after the expiration of the patents for either product. Subsequent to our entering into this agreement, the patents for both of these products expired and other companies obtained 180-day exclusivity, thereby allowing us to launch the authorized generics products. Under this agreement, during the 180-day exclusivity period, we procured these products from Merck at specified rates and sold them to our customers.
     In September 2006, we entered into an agreement with ClinTec International for the joint development of an anti-cancer compound, DRF 1042, belonging to the Topoisomerase inhibitors class of compounds, for use as potential treatment of various types of cancer. We have completed Phase I clinical trials for DRF 1042 in India. Under the terms of the agreement, we and ClinTec International will co-develop DRF 1042, undertaking Phase II and Phase III clinical trials, with the aim of securing U.S. FDA and European Agency for the Evaluation of Medicinal Products (“EMEA”) approvals. We have granted ClinTec International the commercialization rights for most of Europe, including major European markets, and we retain the commercialization rights for the rest of the world, including the United States. Upon commercialization of the product, we will receive a royalty on sales by ClinTec

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International in its designated territories and ClinTec International will receive a royalty on sales by us in the United States. In the event either party out-licenses the drug product, the proceeds from such an arrangement will be shared by both the parties in a pre-determined ratio (excluding the proceeds from out-licenses of the drug product to our territories outside the United States). We will also retain the exclusive, worldwide rights to supply commercial quantities of the drug product.
     In October 2006, we settled patent litigation with GlaxoSmithKline plc (“GlaxoSmithKline”) relating to sumatriptan succinate tablets, the generic version of GlaxoSmithKline’s Imitrex® tablets. The terms of the settlement, which remain subject to government review, provide that we may exclusively distribute an authorized generic version of sumatriptan succinate tablets (in the 25 mg, 50 mg and 100 mg strengths) in the United States, with an expected launch date late in the fourth quarter of calendar year 2008, ahead of the expiration of the pediatric exclusivity on the applicable patent on February 6, 2009. GlaxoSmithKline’s Imitrex® tablets, which are indicated for the acute treatment of migraine attacks in adults, had U.S. sales of U.S.$890 million for the 12 month period ending June 30, 2006 according to Operations Research Group International Medical Statistics (“ORG IMS”) in its moving annual total report.
     In November 2006, we completed a public offering of 14,300,000 American Depositary Shares and raised U.S.$228.8 million (including sales pursuant to the underwriters’ over allotment option). The final prospectus supplement was filed with the Securities and Exchange Commission on November 17, 2006 and the offering was completed on November 22, 2006.
     In December 2006, the U.S. FDA granted final approval for our Abbreviated New Drug Application (“ANDA”) for Ondansetron Hydrochloride tablets, 4 mg, 8 mg, 16 mg and 24 mg. As the first company to file an ANDA containing a paragraph IV certification for this product, we were awarded a 180-day period of marketing exclusivity. We commenced the shipment of this product in December 2006. Our Ondansetron Hydrochloride tablets are the AB-rated generic equivalent of GlaxoSmithKline’s Zofran® tablets, a product indicated for the prevention of nausea and vomiting associated with cancer treatment.
     During fiscal 2007, we filed 33 ANDAs, including seven Paragraph IV filings. As of March 31, 2007, we had 69 ANDAs pending at the U.S. FDA. During fiscal 2007, we filed 56 Drug Master Files (“DMFs”) with the U.S. FDA. We also filed 479 dossiers in various international markets.
     As of March 31, 2007, our capital work-in-progress was Rs.2,805.2 million, primarily in India. Our capital work-in-progress is financed entirely through internally generated funds. We are in the process of expanding our existing facilities in our API, generics, integrated product development organization, custom pharmaceutical services and biotechnology businesses.
     During fiscal 2006 and fiscal 2007, no third party made any public takeover offers in respect of our shares and we did not make any public offers to take over any other company.
4.B. Business overview
     We are an emerging global pharmaceutical company with proven research capabilities. We produce active pharmaceutical ingredients and intermediates and finished dosage forms and biotechnology products and market them globally, with a focus on India, the United States, Europe and Russia. We are vertically integrated and use our active pharmaceutical ingredients and intermediates in our own finished dosage products. We conduct basic research in the areas of cancer, diabetes, cardiovascular disease, inflammation and bacterial infection.
     Our total revenues for fiscal 2007 were Rs.65,095.1 million (U.S.$1,510.3 million). We derived 14.1% of these revenues from sales in India, 43.5% from the United States and Canada (“North America”), 7.3% from Russia and other countries of the former Soviet Union, 22.8% from Europe and 12.3% from other countries. Our net income for fiscal 2007 was Rs.9,326.8 million (U.S.$216.4 million).
OUR STRATEGY
     Our vision is to build a discovery-led global pharmaceutical company, with a strong pipeline of generics as well as innovative products. Our strategy to achieve this vision is as follows:
    Our core businesses of active pharmaceutical ingredients and intermediates and formulations are well established with a track record of growth and profitability. We are focused on cost competitiveness and improving our position in existing markets and expanding into selected new markets in an effort to continue this growth and profitability.
 
    In our global generics business, we are building a pipeline of products that will help us drive growth in the medium-term in the United States and Europe. We are focusing on key markets in Europe, including Germany, Spain, Italy, France and Poland in order to build a dominant presence in these markets.
 
    We are also actively pursuing external business development opportunities to supplement our internal growth initiatives, including acquisitions and alliances.
 
    We are also focused on positioning our custom pharmaceutical services business as partner of choice for the strategic outsourcing needs of innovator pharmaceutical companies.
 
    In addition, we are focusing our investments on innovation led businesses, including drug discovery with a goal of building our drug discovery pipeline, and specialty pharmaceuticals, which is currently in the research and development phase. These businesses, while being investment intensive and having long lead times, have the potential to provide significant growth as well as sustained revenues and profitability for much longer periods due to patent protected franchises.

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OUR PRINCIPAL AREAS OF OPERATIONS
     The following table shows our revenues and percentage of total revenues of our formulations, active pharmaceutical ingredients and intermediates, generics, critical care and biotechnology and drug discovery segments for fiscal 2005, 2006 and 2007, respectively:
                                                         
    Fiscal Year Ended March 31,  
Segment   2005     2006     2007  
    (Rs.in millions, U.S.$ in thousands)  
Formulations
  Rs. 7,822.9       40.1 %   Rs. 9,925.9       40.9 %   Rs. 12,318.9       18.9 %   U.S.$ 285,822  
Active pharmaceutical ingredients and intermediates
    6,944.5       35.6       8,238.0       34.0       11,826,8       18.2       274,404  
Generics
    3,577.4       18.3       4,055.8       16.7       33,224.2       51.0       770,863  
Critical care and biotechnology
    527.1       2.7       691.1       2.8       823.9       1.3       19,115  
Drug discovery
    288.4       1.5                     136.8       0.2       3,174  
Custom pharmaceutical services
    311.6       1.6       1,326.8       5.5       6,599.8       10.1       153,127  
Other
    47.5       0.2       29.4       0.1       164.8       0.3       3,824  
 
                                         
Total revenues
  Rs. 19,519.4       100.0 %   Rs. 24,267.0       100.0 %   Rs. 65,095.1       100.0 %   U.S.$ 1,510,327  
 
                                         
Formulations Segment
     Formulations, also referred to as branded finished dosages, are finished pharmaceutical products ready for consumption by the patient. Branded means we package the formulations for sale under our brand name. We sell branded formulations in India, Russia and other emerging markets. Formulations accounted for 18.9% of our revenues in fiscal 2007.
Markets
     We export our branded formulations to over 40 countries worldwide. Our major markets in this segment are India, Russia and other countries of the former Soviet Union, Central Eastern Europe, Southeast Asian countries and Latin America. We have also expanded our presence in emerging markets, such as Romania, Albania, South Africa, Venezuela and in the Middle East region. We have progressively increased the number of countries in which we market our formulations by registering our products in various markets around the world. During fiscal 2007, we filed 376 new product dossiers in various countries around the world. Our formulations portfolio includes brands covering several therapeutic segments.
     The following table sets forth formulations revenues by geographic area for fiscal 2005, 2006 and 2007, respectively:
                                                         
    Fiscal Year Ended March 31,  
    2005     2006     2007  
Country   Revenues     % Total(1)     Revenues     % Total(1)     Revenues     % Total(1)  
    (in millions)             (in millions)             (in millions)          
India
  Rs. 4,360.2       55.7 %   Rs. 5,525.7       55.7 %   Rs. 6,415.0     U.S.$ 148.8       52.1 %
Russia
    2,107.2       26.9       2,583.2       26.0       3,494.3       81.1       28.4  
Ukraine
    257.8       3.3       413.4       4.2       557.3       12.9       4.5  
Kazakhstan
    183.7       2.3       239.4       2.4       319.8       7.4       2.6  
Romania
    102.6       1.3       192.3       1.9       337.5       7.8       2.7  
Belarus
    140.1       1.8       156.4       1.6       203.0       4.7       1.6  
South Africa
    52.1       0.7       142.0       1.4       179.0       4.2       1.5  
Vietnam
    73.5       0.9       95.0       1.0       57.9       1.3       0.5  
Venezuela
    96.0       1.2       55.6       0.6       153.1       3.6       1.2  
Myanmar
    68.1       0.9       81.4       0.8       101.4       2.4       0.8  
Others
    381.6       4.9       441.7       4.4       500.4       11.6       4.1  
 
                                         
Total
  Rs. 7,822.9       100.0 %   Rs. 9,925.9       100.0 %   Rs. 12,318.9     U.S.$ 285.8       100.0 %
 
                                         
 
(1)   Refers to our revenues from formulations sales in the applicable country expressed as a percentage of our total revenues from formulations sales throughout the world.
     India. Our revenues from sales of formulations in India were 52.1% of our total formulations sales in fiscal 2007. In India, our formulations business focuses mainly on the therapeutic categories of cardiovascular, diabetes management, gastro-intestinal and pain

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management. As of March 31, 2007, we had a total of 130 brands. Our top ten brands together accounted for 51.5% of our formulations revenues in India in fiscal 2007. Our sales of formulations in India grew 16.6% in fiscal 2007 as compared to the industry average growth of 14.3% according to ORG IMS in its March Moving Annual Total report for the 12-month period ending March 2007. According to ORG IMS, as of March 2007, we had 38 brands that were ranked either first or second in terms of sales in India in their respective product categories. According to the Center for Marketing and Advertising Research Consultancy (“CMARC”) report for the period November 2006 to February 2007, which measures doctors’ prescriptions, we were the sixth most prescribed company in India.
     New product launches during fiscal 2007 accounted for 3.8% of our revenues from sales of formulations in India. Key product launches included Leon, our brand of levofloxacin; Pecef, our brand of cefpodoxime; Becelac Forte, our brand of lactic acid bacillus fortified with vitamins; Doxobid, our brand of and Doxofylline; and Niltan, our brand of a combination of four phytochemicals, arbutin, glabridin, boswellin, and umbelliferin.
     The following table provides a summary of our sales in India in our therapeutic categories for fiscal 2005, 2006 and 2007, respectively:
                                                                                 
    Fiscal Year Ended March 31,  
    2005     2006     2007  
    Number                     Number                     Number              
Therapeutic   of our                     of our                     of our              
Category (1)   Products     Revenues     %(2)     Products     Revenues     %(2)     Products(3)     Revenues     %(2)  
            (in millions)                     (in millions)                                          
Cardiovascular
    35     Rs. 937.6       21.5       32     Rs. 1,094.1       19.8       45     Rs. 1222.5     U.S.$ 28.1       19.1  
Gastro-intestinal
    38       902.00       20.7       33       1037.5       18.8       35       1292.1       29.7       20.1  
Pain management
    19       713.7       16.4       19       781.6       14.1       20       968.4       22.3       15.1  
Diabetes management
    21       297.9       6.8       24       458.5       8.3       25       479.9       11.0       7.5  
Neutraceuticals
    16       243.9       5.6       14       313.8       5.7       13       324.0       7.5       5.1  
Anti-infectives
    19       324.1       7.4       16       295.9       5.4       21       367.6       8.5       5.7  
Dermatology
    16       206.5       4.7       18       253.5       4.6       16       285.6       6.6       4.5  
Dental
    22       177.3       4.1       21       220.4       4       23       235.5       5.4       3.7  
Urology
    17       131.5       3.0       14       148.7       2.7       16       205.9       4.7       3.2  
Respiratory
    14       177.5       4.1       11       140.2       2.5       13       172.4       4.0       2.7  
Gynecology
    7       110.9       2.5       8       124.1       2.2       9       126.7       2.9       2.0  
Others
    10       137.3       3.1       25       657.4       11.9       38       734.4       16.9       11.4  
 
                                                           
Total
    234     Rs. 4,360.2       100.0 %     235     Rs. 5,525.7       100.0 %     274     Rs. 6415.0     U.S.$ 147.6       100.0 %
 
                                                           
 
(1)   The categorization into therapeutic segments is based on current marketing practice and focuses on therapies.
 
(2)   Refers to the therapeutic category’s revenues from sales in India expressed as a percentage of our total revenues from sales in all of our therapeutic categories in India.
 
(3)   Products of the same strength sold in different packs have been re-grouped as one product in fiscal 2007.
     The following tables summarize the position of our top 10 brands in the Indian market for fiscal 2005, 2006 and 2007, respectively:
                                 
            Rank of our Brand   Market Share of    
    Therapeutic   Therapeutic Sub-   Within Product   Our Brand Within   Brand
Brand   Category   Category(1)   Category(1)   Product Category (2)   Growth(3)
Nise
  Pain management   Non-steroidal anti-inflammatory     1       28 %     25 %
Omez
  Gastro-intestinal   Anti-ulcerant     1       49.3       13.4  
Stamlo
  Cardiovascular   Anti-hypertensive     1       23.6       4.1  
Stamlo beta
  Cardiovascular   Anti-hypertensive     2       16.4       7.9  
Enam
  Cardiovascular   Anti-hypertensive     2       24.8       (2.3 )
Atocor
  Cardiovascular   Lipid lowering agent     4       8.8       15.3  
Razo
  Gastro-intestinal   Anti-ulcerant     1       11.7       41.9  
Reclimet
  Diabetes management   Sulphonylurea anti-diabetic     2       13.0       49.7  
Clamp
  Anti-infectives   Anti-infectives     4       8.4       15.6  
Mintop
  Dermatology   Alopecia     1       62.2       8  
 
(1)   Therapeutic sub-categories are the specific groups within each therapeutic category and product categories are the compound groups within each therapeutic sub-category. Source: Derived from Operations Research Group March 2007.
 
(2)   Refers to our brand’s revenues from sales in India expressed as a percentage of total revenues from sales in respective product categories in India. Source: Derived from ORG IMS in its Moving Annual Total report for the 12 month period ending March 2007.
 
(3)   Revenue growth determined based on retail sales over the corresponding 12-month period for the previous year. Source: Derived from ORG IMS in its Moving Annual Total report for the 12 month period ending March 2007.

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    Fiscal Year Ended March 31,  
Brand   2005     2006     2007  
                    (in millions)     %Total(1)  
Nise
  Rs. 537.9     Rs. 736.0     Rs. 872.5     U.S.$ 20.1       13.5 %
Omez
    528.1       690.8       829.2       19.1       12.9  
Stamlo
    298.2       339.7       369.8       8.5       5.8  
Stamlo Beta
    186.7       262.8       267.3       6.1       4.2  
Razo
    65.2       127.3       211.0       4.9       3.3  
Atocor
    115.8       167.2       188.8       4.3       2.9  
Enam
    162.1       172.7       174.1       4.0       2.7  
Reclimet
    79.1       123.7       137.9       3.2       2.2  
Clamp
    100.6       118.3       134.7       3.1       2.1  
Mintop
    98.4       109.1       118.7       2.7       1.9  
 
                             
Total
  Rs. 2,172.1     Rs. 2,847.6     Rs. 3304.0     U.S.$ 76.0       51.5  
 
                             
 
(1)   Refers to the brand’s revenues from sales in India expressed as a percentage of our total revenues from sales in all of our therapeutic categories in India.
     Russia. Russia is our largest international market in our formulations business and our sales of formulations in this market accounted for 28.4% of our revenues in the formulations segment in fiscal 2007. Pharmexpert, a market research firm, ranked us 15th in sales in Russia with a market share of 1.31% as of March 2007 in its moving annual total report for first quarter 2007 (the “Pharmexpert MAT Q1 2007 Report”). Pharmexpert also reported that the market growth during fiscal 2007 was 24%. All of the companies ranked ahead of us by Pharmexpert were either multinational corporations or of European origin. Accordingly, we were the top ranked Indian pharmaceutical company in Russia.
     The following table provides a summary of our revenues in Russia by therapeutic category for fiscal 2005, 2006 and 2007, respectively:
                                                                                 
    Fiscal Year Ended March 31,  
    2005     2006     2007  
    Number                     Number                     Number                        
Therapeutic   of             %     of             %     of                     %  
Category   Products     Revenues     Total(1)     Products     Revenues     Total(1)     Products     Revenues     Total(1)  
            (in millions)                     (in millions)                     (in millions)          
Pain management
    9     Rs. 660.3       31.3 %     9     Rs. 929.6       36.0 %     9     Rs. 1324.8     U.S.$ 30.5       37.9 %
Anti-infectives
    7       505.1       24.0       6       546.5       21.2       6       602.2       13.9       17.2  
Gastro-intestinal
    2       493       23.4       3       608.6       23.6       6       841.8       19.4       24.1  
Cardiovascular
    4       306.2       14.5       4       288.9       11.2       4       266.1       6.1       7.6  
Dermatology
    4       96.4       4.6       4       142.4       5.5       4       192.2       4.4       5.5  
Others
    7       46.2       2.2       6       67.1       2.6       10       267.3       6.8       7.7  
 
                                                           
Total
    33     Rs. 2,107.2       100.0 %     32     Rs. 2,583.1       100.0 %     39     Rs. 3,494.3       81.1       100.0 %
 
                                                           
 
(1)   Refers to the therapeutic category’s revenues from sales in Russia expressed as a percentage of our total revenues from sales in all of our therapeutic categories in Russia.
     The following table provides a summary of our principal products in the Russian market for fiscal 2005, 2006 and 2007, respectively:
                                                             
    Fiscal Year Ended March 31,  
        2005     2006     2007  
    Therapeutic                                    
Brand   Category   Revenues     %Total(1)     Revenues     %Total(1)     Revenues     %Total(1)  
        (in millions)             (in millions)             (in millions)          
Omez
  Gastro-intestinal   Rs. 488.7       23.2 %   Rs. 603.5       23.4 %   Rs. 819.7     U.S.$ 18.9       23.5 %
Ketorol
  Pain management     339.3       16.1 %     511.9       19.8 %     633.0       14.6       18.1 %
Nise
  Pain management     296.8       14.1 %     379.2       14.7 %     665.3       15.3       19.0 %
Ciprolet
  Anti-infectives     450.2       21.4 %     484.7       18.8 %     543.9       12.5       15.6 %
 
                                           
Total
      Rs. 1,575.0       74.7 %   Rs. 1,979.3       76.6 %   Rs. 2,661.9     U.S.$ 61.2       76.2 %
 
                                           
 
(1)   Refers to the brand’s revenues from sales in Russia expressed as a percentage of our total revenues from all formulation sales in Russia.
     Our top four brands, Omez, Ciprolet, Ketorol and Nise, accounted for 76.2% of our formulations revenues in Russia in fiscal 2007. Omez, our anti-ulcerant product and Ciprolet, our product in the anti-infective segment, are ranked as the 47th and 83rd best selling formulation brands, respectively, in the Russian market as of March 2007 by Pharmexpert in its MAT Q1 2007 Report. Nise has also entered Pharmexpert’s top 100 rankings at number 79 and has become the top selling non-steroidal anti-inflammatory drug on the Russian pharmaceutical market for the year ended December 2006 according to Pharmexpert MAT Q1 2007 Report.
     Our strategy in Russia is to focus on the therapeutic areas of gastro-intestinal, pain management, anti-infectives and cardiovascular. Our focus is on building brand leaders in these therapeutic segments. Omez, Ciprolet, Enam and Nise continued to be brand leaders in their respective categories, as reported by the Pharmexpert MAT Q1 2007 Report.

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     Growth during the year was driven by marketing initiatives such as targeting the hospital segment, greater penetration in the key cities of Moscow and St. Petersburg, marketing campaigns for key products and an over the counter (“ OTC”), initiative for certain brands.
     During fiscal 2007, we further expanded our Russian sales force. The hospital division has 26 hospital specialists and nine key account managers, focused on expanding our present network of relationships with hospitals and institutes. The OTC division has 39 medical representatives, whose focus is to establish a network of relationships with OTC distributors in preparation for future OTC product launches
     Other Markets. We have operations in former Soviet Union countries other than Russia, including Ukraine, Kazakhstan, Belarus and Uzbekistan. We also have operations in other emerging markets, such as Venezuela, Vietnam, South Africa, Romania and Myanmar. Our export of formulations to these countries accounted for 15.4% of the revenues in our formulations segment in fiscal 2007.
     In South Africa, we market through our partially owned subsidiary, Dr. Reddy’s Laboratories (Proprietary) Limited (DRLPL). As of March 31, 2007, we held a 60% equity interest in DRLPL. We currently market eight products through DRLPL in South Africa and have 22 products pending registration. During fiscal 2007, we launched sales of amlodipine maleate tablets, terbinafine tablets, fluoxetine capsules, cypreterone and ethynyl estradiol tablets and allerway capsules in South Africa through an in-licensing arrangement.
     In China, we market through our equity investee, Kunshan Rotam Reddy Pharmaceuticals Co. Limited (“KRRP” or “Reddy Kunshan”). As of March 31, 2007, we held a 51.33% equity interest in KRRP. We currently market ten products through KRRP in China and have three products pending registration. During fiscal 2007, KRRP sold one product license. Also, we opened a representative office in China during fiscal 2006 to expand our presence there. We have applied for registration of six products from our representative office, which applications are pending approval.
Sales, marketing and distribution network
     India. We generate demand for our products by promoting them to doctors who prescribe them, and meeting with pharmacists to ensure that the pharmacists stock our brands. Our focus on brand building is thus primarily driven through efforts to build relationships with the medical community. While we do not sell directly to doctors or pharmacists, our approximately 1,695 field personnel frequently visit doctors and pharmacists throughout the country to promote our products. In addition, we sponsor medical conferences in different parts of the country and conduct seminars for doctors. During fiscal 2007, we increased our sales personnel in India by 69.
     We sell our formulations primarily through clearing and forwarding agents to approximately 2,000 stockists who decide which brands to buy based on demand. The stockists pay for our products in an agreed credit period and in turn sell these products to retailers. Our clearing and forwarding agents are responsible for transporting our products to the stockists and ensuring that the stockists maintain adequate supplies of our products. We pay our clearing and forwarding agents on a commission basis. We have insurance policies that cover our products during shipment and storage at clearing and forwarding locations.
     Russia. In Russia, we sell our formulations to some of the principal national distributors directly as well as through our wholly-owned subsidiary located in Russia, OOO Dr. Reddy’s Laboratories, Russia. Our sales and marketing efforts are driven by a team of 195 marketing representatives, 11 regional managers, 4 zone managers and 9 key account managers to promote our products to doctors in 48 cities in Russia. During fiscal 2007, we increased our sales personnel in Russia by 78.
     In the Russian market, credit is generally extended only to customers after they have established a satisfactory history of payment with us. The credit ratings of these customers are based on turnover, payment record and the number of the customers’ branches or pharmacies and are reviewed on a periodic basis. There were no material changes in the credit terms which we extended to our major customers during fiscal 2007.
     Other Markets. Our other key focus markets are South Africa, China, Kazakhstan, Uzbekistan, Ukraine, Belarus, Vietnam, Romania, Venezuela and Sri Lanka, where we have our own sales personnel to promote our products. In South Africa, we sell our products to wholesale distributors, dispensing doctors and retail pharmacies. In China, where we market through KRRP, we have 88 (as of March 31, 2007) marketing representatives covering hospitals. In several of these markets, we market and distribute through local agents. We also have representative offices in several of these countries.

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Manufacturing and Raw Materials
     We have four facilities for the manufacture of formulation products, all of which are situated in India, as of March 31, 2007. We manufacture most of our finished products at these facilities and also use third-party manufacturing facilities as we determine necessary. For each of our products, we endeavor to identify alternate suppliers of our products and the processes applicable to our products. The main difference between active pharmaceutical ingredients as compared to formulations and generics is the form in which they are produced and the way they are packaged. Active pharmaceutical ingredients are manufactured and distributed in bulk. In formulations and generics, these bulk ingredients are converted into finished dosages by adding other ingredients, called excipients, and packaged into individual doses that are ready for consumption by the patient. In fiscal 2007, our active pharmaceutical ingredients and intermediates business provided 59.9% of the active pharmaceutical ingredients and intermediates requirements of our formulations business, with the balance coming from various other suppliers.
     We also established a facility to manufacture oral solid and injectable forms of cyto-toxic and hormonal formulations at a Special Economic Zone located in Visakhapatnam, India. After commercialization of those products, the facility will cater to the requirements of our key markets for those products.
     Our manufacture of formulations is subject to strict quality and contamination controls throughout the manufacturing process. Each production line consists of a series of rooms through which the product passes at different stages of its conversion to a finished dosage. In our facilities, we manufacture formulations in various dosage forms including tablets, capsules, injections and liquids. These dosage forms are then packaged and quarantined to be tested for quality and contamination. The Ministries of Health of Brazil, Latvia and Romania have inspected some of our manufacturing plants. One of our facilities also has the approval of the U.K. Medicines and Health Care Products Regulatory Agency (“MHRA”). In April 2006, we completed the construction of a new facility at Baddi in the state of Himachal Pradesh, India. We are manufacturing our key brands at this facility in Baddi to take advantage of certain financial benefits, which include exemption from income tax and excise duty for a specified period, offered by the government of India to encourage industrial growth in the state of Himachal Pradesh.
Competition
     We compete with different companies in different countries, depending upon therapeutic and product categories, and within each category upon dosage strengths and drug delivery. On the basis of sales, we are the seventh largest pharmaceutical seller in India, with a market share of 2.4% according to the ORG IMS March Moving Annual Total report for the 12-month period ending March 2007. Of the top ten participants in the Indian formulations market, three are multinational corporations and the rest are Indian corporations.
     We believe growth opportunities in India exist and the Indian pharmaceutical business environment underwent considerable changes in fiscal 2006. Some of the most significant changes in the industry are as follows:
    Introduction of the product patent regime, effective as of January 1, 2005;
 
    Implementation of the Value Added Tax (“VAT”) system, effective as of April 1, 2005;
 
    Introduction of the Maximum Retail Price (“MRP”)-based excise duty structure for the pharmaceutical industry;
 
    Higher investments by Indian companies in research and development, as well as an increase in the number of new product launches by Indian companies; and
 
    Improvement in sales of multinational corporations and increasing interest of global multinationals in India.
     Our formulation segment’s principal competitors in the Indian market are Cipla Limited, Glaxo SmithKline Pharmaceuticals Limited, Ranbaxy Laboratories Limited, Nicholas Piramal India Limited, Sun Pharmaceuticals Industries Limited and Zydus-Cadila.
     Our formulation segment’s principal competitors in the Russian market include Berlin Chemi AG, Gedeon Richter Ltd., Krka, dd, Novo mesto, Pliva dd, Nycomed A/S and Egis Pharmaceuticals Ltd.
     In our export markets, we compete with local companies, multinational corporations and companies from other emerging markets. In Russia and in most of our export markets, we believe our products occupy a niche position between the less expensive local products and the more expensive products of the multinational corporations.

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Government regulations
     All pharmaceutical companies that manufacture and market products in India are subject to various national and state laws and regulations, which principally include the Drugs and Cosmetics Act, 1940, the Drugs (Prices Control) Order, 1995 (DPCO), various environmental laws, labor laws and other government statutes and regulations. These regulations govern the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of pharmaceutical products.
     In India, manufacturing licenses for drugs and pharmaceuticals are generally issued by state drug authorities. Under the Drugs and Cosmetics Act, 1940, the state drug administrations are empowered to issue manufacturing licenses for drugs if they are approved for marketing in India by the Drug Controller General of India (“DCGI”). Prior to granting licenses for any new drugs or combinations of new drugs, DCGI clearance has to be obtained in accordance with the Drugs and Cosmetics Act, 1940.
     Pursuant to the amendments in May 2005 to the Schedule Y of the Drugs and Cosmetics Act, 1940, manufacturers of finished dosages are required to submit additional technical data to the DCGI in order to obtain a no-objection certificate for conducting clinical trials as well as to manufacture new drugs for marketing.
     All pharmaceutical manufacturers that sell products in any country are subject to regulations issued by the ministry of health (“MoH”) of the respective country. These regulations govern or influence the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of products.
     Our facilities and products are periodically inspected by various regulatory authorities such as the U.K. MHRA, the South African Medicines Control Council, the Brazilian National Agency of Sanitary Surveillance (also known as “ANVISA”), the Romanian National Medicines Agency, and the World Health Organization, all of which have extensive enforcement powers over the activities of pharmaceutical manufacturers operating within their jurisdiction.
     MoH approval of an application is required before a generic equivalent of an existing or referenced brand drug can be marketed. When processing a generics application, the MoH waives the requirement of conducting complete clinical studies, although it normally requires bioavailability and/or bioequivalence studies. “Bioavailability” indicates the rate and extent of absorption and levels of concentration of a drug product in the blood stream needed to produce a therapeutic effect. “Bioequivalence” compares the bioavailability of one drug product with another, and when established, indicates that the rate of absorption and levels of concentration of the active drug substance in the body are the equivalent for the generic drug and the previously approved drug. A generic application may be submitted for a drug on the basis that it is the equivalent of a previously approved drug. Before approving a generic product, the MoH also requires that our procedures and operations conform to Current Good Manufacturing Practice (“cGMP”) regulations, relating to good manufacturing practices as defined by various countries. We must follow the cGMP regulations at all times during the manufacture of our products. We continue to spend significant time, money and effort in the areas of production and quality testing to help ensure full compliance with cGMP regulations.
     The timing of final MoH approval of a generic application depends on various factors, including patent expiration dates, sufficiency of data and regulatory approvals.
     Under the present drug policy of the government of India, certain drugs have been specified under the DPCO as subject to price control. The government of India established the National Pharmaceutical Pricing Authority (“NPPA”) to control pharmaceutical prices. Under the DPCO, the NPPA has the authority to fix the maximum selling price for specified products. At present, 74 drugs and their formulations are categorized as specified products under the DPCO. A limited number of our formulation products fall in this category. Adverse changes in the DPCO list or in the span of price control can affect pricing, and hence, our Indian revenues.
     On March 22, 2005, the government of India passed the Patents (Amendment) Bill 2005 (the “Amendment”), introducing a product patent regime for food, chemicals and pharmaceuticals in India. The Amendment specifically provides that new medicines (patentability of which is not specifically excluded) for which a patent has been applied for in India on or after January 1, 1995 and for which a patent is granted cannot be manufactured or sold in India by other than the patent holder and its assignees and licensees. This will result in a reduction of the new product introductions in India, as well as other countries where similar legislation has been introduced, for all Indian pharmaceutical companies engaged in the development and marketing of generic finished dosages and APIs. Processes for the manufacture of APIs and formulations were patentable in India even prior to the Amendment, so no additional impact is anticipated from patenting of such processes.

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Active Pharmaceutical Ingredients and Intermediates Segment
     Our active pharmaceutical ingredients and intermediates business contributed 18.2% of our total revenues for fiscal 2007. Active pharmaceutical ingredients are the principal ingredients for finished dosages and are also known as bulk actives or bulk drugs. Active pharmaceutical ingredients become formulations when the dosage is prepared for human consumption in the form of a tablet, capsule or liquid using additional inactive ingredients. Intermediates are the compounds from which active pharmaceutical ingredients are prepared. We produce and market more than 100 different active pharmaceutical ingredients and intermediates in several markets. We export active pharmaceutical ingredients to emerging as well as developed markets covering 78 countries. Our principal markets in this business segment include North America and Europe, which together contributed 34.9% of this segment’s revenues. Our active pharmaceutical ingredients and intermediates business is operated independently from our formulations and generics businesses and, in addition to supplying API to our formulations and generics businesses, we sell APIs to third parties for use in creating generic products, subject to any patent rights of other third parties. Our active pharmaceutical ingredients business also manufactures and supplies all of the API required in our custom pharmaceutical services business. The research and development group within the active pharmaceutical ingredients and intermediates segment contributes to our business by creating intellectual property (principally with respect to novel and non-infringing manufacturing processes and intermediates), providing research intended to reduce the cost of production of our products and developing approximately 15-20 new products every year.
     The following table sets forth active pharmaceutical ingredients and intermediates revenues by geographic area for fiscal 2005, 2006 and 2007, respectively:
                                                         
    Fiscal Year Ended March 31,
    2005   2006   2007
    Revenues   % Total(1)   Revenues   % Total(1)   Revenues   % Total(1)
    (in millions)           (in millions)           (in millions)        
    Rs.           Rs.           Rs.   U.S.$        
Emerging markets
                                                       
India
    1,972.1       28.4 %     2,296.4       27.8 %     2,075.1       48.1       17.5 %
Bangladesh
    127.4       1.8 %     265.7       3.2 %     155.0       3.6       1.3 %
Other countries
    1,841.8       26.5 %     2,558.9       31.1 %     5,397.8       125.3       45.6 %
 
                                                       
Total emerging markets
    3,941.3       56.8 %     5,121.0       62.1 %     7,627.9       177.0       64.4 %
 
                                                       
 
                                                       
Developed markets
                                                       
North America
    1,849.0       26.6 %     1,655.0       20.1 %     2,029.6       47.1       17.2 %
Europe
    1,091.1       15.7 %     1,420.9       17.3 %     2,089.4       48.5       17.7 %
Japan
    63.1       0.9 %     41.1       0.5 %     79.9       1.8       0.7 %
 
                                                       
Total developed markets
    3,003.2       43.2 %     3,117.0       37.9 %     4,198.9       97.4       35.6 %
 
                                                       
Total
    6,944.5       100.0 %     8,238.0       100.0 %     11,826.8       274.4       100.0 %
 
                                                       
 
(1)   Refers to our revenues from API sales in the applicable country expressed as a percentage of our total revenues from API sales throughout the world.
     The following table sets forth the sales of our key active pharmaceutical ingredients and intermediates for fiscal 2005, 2006 and 2007, respectively:
                                                                 
            Fiscal Year Ended March 31,
            2005   2006   2007
            Revenues   %Total(1)   Revenues   %Total(1)   Revenues   U.S.$   %Total(1)
            (in millions)                                        
Product
  Category   Sub-Category                                                        
Sertraline hydrochloride
  Cardiovascular   Anti-hypertensive     138.2       2.0 %     494.1       6.0 %     2,461.5       57.1       20.8 %
Rabeprazole sodium
  Gastrointestinal   Anti-ulcerative     7.4       0.1 %     18.4       0.2 %     875.2       20.3       7.4 %
Ramipril
  Cardiovascular   Anti-hypertensive     783.4       11.3 %     642.5       7.8 %     760.7       17.6       6.4 %
Ciprofloxacin Hcl
  Anti-infective   Anti-bacterial     619.1       8.9 %     778.5       9.5 %     739.6       17.2       6.3 %
Finasteride
  Prostatic Inhibition   Benign Prostatic Hyperplasia     58.4       0.8 %     98.3       1.2 %     580.8       13.5       4.9 %
Ranitidine HCl Form 2
  Gastro-intestinal   Anti-ulcerant     734.3       10.6 %     552.8       6.7 %     523.5       12.1       4.4 %
Naproxen sodium
  Pain management   Anti-inflammatory     470.0       6.8 %     380.4       4.6 %     521.2       12.1       4.4 %
Terbinafine HCl
  Anti-infective   Anti-fungal     194.5       2.8 %     537.2       6.5 %     483.9       11.2       4.1 %
Naproxen
  Pain management   Anti-inflammatory     229.6       3.3 %     375.0       4.6 %     408.0       9.5       3.4 %
Clopidogrel
  Cardiovascular   Anti-platelet agent     79.6       1.1 %     139.9       1.7 %     384.2       8.9       3.2 %
Ibuprofen
  Pain management   Analgesic     460.5       6.6 %     502.3       6.1 %     328.9       7.6       2.8 %
Montelukast
  Respiratory   Anti-allergic     52.6       0.8 %     241.1       2.9 %     285.2       6.6       2.4 %
Losartan potassium
  Cardiovascular   Anti-hypertensive     180.5       2.6 %     172.7       2.1 %     234.4       5.4       2.0 %
Nizatidine
  Gastro-intestinal   Anti-ulcerant     216.8       3.1 %     160.9       2.0 %     223.6       5.2       1.9 %
Atorvastatin
  Cardiovascular   Lipid-lowering agent     252.5       3.6 %     321.1       3.9 %     161.9       3.8       1.4 %
 
(1)   Refers to our revenues from key API sales expressed as a percentage of our total API revenues.

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Sales, Marketing and Distribution
     Emerging Markets. India is an important emerging market, contributing 17.5% to the segment’s revenues in fiscal 2007. In India, we market our active pharmaceutical ingredients to Indian and multinational companies who are also our competitors in our formulations segment.
     In India, our top six products are ciprofloxacin, ranitidine, losartan potassium, sparfloxacin, ramipril and atorvastatin. The market in India is highly competitive with severe pricing pressure and competition from cheaper Chinese imports in several products.
     In India, our sales team works closely with our sales agents to market our products. We market our products through these sales agents, commonly referred to as “indenting agents,” with a focus on regional sales and marketing. The sales are made directly from the factory and to a limited extent through clearing and forwarding agents. Distribution through clearing and forwarding agents is done to give better service to the customer.
     Our sales to other emerging markets were Rs.5,552.8 million for fiscal 2007. Our other key emerging markets include Israel, Turkey, South Korea, Mexico, Brazil, Syria, Argentina, Egypt, Iran, Saudi Arabia, China, South Africa, Indonesia, Jordan and Thailand. While we work through our agents in these markets, our zonal marketing managers also interact directly with our key customers in order to service their requirements. Our strategy is to build relationships with top customers in each of these markets and partner with them in product launches by providing timely technical and analytical support.
     Developed Markets. Our principal markets are North America and Europe. In the United States and Europe, over the next five years, a large number of products are expected to lose patent protection, providing growth opportunities for our active pharmaceutical ingredients and intermediates business. We have been marketing APIs in the United States for over a decade. We market through our subsidiaries in the United States and Europe. These subsidiaries are engaged in all aspects of marketing activity and support our customers’ pursuit of regulatory approval for their products focusing on building long-term relationships with the customers.
     As of March 31, 2007, we had 104 DMFs on file in the United States. As of March 31, 2007, we had filed 51 DMFs in Europe and had 20 certificates of suitability granted by European authorities. For most of these, we are either already supplying commercial quantities or development quantities of API to various generic formulators.
Manufacturing and Raw Materials
     We have seven facilities for the manufacture of our APIs. Six of these facilities have been inspected by the U.S. FDA and follow cGMP. All of these facilities are situated in the state of Andhra Pradesh, India. Six of these facilities have ISO 9001 certification, which is valid until December 5, 2009, at which time we will be reinspected. With over 650 reactors of different sizes offering 2.1 million litres of reaction volume annually, we have the flexibility to produce quantities that range from a few kilograms to several metric tons. The manufacturing process consumes a wide variety of raw materials that we obtain from sources that comply with the requirements of regulatory authorities in the markets to which we supply our products. We procure raw materials on the basis of our requirement planning cycles. We utilize a broad base of suppliers in order to minimize risk arising from dependence on a single supplier. Where possible, we have also entered into annual quantity and price contracts to reduce possible supply risks and minimize costs. Our formulations and generics businesses source approximately 59.9% and 65.2%, respectively, of their API purchases from our active pharmaceutical ingredients and intermediates segment. We also outsource the manufacturing of some of our APIs to third-party manufacturers. The active pharmaceutical ingredients and intermediates segment also sources several APIs from third party suppliers for the emerging markets to optimally utilize the in-house manufacturing capacities for the developed markets, which are more profitable relative to the emerging markets. During fiscal 2007, 5.8% of our total revenues resulted from sale of APIs procured from third-party suppliers. We maintain stringent quality controls when procuring materials from third-party suppliers.
Competition
     The global API market can broadly be divided into regulated and less regulated markets. The less regulated markets offer low entry barriers in terms of regulatory requirements and intellectual property rights. The regulated markets, like the United States and Europe, have high entry barriers in terms of intellectual property rights and regulatory requirements, including facility approvals. As a result, there is a premium for quality and regulatory compliance along with relatively greater stability for both volumes and prices.
     During fiscal 2007, the competitive environment for the API industry underwent significant changes. These changes included increasing consolidation in the global generics industry and vertical integration of some key generic pharmaceutical companies.
     As an API supplier, we compete with a number of manufacturers within and outside India, which vary in size. Our main competitors in this segment are Hetero Drugs Limited, Divi’s Laboratories Limited, Shasun Chemicals and Drugs Limited, Aurobindo

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Pharma Limited, Ranbaxy Laboratories Limited, Cipla Limited, Matrix Laboratories Limited , Sun Pharmaceutical Industries Limited and MSN Laboratories Limited, all based in India. In addition, we experience competition from European and Chinese manufacturers, as well as from Teva Pharmaceuticals Industries Limited, based in Israel.
Government regulations
     All pharmaceutical companies that manufacture and market products in India are subject to various national and state laws and regulations, which principally include the Drugs and Cosmetics Act, 1940, the Drugs (Prices Control) Order, 1995, various environmental laws, labor laws and other government statutes and regulations. These regulations govern the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of pharmaceutical products.
     In India, manufacturing licenses for drugs and pharmaceuticals are generally issued by state drug authorities. Under the Drugs and Cosmetics Act, 1940, the state drug administrations are empowered to issue manufacturing licenses for drugs if they are approved for marketing in India by the DCGI. Prior to granting licenses for any new drugs or combinations of new drugs, the DCGI clearance has to be obtained in accordance with the Drugs and Cosmetics Act, 1940.
     Our active pharmaceutical ingredients and intermediates segment is subject to a number of government regulations with respect to pricing and patents as discussed above under our formulations segment.
     We submit a DMF for active pharmaceutical ingredients to be commercialized in the United States. Any drug product for which an Abbreviated New Drug Application (“ANDA”) is being filed must have a DMF in place with respect to a particular supplier supplying the underlying active pharmaceutical ingredient. The manufacturing facilities are inspected by the U.S. FDA to assess cGMP compliance. The manufacturing facilities and production procedures utilized at the manufacturing facilities must meet U.S. FDA standards before products may be exported to the United States. Six of our manufacturing facilities have been inspected by the U.S. FDA and found “Acceptable.” For European markets, we submit a European DMF and, where applicable, obtain a certificate of suitability from the European Directorate for the Quality of Medicines.
Generics Segment
     Generic drugs are the chemical and therapeutic equivalents of reference brand drugs, typically sold under their generic chemical names at prices below those of their brand drug equivalents. Generic drugs are finished pharmaceutical products ready for consumption by the patient. Our generic products are marketed principally in North America and Europe. These drugs are required to meet governmental standards that are similar to those applicable to their brand-name equivalents and must receive regulatory approval prior to their sale in any given country.
     Our generics operations started in the second half of fiscal 2001. This segment accounted for 51.0% of our total revenues for fiscal 2007, contributing Rs.33,224.2 million. In fiscal 2007, revenues in this segment were Rs.9,601.0 million from sales in Europe, Rs.23,619.4 million from sales in North America and Rs.3.8 million from sales in the rest of the world.

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The following table sets forth the sales of our principal generics finished dosages for fiscal 2005, 2006 and 2007, respectively:
                                                                 
            Fiscal Year Ended March 31,
            2005   2006           2007    
    Therapeutic   Therapeutic   Revenues   %   Revenues   %   Revenues   Revenues   %
Region / Product   Category   Sub-Category   (in millions)   Total(1)   (in millions)   Total(1)   (in millions)   (in millions)   Total(1)(2)
North America
                                                               
Fluoxetine capsules
  Central nervous system   Anti-psychotic   Rs.928.5     26.0     Rs.373.8     9.2     Rs.249.8   U.S. $5.8     0.8 %
Ibuprofen tablets
  Pain management   Analgesic     198.7       5.6       235.1       5.8       86.1       2.0       0.3 %
Ranitidine tablets
  Gastro-intestinal   Anti-ulcerant     194.0       5.4       225.9       5.6       206.0       4.8       0.6 %
Famotidine tablets
  Gastro-intestinal   Anti-ulcerant     141.1       3.9       156.1       3.9       172.1       4.0       0.5 %
Citalopram tablets
  Central nervous system   Anti-psychotic     201.6       5.6       143.4       3.5       289.9       6.7       0.9 %
Ciproflaxacin tablets
  Anti-infective   Anti-bacterial     166.1       4.6       135.3       3.3       259.5       6.0       0.8 %
Tizanidine tablets
  Spasticity   Muscle relaxant     206.2       5.8       62.8       1.6       108.7       2.5       0.3 %
Ranitidine capsules
  Alimentary Tract   Stomach ulcer     84.9       2.4       27.9       0.7       36.1       0.8       0.1 %
Simvastatin AG
  Cardiovascular   Cholestrol regulator                             13,899.4       322.5       41.8 %
Ondansetron
  Gastro-intestinal   Antiemetic antinausient solids                             2,890.1       67.1       8.7 %
Fexofinadine
  Respiratory   Antihistamine Systemic                             2,429.3       56.4       7.3 %
 
      Benign Prostate                                                        
Finasteride AG
  Urology   Hyperlesian                             1,913.6       44.4       5.8 %
Pravastatin
  Cardiovascular   Statins                             158.2       3.7       0.5 %
Simvastatin
  Cardiovascular   Cholestrol regulator                             164.3       3.8       0.5 %
 
                                                             
Total
            2,121.1       59.3       1,360.3       33.6       22,863.1       525.1       68.1 %
 
                                                             
Europe
                                                               
Simvastatin
  Cardiovascular   Cholestrol regulator                 119.0       2.9       1,370.62       30.29       4.1 %
Omeprazole
  Gastro- Intestinal   Anti-Ulcerant     434.1       12.1       786.3       19.4       976.57       21.58       2.9 %
Alendronate
  Women's health   Bone calcium regulator                 21.5       0.5       676.23       14.94       2.0 %
Amlodipine
  Cardiovascular   Anti-Hypertensive     219.9       6.1       371.5       9.2       525.05       11.6       1.6 %
Enalapril & HCT
  Cardiovascular   Anti-Hypertensive                 23.1       0.6       265.34       5.86       0.8 %
 
                                                             
Total
            Rs.654.0       18.2       Rs.1,321.4       32.6       Rs.3,813.81     U.S.$ 84.27       11.4 %
 
                                                             
 
(1)   Refers to our revenues from generics sales in the applicable region expressed as a percentage of our total revenues from generics sales throughout the world.
 
(2)   Sales for betapharm, our recently acquired subsidiary in Germany, have been included from the date of its acquisition in March 2006.
     Generic drugs may be manufactured and marketed only if relevant patents on their brand name equivalents and any additional government-mandated market exclusivity periods have expired, been challenged and invalidated, or otherwise validly circumvented.
     Generic pharmaceutical sales have increased significantly in recent years, due in part to an increased awareness and acceptance among consumers, physicians and pharmacists that generic drugs are the equivalent of brand-name drugs. Among the factors contributing to this increased awareness are the passage of legislation permitting or encouraging substitution and the publication by regulatory authorities of lists of equivalent drugs, which provide physicians and pharmacists with generic drug alternatives. In addition, various government agencies and many private managed care or insurance programs encourage the substitution of generic drugs for brand-name pharmaceuticals as a cost-savings measure in the purchase of, or reimbursement for, prescription drugs. We believe that these factors, together with the large volume of branded products losing patent protection over the coming years, should lead to continued expansion of the generic pharmaceuticals market as a whole. We intend to capitalize on the opportunities resulting from this expansion of the market by leveraging our product development capabilities, manufacturing capacities inspected by various international regulatory agencies and access to our own APIs, which offer significant supply chain efficiencies.
     Through the coordinated efforts of our teams in the United States, Europe and India, we constantly seek to expand our pipeline of generic products. As of March 31, 2007, our U.S. generics pipeline included 69 ANDA applications pending approval at the U.S. FDA. As of March 31, 2007, we had received 37 product approvals from the U.S. FDA and 10 tentative product approvals (tentative approvals do not allow us to market the generic product and are not converted to final approvals until all patent or exclusivity issues for the reference listed drug product have been resolved). As of March 31, 2007, we had received two product approvals in Europe, four product approvals in South Africa, two product approvals in Canada and one product approval in each of Australia and New Zealand. Our product launch plans in Germany will depend on the marketing capacities which we build up and the marketing authorizations which we obtain. As of March 31, 2007, we had obtained 27 marketing authorizations in Germany for products in varying dosage strengths.
     During fiscal 2005, we entered into an agreement with I-VEN Pharma Capital Limited (“I-VEN”) for the joint development and commercialization of generic drug products for the U.S. markets. The agreement gives I-VEN the right to fund up to fifty percent of

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the project costs (development, registration and legal costs) related to these products and the related U.S. Abbreviated New Drug Applications (“ANDA”) filed or to be filed in 2004-05 and 2005-06, subject to a maximum funding right of U.S.$56.0 million. During fiscal 2007, we signed an amendment agreement with I-VEN to reflect a change in the product portfolio and the royalty rate.
Sales, Marketing and Distribution Network
     North America. Dr. Reddy’s Laboratories, Inc., our wholly-owned subsidiary in the United States, is engaged in the marketing of our generic products in North America. In early 2003, we commenced sales of generic products under our own label. We have our own sales and marketing team to market these generic products. During fiscal 2007, we launched ondansetron tablets (under 180 days exclusivity), fexofenadine tablets, nizatidine tablets, pravastatin tablets, meloxicam tablets, simvastatin tablets, finasteride tablets, ranitidine tablets (Rx), famotidine 20mg OTC and ibuprofen/pseudoephedrine OTC. Key account representatives for generic products call on purchasing agents for chain drug stores, drug wholesalers, health maintenance organizations and pharmacy buying groups.
     In January 2006, we entered into an agreement with Merck & Co., Inc. allowing us to distribute and sell generic versions of finasteride and simvastatin (sold by Merck under the brand names Proscar® and Zocor®), upon the expiration of Merck’s patents covered by these products, provided that some other company obtains 180-day exclusivity after the expiration of the patents for either product. Subsequently, the patents for both of these products expired and other companies obtained 180-day exclusivity. Accordingly, we launched sales of these products on June 19, 2006 and June 23, 2006, respectively.
     On March 13, 2006, we acquired trademark rights to three off-patent products, along with all the physical inventories of the products, from PDL Biopharma, Inc (“PDL”) for a total consideration of Rs.122.7 million. PDL is a company focused on the development and commercialization of novel therapies for treatment of inflammation and autoimmune diseases, acute cardiac conditions and cancer. As a result of the acquisition, we acquired an opportunity to sell these products using their existing brand names through our generics sales and marketing network.
     In 2001, we entered into a profit sharing marketing alliance with Par Pharmaceuticals, Inc. to market certain prescription generic formulations, none of which are over-the-counter products. We currently market six generic products through Par Pharmaceuticals, Inc.
     We market famotidine 10 mg tablets and ranitidine 75 mg tablets through Leiner Health Products, LLC (“Leiner”). In 2002, we entered into a 15-year exclusive agreement with Leiner to market additional over-the-counter products in the United States pursuant to which we launched our first product, ibuprofen/pseudoephedrine, during fiscal 2007. However, we terminated these over-the-counter product agreements with Leiner on April 18, 2007. This action was taken by us after receiving notice that, on March 16, 2007, Leiner had been served with a list of inspection observations on a Form 483 from the U.S. FDA and, in response thereto, on March 20, 2007, suspended all of its packaging, production and distribution of over-the-counter products manufactured, packaged or tested at its facilities in the United States. Under the terminated agreement, we had provided Leiner with supplies of API to produce over-the-counter products as well as supplies of finished dosage tablets, and rights to market certain of our over-the-counter products under development.
     In Canada, in fiscal 2002, we entered into a profit sharing arrangement with Cobalt Pharmaceuticals Inc. and Pharmascience Inc. to market certain of our generic products.
     United Kingdom. Dr. Reddy’s Laboratories (U.K.) Limited, which we acquired in fiscal 2003, is engaged in the marketing of our generic products in the United Kingdom and other European Union countries. We currently market approximately 30 generic products representing over 89 dosage strengths. New product launches in fiscal 2007 included the generic versions of Sumatriptan. We also seek to expand our presence to the other European countries either directly or through strategic alliances.
     Germany. In March 2006, we acquired 100% of beta Holding GmbH (“betapharm”) from 3i Group plc, a European private equity house. This acquisition allowed us to enter the German market. The German market has significant barriers to entry that largely emanate from the fact that generics in Germany are prescribed by brand rather than by active ingredient. The German generics market has certain distinct characteristics, as compared with other major markets including the United States, Japan and the United Kingdom. These include the method of promoting generics, the reimbursement and insurance system and the structure of the retail channel. The German government is currently focused on reducing healthcare spending. During fiscal 2007, the German government passed the Economic Optimization of Pharmaceutical Care Act (“Arzneimittelversorgungs-Wirtschaftlichkeisgestz” or “AVWG”) which became effective as of May 1, 2006, which also is designed to contain increased pharmaceutical costs. The AVWG’s provisions include, among other things: prohibitions on the provision of free goods to health professionals (including wholesalers, pharmacists, medical institutions, physicians etc.); limitations on the payment of rebates to wholesalers and pharmacists; prohibitions on price increases for medicinal products prior to March 31, 2008; implementation of additional mandatory rebates of 10% if pharmaceutical prices are not 30% below the reference prices as published by the Federal Associations of Healthcare Insurance funds; reduction of

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fixed prices as of July 1, 2006; and empowering the statutory health insurance funds to waive copayments by patients. Due to the AVWG, insurance companies operating in Germany have the power to influence prices in that country, and they have done so by releasing several products from co-payment. Going forward, we expect these insurance companies to further exert their influence to contain healthcare costs via the Federal Association of Healthcare Insurance Funds, which has far-reaching powers in the German health care system based on self-government of the participants in the system.
     Through our national German sales force, we sell a broad and diversified range of generic pharmaceutical products, under the “beta” brand. The sales force targets primary care physicians and pharmacists and the key account management team targets insurance companies, various doctors and pharmacist associations. These efforts are supported by a direct marketing team and an active public relations program. Value-added services provided by the beta institut fur sozialmedizinische Forschung und Entwicklung GmbH, also known as the beta Institute for Sociomedical Research, are fully integrated into the sales and marketing effort and provide a unique differentiation point for our sales calls. The beta Institute for Sociomedical Research is a non-profit organization engaged in research and development in order to seek means of improving the healthcare process in ways which promote the psychological welfare of patients.
     Our sales force promotes products to physicians and pharmacies by emphasizing product-specific factors, promoting our reputation and other promotional and customer relationship activities.
     betapharm’s key account management function focuses on statutory health insurance funds and various associations, to increase their influence in the generics market. betapharm is one of the few generic companies that have concluded agreements with the statutory health insurance funds.
Manufacturing and Raw Materials
     As with formulations, generics are packaged in individual doses for consumption by the patient. In fiscal 2007, our generics segment procured 65.2% of its API requirements from our active pharmaceutical ingredients and intermediates segment.
     For a majority of the products we sell in the United States and the United Kingdom (to the extent not manufactured in the United Kingdom), we manufacture our finished products at our plant in Bachupally, Andhra Pradesh, India. The facility in Andhra Pradesh, India is designed for the manufacture of tablets and hard gelatin capsules. We added large batch size tableting and pellets capabilities in this facility during fiscal 2003. We are dependent on third parties for the supply of the inactive pharmaceutical ingredients used in our products.
     For our manufacturing operations in India, we source most of the raw material requirements with respect to the active pharmaceutical ingredients internally from our active pharmaceutical ingredients and intermediates segment. We are required to identify the suppliers of all the raw materials for our products in the drug applications that we file with the U.S. FDA If raw materials for a particular product become unavailable from an approved supplier specified in a drug application, we would be required to qualify a substitute supplier with the U.S. FDA, which would likely interrupt manufacturing of the affected product. To the extent practicable, we attempt to identify more than one supplier in each drug application. However, some raw materials are available only from a single source and, in some of our drug applications, only one supplier of raw materials has been identified, even in instances where multiple sources exist. In addition, we obtain a significant portion of our inactive pharmaceutical ingredients from foreign suppliers. Arrangements with international raw material suppliers are subject to, among other things, U.S. FDA regulations, various import duties and other government clearances.
     Our facility in the United Kingdom is located at Beverley. This facility is designed for the packaging and warehousing of pharmaceutical products in a variety of dosage forms, including tablets, capsules, liquids and creams. The facility holds all relevant licenses and authorizations required to conduct all necessary activities, including the supply of materials for use in clinical studies. In addition, the quality systems for ensuring product quality planning and control are ISO 9000 accredited. We closed our other U.K. facility, which had been located at Battersea, in fiscal 2007. We transferred the manufacturing of most of the products from the Battersea facility to our facilities in India.
     For our manufacturing operations in the United Kingdom, we are dependent on third parties for the supply of all pharmaceutical ingredients and packaging materials used in manufactured products. Supply agreements are in place with all of our suppliers. We are required to identify the suppliers of key raw materials, including all active materials used in our products, within our applications to market products within the United Kingdom and Europe. If we wish to change to an alternative supplier, then we are required to substantiate the suitability of the alternative raw materials and seek prior approval from the health authority in each market where our products using the alternative raw materials are marketed.
     We are in the process of expanding our facility at Bachupally, Andhra Pradesh to manufacture tablets and capsules. We are also

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in the process of establishing a facility at a Special Economic Zone located in Visakhapatnam, India to manufacture tablets and capsules. Upon completion of the facility, and commercialization of such products, the facility will cater to the requirements of North American and European customers for those products.
     In Germany, manufacturing of betapharm’s products and the logistics function have been outsourced to third party providers under supply and service agreements. In fiscal 2008, we intend to commence shifting manufacturing of betapharm’s products and the logistics function from third party providers to our facilities in India.
Competition
     Revenues and gross profit derived from the sales of generic pharmaceutical products are affected by certain regulatory and competitive factors. As patents and regulatory exclusivity for brand name products expire, the first off-patent manufacturer to receive regulatory approval for generic equivalents of such products is generally able to achieve significant market penetration. As competing off-patent manufacturers receive regulatory approvals on similar products, market share, revenues and gross profit typically decline, in some cases significantly. Accordingly, the level of market share, revenues and gross profit attributable to a particular generic product is normally related to the number of competitors in that product’s market and the timing of that product’s regulatory approval and launch, in relation to competing approvals and launches. Consequently, we must continue to develop and introduce new products in a timely and cost-effective manner to maintain our revenues and gross margins. In addition, the other competitive factors critical to this business include price, product quality, prompt delivery, customer service and reputation. Many of our competitors seek to participate in sales of generic products by, among other things, collaborating with other generic pharmaceutical companies or by marketing their own generic equivalent to their branded products. Our major competitors in the U.S. market include Ranbaxy Laboratories Limited, Teva Pharmaceutical Industries Limited, Barr Laboratories Inc., Mylan Laboratories Inc., Andrx Corporation, Watson Laboratories Inc., and Sandoz, a division of Novartis Pharma A.G.
     Brand-name manufacturers have devised numerous strategies to delay competition from lower cost generic versions of their products. One of these strategies is to change the dosage form or dosing regimen of the brand product prior to generic introduction, which may reduce the demand for the original dosage form as sought by a generic ANDA dossier applicant or create regulatory delays, sometimes significant, while the generic applicant, to the extent possible, amends its ANDA dossier to match the changes in the brand product. In many of these instances, the changes to the brand product may be protected by patent or data exclusivities, further delaying generic introduction. Another strategy is the launch by the innovator or its licensee of an “authorized generic” during the 180-day generic exclusivity period, resulting in two generic products competing for the market rather than just the product that obtained the generic exclusivity. This may result in reduced revenues for the generic company which has been awarded the generic exclusivity period. In January 2006, we entered into an agreement with Merck & Co., Inc., allowing us to distribute and sell generic versions of finasteride and simvastatin (sold by Merck under the brand names Proscar® and Zocor®), upon the expiration of Merck’s patents covered by these products, provided that some other company obtains 180-day exclusivity after the expiration of the patents for either product. Subsequently, the patents for both of these products expired and other companies obtained 180-day exclusivity. Accordingly, we launched sales of these products on June 19, 2006 and June 23, 2006, respectively.
     In Germany, the companies with the largest generics market shares are continuing to increase their generics market shares. The top five generics companies (including their subsidiaries) in Germany hold an aggregate market share of approximately 54.9%, according to INSIGHT HEALTH’s NPI-Gx (Sales March 2007) report. Our key competitors within the German generics market include Sandoz (including its Hexal, Sandoz and 1A Pharma subsidiaries), a division of Novartis Pharma A.G., Ratiopharm GmbH and Stada Arzneimittel AG (including its Stada and Aliud subsidiaries).
Government regulations
U.S. Regulatory Environment
     All pharmaceutical manufacturers that sell products in the United States are subject to extensive regulation by the U.S. federal government, principally pursuant to the Federal Food, Drug and Cosmetic Act, the Hatch-Waxman Act, the Generic Drug Enforcement Act and other federal government statutes and regulations. These regulations govern or influence the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of products.
     Our facilities and products are periodically inspected by the U.S. FDA, which has extensive enforcement powers over the activities of pharmaceutical manufacturers. Non-compliance with applicable requirements can result in fines, criminal penalties, civil injunction against shipment of products, recall and seizure of products, total or partial suspension of production, sale or import of products, refusal of the U.S. government to enter into supply contracts or to approve new drug applications and criminal prosecution. The U.S. FDA also has the authority to deny or revoke approvals of drug active ingredients and dosage forms and the power to halt the

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operations of non-complying manufacturers. Any failure by us to comply with applicable U.S. FDA policies and regulations could have a material adverse effect on the operations in our generics business.
     U.S. FDA approval of an ANDA is required before a generic equivalent of an existing or referenced brand drug can be marketed. The ANDA process is abbreviated because when processing an ANDA, the U.S. FDA waives the requirement of conducting complete clinical studies, although it normally requires bio-availability and/or bio-equivalence studies. An ANDA may be submitted for a drug on the basis that it is the equivalent of a previously approved drug or, in the case of a new dosage form, is suitable for use for the indications specified.
     An ANDA applicant in the United States is required to review the patents of the innovator listed in the U.S. FDA publication entitled Approved Drug Products with Therapeutic Equivalence Evaluations, popularly known as the “Orange Book,” and make an appropriate certification. There are several different types of certifications that can be made. A Paragraph IV filing is made when the ANDA applicant believes its product or the use of its product does not infringe on the innovator’s patents listed in the Orange Book or where the applicant believes that such patents are not valid or enforceable. The first generic company to file a Paragraph IV filing may be eligible to receive a six-month marketing exclusivity period from the date a court rules the patent is invalid or not infringed. A Paragraph III filing is made when the ANDA applicant does not intend to market its generic product until the patent expiration. A Paragraph II filing is made where the patent has already expired. A Paragraph I filing is made when the innovator has not submitted the required patent information for listing in the Orange Book. Another type of certification is made where a patent claims a method of use, and the ANDA applicant’s proposed label does not claim that method of use. When an innovator has listed more than one patent in the Orange Book, the ANDA applicant must file separate certifications as to each patent. Generally, Paragraph IV and Paragraph III filings are made before the product goes off patent, and Paragraph II and Paragraph I filings are made after the patent has expired.
     Before approving a product, the FDA also requires that our procedures and operations conform to Current Good Manufacturing Practice (“cGMP”) regulations, relating to good manufacturing practices as defined in the U.S. Code of Federal Regulations. We must follow cGMP regulations at all times during the manufacture of our products. We continue to spend significant time, money and effort in the areas of production and quality testing to help ensure full compliance with cGMP regulations.
     The timing of final U.S. FDA approval of an ANDA depends on a variety of factors, including whether the applicant challenges any listed patents for the drug and whether the brand-name manufacturer is entitled to one or more statutory exclusivity periods, during which the U.S. FDA may be prohibited from accepting applications for, or approving, generic products. In certain circumstances, a regulatory exclusivity period can extend beyond the life of a patent, and thus block ANDAs from being approved on the patent expiration date. For example, in certain circumstances the U.S. FDA may now extend the exclusivity of a product by six months past the date of patent expiration if the manufacturer undertakes studies on the effect of their product in children, a so-called pediatric extension.
     In June 2003, the U.S. FDA announced reforms in its generic drug review program with the goal of providing patients with greater and more predictable access to effective, low cost generic alternatives to brand name drugs.
     The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act of 2003”) has modified certain provisions of the Hatch-Waxman Act. In particular, significant changes have been made to provisions governing 180-day exclusivity and forfeiture thereof. The new statutory provisions governing 180-day exclusivity may or may not apply to an ANDA, depending on whether the first Paragraph IV certification submitted by any applicant for the drug was submitted prior to the enactment of the Medicare Amendments on December 8, 2003.
     Where the first Paragraph IV certification was submitted on or after December 8, 2003, the new statutory provisions apply. Under these provisions, 180-day exclusivity is awarded to each ANDA applicant submitting a Paragraph IV certification for the same drug with regard to any patent on the first day that any ANDA applicant submits a Paragraph IV certification for the same drug. The 180-day exclusivity period begins on the date of first commercial marketing of the drug by any of the first applicants. However, a first applicant may forfeit its exclusivity in a variety of ways, including, but not limited to (a) failure to obtain tentative approval within 30 months after the application is filed or (b) failure to market its drug by the later of two dates calculated as follows: (x) 75 days after approval or 30 months after submission of the ANDA, whichever comes first, or (y) 75 days after each patent for which the first applicant is qualified for 180-day exclusivity is either (1) the subject of a final court decision holding that the patent is invalid, not infringed, or unenforceable or (2) withdrawn from listing with the U.S. FDA (court decisions qualify if either the first applicant or any applicant with a tentative approval is a party; a final court decision is a decision by a court of appeals or a decision by a district court that is not appealed). The foregoing is an abbreviated summary of certain provisions of the Medicare Act, and accordingly it should be consulted for a complete understanding of both the provisions described above and other important provisions related to 180-day exclusivity and forfeiture thereof.
Where the first Paragraph IV certification was submitted prior to enactment of the Medicare Act, the statutory provisions governing

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180-day exclusivity prior to the Medicare Act still apply. The U.S. FDA interprets these statutory provisions to award 180-day exclusivity to each ANDA applicant submitting a Paragraph IV certification for the same drug on the same day with regard to the same patent on the first day that any ANDA applicant submits a Paragraph IV certification for the same drug with regard to the same patent. The 180-day exclusivity period begins on the date of first commercial marketing of the drug by any of the first applicants or on the date of a final court decision holding that the patent is invalid, not infringed, or unenforceable, whichever comes first. A final court decision is a decision by a court of appeals or a decision by a district court that is not appealed
European Union Regulatory Environment
     The activities of pharmaceutical companies within the European Union are governed by Directive 2001/83EC as amended. This Directive outlines the legislative framework, including the legal basis of approval, specific licensing procedures, and quality standards including manufacture, patient information and pharmaco-vigilance activities.
     Our U.K. facilities are licensed and periodically inspected by the U.K. MHRA Inspectorate, which has extensive enforcement powers over the activities of pharmaceutical manufacturers. Non-compliance can result in product recall and closure. In addition, the U.K. MHRA Inspectorate has approved and periodically inspected our manufacturing facility based in Andhra Pradesh, India for the manufacture of generic tablets and capsules for supply to Europe.
     All pharmaceutical companies that manufacture and market products in Germany are subject to the rules and regulations defined by the German drug regulator, the Bundesinstitut für Arzneimittel und Medizinprodukte (“BfArM”) and the Federal Drug Authorities. Our facilities in Germany are licensed and periodically inspected by the Federal Drug Authorities, which has extensive enforcement powers over the activities of pharmaceutical companies. Non-compliance can result in closure of the facility.
     Prior approval of a Marketing Authorization is required to supply products within the European Union. Such Marketing Authorizations may be restricted to one member state then recognized in other member states or can cover the whole of the European Union, depending upon the form of registration elected. In Germany, Marketing Authorizations have to be submitted for approval to the BfArM.
     Generic or abridged applications omit full non-clinical and clinical data but contain limited non-clinical and clinical data, depending upon the legal basis of the application or to address a specific issue. The majority of our generic applications are made on the basis of essential similarity although other criteria may be applied. In the case of an essentially similar application, the applicant is required to demonstrate that its generic product contains the same active pharmaceutical ingredients in the same dosage form for the same indication as the innovator product. Specific data is included in the application to demonstrate that the proposed generic product is essentially similar to the innovator product with respect to quality, safe usage and continued efficacy. The applicant is also required to demonstrate bioequivalence with the reference product. Once all these criteria are met then a Marketing Authorization may be considered for grant.
     Unlike in the United States, there is no regulatory mechanism within the European Union to challenge any patent protection. Nor is any period of market exclusivity conferred upon the first generic approval. In situations where the period of exclusivity given to the branded product expires before their patent expires, the launch of our product would then be delayed until patent expiration.
     In Germany, the new government passed a new healthcare reform, the Statutory Health Insurance - Competition Strengthening Act or Wettbewerbsstärkungsgesetz (“WSG”), which became effective as of April 1, 2007. Highlights of this new act are:
    private insurance funds cannot refuse to provide health insurance to anyone who is without private health insurance coverage or who wants to switch from the public system; for these patients, private insurance funds need to offer basic rates in the future;
 
    insurance funds are encouraged to enter into contracts with doctors, pharmacies and the pharmaceutical industry designed to lower the costs for the supply of patients with medicinal products (e.g., rebate agreements with the pharmaceutical industry and pharmacists) and integrating different fields of care to lower medical treatment costs (e.g., agreements with doctors requiring general practitioners to be the gatekeepers to access to medical specialists);
 
    insurance funds can cause drugs that are covered by rebate contracts with the pharmaceutical industry to be exempt from co-payments by patients;
 
    in filling prescriptions, pharmacists are required to give prefererence to drugs subject to rebates, unless the physician has explicitly excluded replacement of the prescribed drug;
 
    rebated medicinal products might, depending on individual agreements with physicians, be exempted from individual prescribing limits of the physicians (in Germany, physicians are given prescribing limits by insurance funds based on their number of patients, and if those limits are exceeded, the physicians can be penalized);
 
    patients included in integrated care routes (see above) shall preferably receive rebated medicinal products; and

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    in making decisions pertaining to the prescription of drugs or filling of prescriptions, drugs will be evaluated not only from a benefit perspective but also from a cost perspective.
Canada and South Africa Regulatory Environment
          In Canada and South Africa, we are required to file product dossiers with the particular country’s regulatory authority for permission to market the generic formulation. The regulatory authorities may inspect our manufacturing facility before approval of the dossier.
Critical Care and Biotechnology Segment
     The critical care and biotechnology businesses were started in 1998 to focus on and create a strong technology base in these areas. While this area of our business generates low sales volume, these products generally carry a higher profit margin. Our critical care products are formulations used in hospitals to treat cancer and for supportive care. Our biotechnology products cover recombinant protein therapeutics development.
     The following table provides revenues for this segment for fiscal 2005, 2006 and 2007. The critical care division accounted for 78.02% of this segment’s revenues in fiscal 2007, contributing Rs.642.77 million. The biotechnology division accounted for 21.98% of this segment’s revenues in fiscal 2007, contributing Rs.181.09 million.
                                                         
    Fiscal Year ended March 31,  
    2005     2006     2007  
Division   Revenues     %     Revenues     %     Revenues     % Total  
    (in millions)     Total     (in millions)     Total     (in millions)          
Critical Care
  Rs. 407.9       77.4 %   Rs. 517.5       74.9 %   Rs. 642.8     U.S.$ 14.9       78.0 %
Biotechnology
    119.2       22.6 %     173.6       25.1 %     181.1       4.2       22.0 %
 
                                                 
Total
  Rs. 527.1       100.0 %   Rs. 691.1       100.0 %   Rs. 823.9     U.S.$ 19.1       100.0 %
     The following table sets forth revenues of our critical care and biotechnology segment by geographic area for fiscal 2005, 2006 and 2007, respectively:
                                                         
    Fiscal Year ended March 31,
    2005   2006   2007
Division   Revenues   %   Revenues   %   Revenues   %
    (in millions)   Total(1)   (in millions)   Total(1)   (in millions)   Total(1)
India
  Rs. 360.7       68.4 %   Rs. 450.4       65.2 %   Rs. 555.5     U.S.$ 12.9       67.4 %
Russia
    62.3       11.8 %     93.0       13.4 %     89.9       2.1       10.9 %
Other CIS(1)
    19.4       3.7 %     56.5       8.2 %     50.2       1.2       6.1 %
Other
    84.7       16.1 %     91.2       13.2 %     128.3       2.9       15.6 %
Total
  Rs. 527.1       100 %   Rs. 691.1       100.0 %   Rs. 823.9     U.S.$ 19.1       100 %
 
(1)   Refers to our revenues from market sales in the applicable country expressed as a percentage of our total revenues throughout the world.
     Product Portfolio
     The following table sets forth the sales of our key products in fiscal 2005, 2006 and 2007
                                                             
        Fiscal Year ended March 31,
    Therapeutic   2005   2006   2007
Product   Category   Revenues   %   Revenues   %   Revenues   %
        (Rs. in millions)   Total(1)   (Rs. in millions)   Total(1)   (in millions)   Total(1)
                                        Rs.   U.S.$        
Mitotax
  Ovarian/breast/lung cancer     178.8       33.9 %     231.8       33.5 %     194.17       4.51       23.57 %
Docetere
  Breast/lung cancer     73.2       13.9 %     81.6       11.8 %     94.11       2.18       11.42 %
Cytogem
  Lung/pancreatic cancer     59.1       11.2 %     55.7       8.1 %     130.64       3.03       15.86 %
Dacotin
  Colorectal cancer     25.9       4.9 %     43.8       6.3 %     63.29       1.47       7.68 %
Grafeel
  Supportive therapeutic     119.2       22.6 %     173.6       25.1 %     181.09       4.20       21.98 %
 
                                                           
Total
        456.2       86.5 %     586.5       84.9 %     663.29       15.39       80.51 %
 
                                                           
 
(1)   Refers to our revenues from sales of the applicable product expressed as a percentage of the total revenues of our critical care and biotechnology segment.
     Critical care. We focus on high margin, low volume products for niche markets in India in the area of critical care. Our main

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products are Mitotax (paclitaxel), Cytogem (gemcitabine), Docetere (docetaxel) and Irinocam (irinotecan). We also market Dacotin (oxaliplatin), which is licensed and imported from Debiopharm S.A. of Switzerland. We are also developing oncology generics focused on U.S. and European markets. We have entered into a revenue sharing agreement with Pliva d.d., an Eastern European generics company, for the development and marketing of a group of oncology products for the European markets.
     Biotechnology. Grafeel, the bio-generic version of filgrastim, is the only biotechnology product we sold in fiscal 2007. Filgrastim is a recombinant protein used in chemotherapy-induced neutropenia and in bone marrow transplantation. Grafeel has been launched in India, Brazil and certain other countries.
     We are developing cell-culture and E. Coli based biogeneric recombinant proteins and have a portfolio of products in various stages of development. The most advanced of these developing biotechnology products is rituximab, which we expect to launch in India during the first half of fiscal 2008.
     We view biotechnology as a business with significant potential. Our commitment to the business is reflected in our investments in building the research and development infrastructure, including laboratories and scientific teams.
Sales, Marketing and Distribution Network.
     The marketing of our critical care and biotechnology products is handled by a dedicated sales and marketing team. We sell our products through clearing and forwarding agents in India. In India, the marketing team promotes our products to medical specialists and focuses on sales to hospitals, government agencies and non-government institutional organizations.
     We also have a partnership agreement with Pliva d.d., an Eastern European generics company, for the development by us and marketing by Pliva d.d. of a group of oncology products for the European markets.
Manufacturing and Raw Materials
     Critical care. For our critical care products, we manufacture all of the active pharmaceutical ingredients. The manufacturing of the formulation is undertaken at our formulations facility. We source some of the products from third party suppliers. We have completed construction of a completely contained API facility for the manufacture of cytotoxic products. Construction of another API facility for anti-hormonal products for cancer therapy was completed in August 2005. We have completed construction of a fully contained facility (i.e., an isolated environment where the workers are not exposed to the materials or machinery) in Visakhapatnam, India for the manufacture of oral solid dosage form and injectable forms of cytotoxic as well as hormonal products catering primarily to the U.S. and European markets. The exhibit batches of these products are in progress. As part of our plan to increase our range of cancer therapy products, we also plan to introduce certain other cancer therapy products in the Indian market.
     Biotechnology. We have a facility at Bachupally, Andhra Pradesh, India for the manufacture of our biotechnology products. The manufacture of our biotechnology products involves cloning proteins and then extracting the proteins by fermentation and purification.
Competition
     Critical care. For our critical care products, our main competitors in the oncology market in India are Dabur Pharma Limited, Cipla Limited, Eli Lily & Co. and Aventis India Limited. For our oncology products currently under development, our main competitors include generics companies in India, Europe and the United States with a focus on development of oncology products, including Mayne Group Limited (Australia), Zydus Cadila Group (India) and Pliva d.d. (Croatia).
     Biotechnology. In our biotechnology business, our marketed product faces competition primarily from the innovator company. Given the significant potential of the biogenerics market, several companies are focused on the development of biogenerics, including Sandoz, a division of Novartis Pharma A.G., Teva Pharmaceutical Industries Limited, and Barr Laboratories, Inc.
Government Regulations
     Critical care. For critical care products, the regulations are similar to those discussed in the formulations, API and generics segments.
     Biotechnology. The biotechnology sector in India is governed by the guidelines/rules formulated by the Department of Biotechnology (“DBT”), under the Indian government’s Ministry of Science and Technology. The guidelines cover the entire requirements of various other related ministries/statutory departments of the government of India.

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     A business which intends to manufacture and market biotechnology products is required to form an Institutional Bio Safety Committee (“IBSC”) consisting of internal experts on related fields as well as a nominee of the DBT and Central Pollution Control Board (“CPCB”). The IBSC reviews, verifies and approves the product application before submitting it to the Review Committee of Genetic Manipulation (“RCGM”) under the Indian government’s Ministry of Science and Technology. The RCGM verifies and approves all the data included in the application including the protocol and final reports on animal toxicity and human clinical trials.
     Once clearance is obtained from the RCGM, the business is required to obtain clearance from the Genetic Engineering Approval Committee (“GEAC”) under the Ministry of Environment and Forest, government of India. The GEAC forwards its recommendation to the DBT and DCGI. Upon receipt of a “No Objection Certificate” from the DCGI, the business is required to obtain a manufacturing license from the State Drugs Authority and thereafter can commence commercial marketing.
Drug Discovery Segment
     Drug discovery is a key segment of our business. In this segment, we are actively pursuing discovery and development of new molecules, sometimes referred to as “New Chemical Entities” or “NCEs.” Our research programs focus on the following therapeutic areas:
    Metabolic disorders
 
    Cardiovascular disorders
 
    Bacterial infections
 
    Inflammation
 
    Cancer
     Our research laboratories are based in Hyderabad, India and Atlanta, Georgia, U.S. As of March 31, 2007, we employed a total of 283 scientists, including approximately 56 scientists who held Ph.D. degrees. We pursue an integrated research strategy with our laboratories in the United States focusing on discovery of new molecular targets and designing of screening assays to screen for promising lead molecules followed by selection and optimization of lead molecules and further clinical development of those optimized leads at our laboratories in India. By establishing a research facility in the United States, we have better access to research scientists in the United States, enhancing our screening abilities for new molecular targets and access to high technology platforms.
     While we continue to seek licensing and development arrangements with third parties to further develop our pipeline products, we also conduct clinical development of some of the candidate drugs ourselves where it is economically and technically feasible. Our long-term strategy for drug discovery is to increasingly undertake clinical testing ourselves, as we believe that this will enable us to derive higher value for our compounds. Our goal is to balance internal development of our own product candidates with in-licensing of promising compounds that complement our strengths. We also pursue licensing and joint development of some of our lead compounds with companies looking to implement their own product portfolio.
     In September 2005, we entered into a co-development and commercialization agreement with Denmark based Rheoscience A/S for the joint development and commercialization of balaglitazone (DRF 2593), a partial PPAR-gamma agonist, for the treatment of type 2 diabetes. Under the terms of the agreement, Rheoscience will fund all the costs associated with the Phase III clinical trials of DRF 2593 and we will pay Rheoscience a pre-determined amount towards its share of the development costs. Rheoscience has exclusive marketing rights in the European Union and China, and we have exclusive marketing rights in the rest of the world. Rheoscience is obligated to obtain all necessary regulatory approvals on our behalf in the United States. Upon receiving final approval from the U.S. FDA, we are obligated to make a pre-determined milestone payment to Rheoscience. The agreement is valid for a period of ten years from the date of commercialization. Under the terms of the agreement, if either party chooses to commercialize the product without the other, then the other party will be entitled to a milestone-based royalty on sales. However, if the parties choose to commercialize the product through a third party, then each of the parties is entitled to share a pre-determined percentage of the net proceeds of commercialization received. We also retain the right to supply clinical development and commercial quantities of the requisite active pharmaceutical ingredients on arms-length basis to the party that commercializes DRF 2593. After completion of long term carcinogenicity studies, as at March 2007, DRF 2593 is scheduled to enter Phase III clinical trials.
     In September 2005, we announced the formation of an integrated drug development company, Perlecan Pharma Private Limited (“Perlecan Pharma”), as a joint venture with Citigroup Venture Capital International Growth Partnership Mauritius Limited (“CVC”) and ICICI Venture Funds Management Company (“ICICI Venture”). The terms of the joint venture were amended in March 2006. Under the terms of the joint venture agreement, CVC and ICICI Venture each contributed Rs.1,018 million and we contributed Rs.170 million towards Perlecan’s initial equity capital. Furthermore, the agreement grants us the first right to conduct product development and clinical trials on behalf of Perlecan Pharma on an arm’s length basis, subject to the final decision by the board of

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directors of Perlecan Pharma. During fiscal 2007, we entered into a Research Services Agreement with Perlecan Pharma pursuant to which we provide Perlecan Pharma with clinical development support and services.
     Perlecan Pharma has certain development rights with respect to additional NCE assets that we discover and we have certain commercialization rights with respect to products that Perlecan Pharma develops. In addition, as part of this arrangement, we transferred all rights and title, including the development and commercialization rights, of four NCE assets to Perlecan Pharma. As a result, we own approximately 14.31% of the equity of Perlecan Pharma and we have the right to designate three out of seven directors on the board of Perlecan Pharma. In addition, Perlecan Pharma has issued warrants to us to purchase 45,000,000 equity shares of Perlecan Pharma, the exercise of which is contingent upon the success of certain research and development milestones. If the warrants are fully exercised, then we will own approximately 62.5% of the equity shares of Perlecan Pharma. During fiscal 2007, Perlecan Pharma discontinued the development of DRL 11605, one of the the four NCE assets.
     In September 2006, we entered into an agreement with ClinTec International for the joint development of an anti-cancer compound, DRF 1042, belonging to the Topoisomerase inhibitors class of compounds for use as potential treatment of various types of cancer. We have completed Phase I clinical trials for DRF 1042 in India. Under the terms of the agreement, we and ClinTec International will co-develop DRF 1042, undertaking Phase II and Phase III clinical trials, with the aim of securing U.S. FDA and EMEA approvals. ClinTec International is granted the commercialization rights for most of Europe, including major European markets, and we retain the commercialization rights for the rest of the world, including the United States. Upon commercialization of the product, we will receive a royalty on sales by ClinTec International in its designated territories and ClinTec International will receive a royalty on sales by us in the United States. In the event either party out-licenses the drug product, the proceeds from such an arrangement will be shared by both the parties in a pre-determined ratio (excluding the proceeds from out-licenses of the drug product to our territories outside the United States). We will also retain the exclusive, worldwide rights to supply commercial quantities of the drug product.
     As part of our research program, we pursue collaborations with leading institutions and laboratories all over the world. We enter into these collaborations to utilize the expertise and facilities these institutions and laboratories provide. We have collaborated with the National Cancer Institute in Maryland, which is a part of the United States National Institutes of Health. In February 2006, we entered into an agreement with Argenta Discovery Limited (“Argenta”) for the joint development and commercialization of a novel approach to the treatment of Chronic Obstructive Pulmonary Disease (“COPD”). Under the terms of the agreement, the parties agreed to collaborate to identify clinical candidates from a certain class of our compounds for use as potential treatments for COPD. Both parties agreed to jointly develop the selected candidates from the pre-clinical stage up to Phase IIa (proof-of-concept). Upon successful completion of a Phase IIa trial, the parties may either license-out the candidate for further development and commercialization to a larger pharmaceutical company or continue the further co-development and commercialization themselves. We and Argenta have agreed to fund the joint collaboration up to proof-of-concept and share the development expenses equally and profits at a predetermined ratio. DRF 2546 was identified as candidate that could be developed for COPD, and preclinical development has begun.
     Our investments into research and development of NCEs have been consistently focused towards developing promising therapeutics. In fiscal 2005, 2006 and 2007, we spent Rs.868.9 million, Rs.814.5 million and Rs.774.6, respectively, towards drug discovery activities. In fiscal 2005, 2006 and 2007, we received Rs.288.4 million, Rs.0 and Rs.136.8 in revenues, respectively, from drug discovery activities.
     The compounds currently under development in our pipeline include:
                 
DRF 2593
  Metabolic disorders   Phase II completed   Rheoscience   Long-term carcinogenicity studies completed. Entered Phase III clinical testing in July 2007.
 
               
DRF 10945
  Metabolic disorders   Phase II in progress   Assigned to Perlecan   Completed Proof of Concept for Type IV/V dyslipidemia.
 
               
RUS 3108
  Cardiovascular   Phase I completed   Assigned to Perlecan   Perlecan inducer for the treatment of atherosclerosis.
 
               
 
              Scheduled to enter Phase II clinical testing in April 2008.
 
               
DRL 16536
  Metabolic disorders   Phase I in progress   Assigned to Perlecan   AMPK modulator for the treatment of diabetes.
 
               
 
              Phase I Multiple Ascending Dose scheduled to begin in November 2007.
 
               
DRF 1042
  Oncology   Phase I   Clintec   Scheduled to enter Phase II clinical testing for solid tumors.
     Patents. The status of patents filed and issued as of March 31, 2007 is summarized below:

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Category   USPTO(1)   USPTO(1)   PCT(2)   India   India
    (Filed)   (Granted)   (Filed)   (Filed)   (Granted)
Anti-diabetic
    68       39       60       110       30  
Anti-cancer
    13       8       12       43       12  
Anti-bacterial
    7       4       7       20       2  
Anti-inflammation/ Cardiovascular
    33       9       13       14       1  
Anti-ulcerant
    1       1             1        
Miscellaneous
    4       1       3       23       5  
TOTAL
    126       62       95       211       50  
 
(1)   “USPTO” means the United States Patent and Trademark Office.
 
(2)   “PTC” means the Patent Cooperation Treaty, an international treaty that facilitates foreign patent filings for residents of member countries when obtaining patents in other member countries.
     Stages of Testing / Development. The stages of testing required before a pharmaceutical product can be marketed in the United States are generally as follows:
     
Stage of Development   Description
Preclinical
  Animal studies and laboratory tests to evaluate safety and efficacy, demonstrate activity of a product candidate and identify its chemical and physical properties.
 
   
Phase I
  Clinical studies to test safety and pharmacokinetic profile of a drug in humans.
 
   
Phase II
  Clinical studies conducted with groups of patients to determine preliminary efficacy, dosage and expanded evidence of safety.
 
   
Phase III
  Larger scale clinical studies conducted in patients to provide sufficient data for statistical proof of efficacy and safety.
     For ethical, scientific and legal reasons, animal studies are required in the discovery and safety evaluation of new medicines. Preclinical tests assess the potential safety and efficacy of a product candidate in animal models. The results of these studies must be submitted to the U.S. FDA as part of an Investigational New Drug (“IND”) application before human testing may proceed.
     U.S. law further requires that studies conducted to support approval for product marketing be “adequate and well controlled.” In general, this means that either a placebo or a product already approved for the treatment of the disease or condition under study must be used as a reference control. Studies must also be conducted in compliance with good clinical practice requirements, and adverse event and other reporting requirements must be followed.
     The clinical trial process can take five to ten years or more to complete, and there can be no assurance that the data collected will be in compliance with good clinical practice regulations, will demonstrate that the product is safe or effective, or, in the case of a biologic product, pure and potent, or will provide sufficient data to support U.S. FDA approval of the product. The U.S. FDA may place clinical trials on hold at any point in this process if, among other reasons, it concludes that clinical subjects are being exposed to an unacceptable health risk. Trials may also be terminated by institutional review boards, who must review and approve all research involving human subjects. Side effects or adverse events that are reported during clinical trials can delay, impede, or prevent marketing authorization.
     Scientific Advisory Board. Our Scientific Advisory Board is composed of leading professionals in the field of healthcare and chemical sciences. These professionals contribute to the strategic definition and implementation of pre-clinical development plans for our products. Members of the advisory committee meet individually and as a group with our management on an annual basis.
     
Members    
Dr. Daniel Rader
  Faculty in the Department of Medicine and the Director of Cardiovascular Metabolism unit at the Institute for Diabetes, Obesity and Metabolism, University of Pennsylvania
 
   
Dr. K. Janardhan Reddy
  Professor and Chairman, Department of Pathology, Northwestern University Medical School, Chicago, Illinois, U.S.A.
 
   
Dr. Henry Ginsberg
  Herbert Irving Professor of Medicine, Division of Preventive Medicine, Presbyterian Hospital, New York, U.S.A.
 
   
Dr. Ira J. Goldberg
  Professor of Medicine, Division of Preventive Medicine and Nutrition Columbia University College of Physicians and Surgeons, New York, U.S.A.
 
   
Dr. K. Anji Reddy
  Chairman, Dr. Reddy’s Laboratories Limited
 
   
Dr. Uday Saxena
  Chief Scientific Officer, Dr. Reddy’s Laboratories Limited
 
   
Dr. R. Rajagopalan
  President, Discovery Research, Dr. Reddy’s Laboratories Limited

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Competition
     The pharmaceutical and biotechnology industries are highly competitive. We face intense competition from organizations such as large pharmaceutical companies, biotechnology companies and academic and research organizations. The major pharmaceutical organizations competing with us have greater capital resources, larger overall research and development staff and facilities and considerably more experience in drug development. Biotechnology companies competing with us may have these advantages as well. In addition to competition for collaborators and investors, these companies and institutions also compete with us in recruiting and retaining highly qualified scientific and management personnel.
Government regulations
     Virtually all pharmaceutical and biotechnology products that we or our collaborative partners develop will require regulatory approval by governmental agencies prior to commercialization. The nature and extent to which these regulations apply varies depending on the nature of the products and also vary from country to country. In particular, human pharmaceutical products are subject to rigorous pre-clinical and clinical testing and other approval procedures by the relevant regulatory agency. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country.
     In India, under the Drugs and Cosmetics Act, 1940, the regulation of the manufacture, sale and distribution of drugs is primarily the concern of the state authorities while the Central Drug Control Administration is responsible for approval of new drugs, clinical trials in the country, laying down the standards for drugs, control over the quality of imported drugs, coordination of the activities of state drug control organizations and providing expert advice with a view of bringing about the uniformity in the enforcement of the Drugs and Cosmetics Act, 1940.
     For marketing a drug in the United States, we or our partners will be subject to regulatory requirements governing human clinical trials, marketing approval and post-marketing activities for pharmaceutical products and biologics. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record-keeping and marketing of these products. The process of obtaining these approvals and the subsequent compliance with applicable statutes and regulations is time consuming and requires substantial resources, and the approval outcome is uncertain.
     Generally, in order to gain U.S. FDA approval, a company first must conduct pre-clinical studies in the laboratory and in animal models to gain preliminary information on a compound’s activity and to identify any safety problems. Pre-clinical studies must be conducted in accordance with U.S. FDA regulations. The results of these studies are submitted as part of an IND application that the U.S. FDA must review before human clinical trials of an investigational drug can start. If the U.S. FDA does not respond with any questions, a drug developer can commence clinical trials thirty days after the submission of an IND.
     In order to eventually commercialize any products, we or our collaborator first will be required to sponsor and file an IND and will be responsible for initiating and overseeing the clinical studies to demonstrate the safety and efficacy that are necessary to obtain U.S. FDA marketing approval. Clinical trials are normally done in three phases and generally take several years, but may take longer to complete. The clinical trials have to be designed taking into account the applicable U.S. FDA guidelines. Furthermore, the U.S. FDA may suspend clinical trials at any time if the U.S. FDA believes that the subjects participating in trials are being exposed to unacceptable risks or if the U.S. FDA finds deficiencies in the conduct of the trials or other problems with our product under development.
     After completion of clinical trials of a new product, U.S. FDA marketing approval must be obtained. If the product is classified as a new pharmaceutical, we or our collaborator will be required to file a New Drug Application (“NDA”), and receive approval before commercial marketing of the drug. The testing and approval processes require substantial time and effort. NDAs submitted to the U.S. FDA can take several years to obtain approval and the U.S. FDA is not obligated to grant approval at all.
     Even if U.S. FDA regulatory clearances are obtained, a marketed product is subject to continual review. If and when the U.S. FDA approves any of our or our collaborators’ products under development, the manufacture and marketing of these products will be subject to continuing regulation, including compliance with cGMP, adverse event reporting requirements and prohibitions on promoting a product for unapproved uses. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of pharmaceutical products.
     Our research and development processes involve the controlled use of hazardous materials and controlled substances. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products.
Custom Pharmaceutical Services
     Our Custom Pharmaceutical Services (“CPS”) business unit markets process development and manufacturing services to

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customers primarily consisting of innovator pharmaceutical and biotechnology companies. This segment accounted for 10.1% of our total revenues for fiscal 2007, contributing Rs.6,599.8 million.
     The CPS business unit was established in 2001 to leverage our strength in process chemistry to serve the niche segment of the specialty chemical industry. Over the years, our CPS business strategy has evolved to focus on the marketing of process development and manufacturing services. The objective of our CPS segment is to be the preferred partner for innovator pharmaceutical companies, providing a complete range of services that are necessary to take their innovations to the market speedily and more efficiently. The focus is to leverage our skills in process development, analytical development, formulation development and cGMP manufacture to serve various needs of innovator pharmaceutical companies.
     With the acquisition of the Falcon plant in Mexico, we are positioning our CPS segment to be the partner of choice for large and emerging innovator companies across the globe, with service offerings spanning the entire value chain of pharmaceutical services.
Sales, Marketing and Distribution Network.
     We have focused business development teams dedicated to our key geographies of North America, the European Union and India targeting large and emerging innovator companies to build long-term business relationships focused on catering to their outsourcing needs.
Manufacturing and Materials
     Our CPS segment has well-resourced synthetic organic chemistry laboratories, analytical laboratories, kilo laboratories and pilot plants at our technology development center at Miyapur, Hyderabad. To support our increasing CPS business, we added a new facility in fiscal 2007 at Jeedimetla, Hyderabad. We have already set up four laboratories at the new facility and are in the process of establishing another three laboratories in that region. Our chemists and engineers understand cGMP manufacturing and regulatory requirements for synthesis, manufacture and formulation of an NCE from pre-clinical stage to commercialization. Larger quantities of APIs and intermediates are sourced internally from our API segment. We acquired the Falcon plant, which was Roche’s API manufacturing facility at Cuernavaca, Mexico, during fiscal 2006. This facility is U.S. FDA inspected and consists of seven manufacturing bays. The facility is well maintained with good systems and processes which were developed by Roche over the last decade. In addition to manufacturing the active pharmaceutical ingredients naproxen and naproxen sodium and a range of intermediates for Roche products, this facility synthesizes steroids for use in pharmaceutical and veterinary products.
Competition
     Globally, the pharmaceutical manufacturing services industry is estimated to generate sales of U.S.$25-30 billion and is set to grow to sales of U.S.$45 billion by 2010, according to Express Pharma, an Indian pharmaceutical publication, in its June 1-15, 2006 edition. Contract manufacturing is still a nascent industry in India with sales in excess of U.S.$300 million, according to Express Pharma. Contract manufacturing is a significant opportunity for Indian pharmaceutical companies based on their low-cost manufacturing infrastructure. Key competitors in India include Torrent Pharmaceuticals Ltd., Shasun Chemicals & Drugs Ltd., Divi’s Laboratories Ltd., Matrix Laboratories Ltd., Dishman Pharmaceuticals & Chemicals Ltd., Syngene Ltd. and Nicholas Piramal India Ltd. Key competitors from outside India include Lonza Group Ltd., Koninklijke DSM N.V., Albany Molecular Research, Inc., Patheon, Inc. and Cardinal Health, Inc. Our CPS segment distinguishes itself from its key competitors by offering a wider range of services spanning the entire pharmaceutical value chain.
     Growth in contract manufacturing is likely to be driven by increasing outsourcing of late-stage and off-patent molecules by large pharmaceutical companies to compete with generics. India is emerging as an alliance and outsourcing destination of choice for global pharmaceutical companies. Companies such as Roche, Bayer, Aventis and Chiron are all executing plans to make India the regional hub for API and supply of bulk drugs.
Government Regulations
     For Custom Pharmaceutical Services, the regulations are similar to those as discussed in the formulations, API and generics segments.
4.C. Organizational structure
     Dr. Reddy’s Laboratories Limited is the parent company in our group. We had the following subsidiary companies where our direct and indirect ownership was more than 50% as of March 31, 2007:

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        Percentage of Direct/
    Country of   Indirect Ownership
Name of Subsidiary   Incorporation   Interest
DRL Investments Limited
  India     100 %
Reddy Pharmaceuticals Hong Kong Limited
  Hong Kong     100 %
OOO JV Reddy Biomed Limited
  Russia     100 %
Reddy Antilles N.V.
  Netherlands     100 %
Reddy Netherlands B.V.
  Netherlands     100 %(1)
Reddy US Therapeutics, Inc.
  U.S.A.     100 %(1)
Dr. Reddy’s Laboratories, Inc.
  U.S.A.     100 %
Dr. Reddy’s Farmaceutica do Brasil Ltda
  Brazil     100 %
Cheminor Investments Limited
  India     100 %
Aurigene Discovery Technologies Limited
  India     100 %
Aurigene Discovery Technologies, Inc.
  U.S.A.     100 %(3)
Kunshan Rotam Reddy Pharmaceutical Co. Limited
  China     51.33 %(4)
Dr. Reddy’s Laboratories (EU) Limited
  United Kingdom     100 %
Dr. Reddy’s Laboratories (U.K.) Limited
  United Kingdom     100 %(5)
Dr. Reddy’s Laboratories (Proprietary) Limited
  South Africa     60 %
Reddy Cheminor S.A.
  France     100 %(2)
OOO Dr. Reddy’s Laboratories Limited
  Russia     100 %
Dr. Reddy’s Bio-sciences Limited
  India     100 %
Reddy Pharmaceuticals, Inc.
  U.S.A.     100 %(6)
Trigenesis Therapeutics, Inc.
  U.S.A.     100 %
Industrias Quimicas Falcon de Mexico, SA de CV
  Mexico     100 %
Reddy Holding GmbH
  Germany     100 %(7)
Lacock Holdings Limited
  Cyprus     100 %
betapharm Arzneimittel GmbH
  Germany     100 %(8)
beta Healthcare Solutions GmbH
  Germany     100 %(8)
beta institut fur sozialmedizinische Forschung und Entwicklung GmbH
  Germany     100 %(8)
Reddy Pharma Iberia SA
  Spain     100 %
Reddy Pharma Italia SPA
  Italy     100 %(7)
Dr. Reddy’s Laboratories (Australia) Pty Ltd.
  Australia     70 %
 
(1)   Indirectly owned through Reddy Antilles N.V.
 
(2)   Subsidiary under liquidation.
 
(3)   Indirectly owned through Aurigene Discovery Technologies Limited.
 
(4)   Kunshan Rotam Reddy is a subsidiary as we hold a 51.33 % stake in it; however, we account for this investment by the equity method and do not consolidate it in our financial statements.
 
(5)   Indirectly owned through Dr. Reddy’s Laboratories (EU) Limited.
 
(6)   Indirectly owned through Dr. Reddy’s Laboratories Inc.
 
(7)   Indirectly owned through Lacock Holdings Limited.
 
(8)   Indirectly owned through Reddy Holding GmbH.

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4.D. Property, plant and equipment
     The following table sets forth current information relating to our principal facilities:
                                     
    Approximate   Built up       Installed   Actual
Location   Area   Area   Certification   Capacity   Production
    (Square feet)   (Square feet)                    
Formulations
                        3,440 (6)(7)     3,715 (6)
Bollaram, Andhra Pradesh, India
    217,729       207,959     (1)                
Bachupally, Andhra Pradesh, India
    1,306,372       198,909     (2)                
Yanam, Pondicherry, India
    457,000       26,226     None                
Baddi, Himachal Pradesh, India
    765,542       247,028     None                
 
                                   
Active Pharmaceutical Ingredients and Intermediates
                        3,393 (8)     3,039 (8)
Bollaram, Andhra Pradesh, India
    734,013       172,879     U.S. FDA and EuGMP                
Bollaram, Andhra Pradesh, India
    648,173       286,193     U.S. FDA and EuGMP                
Bollaram, Andhra Pradesh, India
    285,235       210,630     U.S. FDA and EuGMP                
Jeedimetla, Andhra Pradesh, India
    228,033       74,270     U.S. FDA and EuGMP                
Miryalguda, Andhra Pradesh, India
    2,787,840       337,063     U.S. FDA                
Pydibheemavaram, Andhra Pradesh, India
    8,523,466       905,612     U.S. FDA                
Pydibheemavaram, Andhra Pradesh, India (4)
    737,134       53,854                      
 
                                   
Generics
                        7,500 (6)     3,014 (6)
Bachupally, Andhra Pradesh, India (4)
    783,823       253,503     (3)                
Beverley, East Yorkshire, United Kingdom
    64,904       15,179     U.K. Medicine Control
Agency, ISO 9001: 2000
               
 
                                   
Critical Care and Biotechnology
                                   
Bachupally, Andhra Pradesh, India
    174,183       123,300     (1)     370 (9)     61.6 (9)
Bollaram, Andhra Pradesh, India
    20,089       20,089     U.S. FDA                
Pydibheemavaram, Andhra Pradesh, India
    15,494       15,494     U.S. FDA                
 
                                   
Drug Discovery(10)
                                   
Miyapur, Andhra Pradesh, India
    576,941       234,591     None                
Georgia, United States (5)
    24,733       24,733     None                
 
                                   
Custom Pharmaceutical Services
                        3,428 (9) (11)     2,533 (9) (11)
Miyapur, Andhra Pradesh, India
    113,211       73,644     None                
Jeedimetla, Andhra Pradesh, India
    68,825       16,597     None                
Cuernavaca, Mexico
    2,793,665       1,345,488     None                
 
(1)   Ministry of Health, Sudan; Ministry of Health, Uganda; ANVISA, Brazil; National Medicines Agency, Romania.
 
(2)   Medicine Control Council, Republic of South Africa; The State Company for Marketing Drugs and Medical Appliances, Ministry of Health, Iraq; Sultanate of Oman, Ministry of Health, Muscat; Ministry of Health, Sudan; Ministry of Health, State of Bahrain; State Pharmaceutical Inspection, Republic of Latvia; Pharmaceutical and Herbal Medicines, Registration and Control Administrations, Ministry of Health, Kuwait; National Medicines Agency, Romania; ANVISA, Brazil; Medicines and Health Care Products Regulatory Agencies (MHRA), U.K.
 
(3)   U.S. FDA; Medicines and Healthcare Products Regulatory Agency, U.K.; Ministry of Health, UAE; Medicines Control Council, South Africa; ANVISA, Brazil ; Environmental Management System ISO 14001; Occupational Health and Safety Management System — OHSAS 18001; Quality Management System-ISO 9001:2000.
 
(4)   100% Export Oriented Unit.
 
(5)   Leased facilities.
 
(6)   Million units.
 
(7)   On a single shift basis.
 
(8)   Tonnes.
 
(9)   Grams.
 
(10)   Laboratories only.
 
(11)   Mexico only.
     Except as indicated in the notes above, we own all of our facilities. All properties mentioned above, including leased properties, are either used for manufacturing and packaging of pharmaceutical products or for research and development activities. In addition,

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we have sales, marketing and administrative offices, which are leased properties. We believe that our facilities are optimally utilized.
     The new facility for the manufacture of formulations at Baddi, Himachal Pradesh, India was completed in April 2006. This project was initiated to take advantage of certain financial benefits, which include exemption from income tax and excise duty for a specified period, offered by the government of India to encourage industrial growth in the state of Himachal Pradesh, India.
     We expanded our Generics plant at Bachupally, Hyderabad, Andhra Pradesh, India in a two phase process to increase the production capacity to manage high demand periods. Both phases of expansion have been completed, although only the facilities added in the first phase have been put into operation. The plant is intended to be a 100% export oriented unit under Indian law, meaning that it will export its total production to customers abroad and, as a result, will qualify for certain tax exemptions and other benefits under Indian law. We are also in the process of establishing a global distribution centre at Bachupally, Hyderabad, Andhra Pradesh, India, which is expected to commence operations in fiscal 2008. An integrated product development facility is under construction at Bachupally, Hyderabad, Andhra Pradesh, India, which is expected to commence operations in fiscal 2008.
     We have completed construction of a facility at a Special Economic Zone in Visakhapatnam, Andhra Pradesh, India for the manufacture of oral and injectible cytotoxic finished dosages. Exhibit batches are being produced at this facility and we are expecting commercial production to commence in fiscal 2008.
     We are also in the process of establishing a plant in a Special Economic Zone in Andhra Pradesh, India for the manufacture of Formulations and APIs. Preliminary steps for this purpose have been initiated.
     We have working capital facilities with banks and, in order to secure those facilities, we have created encumbrance charges on certain of our immovable and movable properties.
     We are subject to significant national and state environmental laws and regulations which govern the discharge, emission, storage, handling and disposal of a variety of substances that may be used in or result from our operations at the above facilities. Non-compliance with the applicable laws and regulations may subject us to penalties and may also result in the closure of our facilities.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
     We are an emerging global pharmaceutical company with proven research capabilities. We derive our revenues from the sale of finished dosage forms, active pharmaceutical ingredients and intermediates and biotechnology products, with a focus on India, the United States, Europe and Russia; from development and manufacturing services provided to innovator pharmaceutical and biotechnology companies; and from license fees from our drug discovery operations.
     As of March 31, 2007, we had the following business segments:
      Formulations. In this segment we derive revenues from the sale of finished dosage forms, primarily in India and other emerging markets. Key drivers of profitability in this segment are the volume and price of products sold, which in turn are dependent upon the popularity of our branded products in the relevant markets. Increases in this segment in recent periods have been on account of our increased marketing efforts and expansion of our markets.
      Active pharmaceutical ingredients and intermediates. In this segment we derive revenues from our sales to third parties of the principal ingredients for finished dosages. Our principal markets are Europe, the United States and India. Revenues in this segment are dependent upon the number of products that lose patent protection in any given period, and the price of those products, which tends to decline over time. These being commoditized products, our ability to set prices is limited, while the cost of revenues generally remains stable. Thus, in any given period, different products will contribute varying amounts to our revenues and our gross profits. Recent increases in revenues from this segment have generally been due to increased sales volumes.
      Generics. In this segment we derive revenues from the sale of therapeutic equivalents of branded drugs, primarily in Europe and the United States. Revenues from beta Holding GmbH (“betapharm”), our recently acquired subsidiary in Germany, are included in this segment from March 3, 2006 and thus will tend to increase revenues from this segment in future periods. Revenues from our sale of generics are highly cyclical. In the event that we obtain 180-day exclusivity for a particular product, we generally experience

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significantly increased revenues for this period, particularly at the beginning of the period, with sales prices decreasing toward the end of the 180 days as other manufacturers enter the market. Cost of sales remains generally constant, however, and thus products coming off patent contribute significantly to gross margins for a limited period, tending to increase volatility in this segment. In fiscal 2007, we launched two products pursuant to an agreement for “authorized generics,” which the innovator company licensed us to distribute generic versions of their branded product and sell it in competition with the companies that have 180-day exclusivity. In these cases, while sales volumes increase significantly (again, more significantly in the early part of the 180-day period), profit-sharing agreements with the innovator company mean that gross margins are much lower than would be the case if we were distributing the product under 180-day exclusivity. Additionally, the existence of “authorized generic” arrangements (a relatively new development) by innovator companies with other manufacturers in cases where we have obtained 180-day exclusivity could adversely affect overall sales revenues during the 180-day period.
      Critical care and biotechnology. In this segment we derive revenues from the sale of our critical care and biotechnology products, primarily to hospitals in India. Revenues are driven by the volume of products sold, and the price of those products. These are generally low-volume, higher gross margin products, although pricing pressure in key products has recently reduced gross margins.
      Drug discovery. Revenues in this segment are derived from licensing fees for new molecules that we discover. Thus, revenues are dependent upon the success of our research activities, and may vary significantly from period to period depending upon whether specified milestones in licensing agreements are reached. In September, 2005, we formed Perlecan Pharma Private Limited as a joint venture with Citigroup Venture Capital International Growth Partnership Mauritius Limited and ICICI Venture Funds Management Company and contributed capital and four NCE assets to Perlecan. Perlecan has continued development of these NCE assets.
      Custom pharmaceutical services. In this segment we derive revenues from service fees for process development and manufacturing services provided to innovator pharmaceutical and biotechnology companies. Revenue from our acquired subsidiary Falcon are included in this segment from December 30, 2005 and thus would tend to increase revenues from this segment in future periods. The key driver of revenue in this segment is likely to be the increasing outsourcing of late-stage and off-patent molecules by large pharmaceutical companies to compete with generics.
     In addition, we are currently in the research and development phase of a specialty pharmaceuticals business, which may become a separate segment at some point in the future.
     Our total revenues for fiscal 2007 were Rs.65,095.1 million (U.S.$1,510.3 million). We derived 14.1% of these revenues from sales in India, 43.5% from the United States and Canada (“North America”), 7.3% from Russia and other countries of the former Soviet Union, 22.8% from Europe and 12.3% from other countries. Our net income for fiscal 2007 was Rs.9,326.8 million (U.S.$216.4 million).
Acquisition of betapharm Group
     During fiscal 2006, we acquired beta Holding Gmbh (“betapharm”) which, according to INSIGHT Health’s NPI-Gx reports, was Germany’s fourth largest generic pharmaceuticals company at the time of acquisition. The aggregate purchase price was 482.6 million (Rs.26,063.3 million) in cash. betapharm has a portfolio of 145 products and, according to INSIGHT Health’s NPI-Gx reports, has been the fastest growing among the 10 largest generics companies in Germany. As a result of this acquisition, the financials of betapharm have been consolidated with our generics segment effective as of March 3, 2006.
Acquisition of Industrias Quimicas Falcon de Mexico
     During fiscal 2006,we acquired Industrias Quimicas Falcon de Mexico (“Falcon”), one of Roche’s manufacturing subsidiaries with facilities located at Cuernavaca, Mexico for a total purchase consideration of U.S.$61.2 million (Rs.2,773.1 million). Falcon was acquired with an intent to add steroid manufacturing capabilities and permit us to offer a full range of services in our custom pharmaceutical services business. Falcon is engaged in the manufacture and sale of APIs, intermediates and steroids and has a portfolio of 18 products. As a result of this acquisition, the financials of Falcon have been consolidated with our custom pharmaceuticals services segment effective as of December 30, 2005.

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Critical Accounting Policies
     Critical accounting policies are those most important to the portrayal of our financial condition and results and that require the most exercise of our judgment. We consider the policies discussed under the following paragraphs to be critical for an understanding of our financial statements. Our significant accounting policies and application of these are discussed in detail in Note 2 to the Consolidated Financial Statements.
     Accounting estimates
     While preparing financial statements we make estimates and assumptions that affect the reported amount of assets, liabilities, disclosure of contingent liabilities at the balance sheet date and the reported amount of revenues and expenses for the reporting period. Financial reporting results rely on our estimate of the effect of certain matters that are inherently uncertain. Future events rarely develop exactly as forecast and the best estimates require adjustments, as actual results may differ from these estimates under different assumptions or conditions. We continually evaluate these estimates and assumptions based on the most recently available information. Specifically, we make estimates of:
    the useful life of property, plant and equipment and intangible assets;
 
    impairment of long-lived assets, including identifiable intangibles and goodwill;
 
    our future obligations under employee retirement and benefit plans;
 
    allowances for doubtful accounts receivable;
 
    inventory write-downs;
 
    allowances for sales returns; and
 
    valuation allowance against deferred tax assets.
     We depreciate property, plant and equipment over their useful lives using the straight-line method. Estimates of useful life are subject to changes in economic environment and different assumptions. Assets under capital leases are amortized over their estimated useful life or lease term as appropriate. We review long-lived assets, including identifiable intangibles and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual outcomes could vary significantly from such estimates. Factors such as changes in the planned use of buildings, machinery or equipment or lower than anticipated sales for products with capitalized rights could result in shortened useful lives or impairment.
     In accordance with applicable Indian laws, we provide a defined benefit retirement plan (“Gratuity Plan”) covering certain categories of employees. The Gratuity Plan provides a lump sum payment to vested employees at retirement or termination of employment, in an amount based on the respective employee’s last drawn salary and the years of employment with us. Liabilities with regard to the Gratuity Plan are determined by an actuarial valuation, based upon which we make contributions to the Gratuity Fund. In calculating the expense and liability related to the plans, assumptions are made about the discount rate, expected rate of return on plan assets, withdrawal and mortality rates and rate of future compensation increases as determined by us, within certain guidelines. The assumptions used may differ materially from actual results, resulting in a significant impact to the amount of expense recorded by us.
     We make allowance for doubtful accounts receivable, including receivables sold with recourse, based on the present and prospective financial condition of the customer and ageing of the accounts receivable after considering historical experience and the current economic environment. Actual losses due to doubtful accounts may differ from the allowances made. However, we believe that such losses will not materially affect our consolidated results of operations.
     We provide for inventory obsolescence, expired inventory and inventories with carrying values in excess of realizable values based on our assessment of future demands, market conditions and our specific inventory management initiatives. If the market conditions and actual demands are less favorable than our estimates, additional inventory write-downs may be required. In all cases, inventory is carried at the lower of historical costs or realizable value.

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Revenue recognition
     Product sales
     Revenue is recognized when significant risks and rewards in respect of ownership of products are transferred to the customer, generally stockists or formulations manufacturers, and when the following criteria are met:
    Persuasive evidence of an arrangement exists;
 
    The price to the buyer is fixed and determinable; and
 
    Collectibility of the sales price is reasonably assured.
     Revenue from domestic sales of formulation products is recognized on dispatch of the product to the stockist by our consignment and clearing and forwarding agent. Revenue from domestic sales of active pharmaceutical ingredients and intermediates is recognized on dispatch of products to customers from our factories. Revenue from export sales is recognized when significant risks and rewards are transferred to the customer, generally upon shipment of products.
     Revenue from product sales includes excise duties and is shown net of sales tax and applicable discounts and allowances.
     Sales of formulations in India are made through clearing and forwarding agents to stockists. Significant risks and rewards in respect of ownership of formulation products is transferred by us when the goods are shipped to stockists from clearing and forwarding agents. Clearing and forwarding agents are generally compensated on a commission basis as a percentage of sales made by them.
     Sales of active pharmaceutical ingredients and intermediates in India are made directly to the end customers, generally formulation manufacturers, from the factories. Sales of formulations and active pharmaceutical ingredients and intermediates outside India are made directly to the end customers, generally stockists or formulations manufacturers, from us or our consolidated subsidiaries.
     We have entered into marketing arrangements with certain marketing partners for the sale of goods. Under such arrangements, we sell generic products to our marketing partners at a price agreed in the arrangement. Revenue is recognized on these transactions upon delivery of products to our marketing partners as all the conditions under Staff Accounting Bulletin No.104 (“SAB 104”) are then met. Subsequently, the marketing partners remit an additional amount upon further sales made by them to the end customer. Such amount is determined as per the terms of the arrangement and is recognized by us when the realization is certain under the guidance given in SAB 104.
     We have entered into certain dossier sales, licensing and supply arrangements that include certain performance obligations. Based on an evaluation of whether or not these obligations are inconsequential or perfunctory, we defer the upfront payments received towards these arrangements. Such deferred amounts are recognized in the income statement in the period in which we complete our remaining performance obligations.
     Sales of generic products are recognized as revenue when the products are shipped and title and risk of loss passes on to the customer. Provisions for chargeback, rebates and medicaid payments are estimated and provided for in the year of sales and recorded as a reduction of revenue. A chargeback claim is a claim made by the wholesaler for the difference between the price at which the product is initially invoiced to the wholesaler and the net price at which it is agreed to be procured from us. Provision for such chargebacks are accrued and are estimated based on the historical average chargeback rate actually claimed over a period of time, current contract prices with wholesalers and other customers and the wholesaler’s average inventory holding. Such provisions are disclosed as a reduction of accounts receivable.
     We account for sales returns in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 48 by establishing an accrual in an amount equal to our estimate of sales recorded for which the related products are expected to be returned.
     We deal in various products and operate in various markets and our estimate is determined primarily by our experience in these markets for the products. For returns of established products, we determine an estimate of the sales returns accrual primarily based on our historical experience regarding sales returns. Additionally other factors that we consider in our estimate of sales returns include levels of inventory in the distribution channel, estimated shelf life, product discontinuances, price changes of competitive products, introductions of generic products and introductions of competitive new products to the extent each of them has an impact on our business and markets. We consider all of these factors and adjust the accrual to reflect actual experience.
     In respect of certain markets, we consider the level of inventory in the distribution channel and determine whether an adjustment to our sales return accrual is appropriate. For example, if the level of inventory in the distribution channel increases, we analyze the reasons for the increase and if the reasons indicate that sales returns will be larger than expected, we adjust the sales returns accrual. Further, the products and markets in which we operate have a rapid distribution cycle and therefore products are sold to the ultimate customer within a very short period of time. As a result, the impact of changes in levels of inventory in the distribution channel

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historically has not caused any material changes in our return estimates. Further, we have not had any significant product recalls / discontinuances within our product portfolio, which could potentially require us to make material changes to our estimates.
     With respect to new products that we introduce, they are either extensions of an existing line of products or in a general therapeutic category where we have historical experience. Our new product launches have historically been in therapeutic categories where established products exist and are sold either by us or our competitors. We have not yet introduced products in any new therapeutic category where the acceptance of such products is not known. The amount of sales returns for our newly launched products are not significantly different from current products marketed by us, nor are they significantly different from the sales returns of our competitors as we understand them to be based on industry publications and discussions with our customers. Accordingly, we do not expect sales returns for new products to be significantly different than expected sales returns of current products. We evaluate the sales returns of all of the products at the end of each reporting period and necessary adjustments, if any, are made. However, to date, no significant revision has been determined to be necessary.
     License fees
     Non-refundable milestone payments are recognized in the statement of income when earned, in accordance with the terms prescribed in the license agreement, and where we have no future obligations or continuing involvement pursuant to such milestone payment. Non-refundable up-front license fees are deferred and recognized when the milestones are earned, in proportion that the amount of each milestone earned bears to the total milestone amounts agreed in the license agreement. As the upfront license fees are a composite amount and cannot be attributed to a specific molecule, they are amortized over the development period. The milestone payments during the development period increase as the risk involved decreases. The agreed milestone payments reflect the progress of the development of the molecule and may not be spread evenly over the development period. Further, the milestone payments are a fair representation of the extent of progress made in the development of these molecules. Hence, the upfront license fees are amortized over the development period in proportion to the milestone payments received. In the event, the development is discontinued, the corresponding amount of deferred revenue is recognized in the income statement in the period in which the project is effectively terminated.
     Service income
     Income from service, which primarily relates to contract research, is recognized as the related services are performed in accordance with the terms of the contract and as all the conditions of SAB 104 are met. Arrangements with customers for contract research and other related services are either on a fixed price, fixed timeframe or a time and material basis.
     Stock Based Compensation
     We use the Black-Scholes option pricing model to determine the fair value of each option grant. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected lives and risk free interest rates. These assumptions reflect our best estimates, but these assumptions involve inherent market uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used in the current period, stock-based compensation expense could have been materially impacted. Furthermore, if we use different assumptions in future periods, stock based compensation expense could be materially impacted in future years.
     The fair value of each option is estimated on the date of grant using the Black-Scholes model with the following assumptions:
                         
    Fiscal Year Ended March 31,
    2005   2006   2007
Dividend yield
    0.5 %     0.5 %     0.5 %
Expected life
  12-78 months   12-78 months   12-48 months
Risk free interest rates
    4.5-6.7 %     5.7-7.5 %     6.5-7.4 %
Volatility
    39.4-44.6 %     23.4-36.9 %     30.5-33.6 %
     At March 31, 2007, we had four equity -based employee compensation plans, which are described more fully in Section 6.E. under “Employee Stock Incentive Plans”. Our parent company and our subsidiary, Aurigene Discovery Technologies Limited, have two equity based employee compensation plans each.
     Prior to April 1, 2006, we accounted for our equity-based compensation plans under SFAS 123 “Accounting for Stock Based Compensation”. On April 1, 2006, we adopted SFAS No. 123R (revised 2004), “Share Based Payment” (“SFAS No. 123(R)”) under the modified-prospective application. Under the modified-prospective-application, SFAS No. 123(R) applies to new awards and to awards modified, repurchased, or cancelled after adoption.

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     The adoption of SFAS No. 123(R) did not have a material impact on our equity-based compensation expense for the year ended March 31, 2007. Furthermore, we believe that the adoption of SFAS No.123(R) will not have a material impact on our future equity-based compensation expense. As of March 31, 2007, there was approximately Rs.201,490 of total unrecognized compensation cost related to unvested equity-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 3.7 years.
     Under SFAS No. 123, we had a policy of recognizing the effect of forfeitures only as they occurred. Accordingly, as required by SFAS No. 123(R), on April 1, 2006, we estimated the number of outstanding instruments which are not expected to vest and recognized an income of Rs.14,806 representing the reversal of compensation cost for such instruments previously recognized in the income statement. For the years ended March 31, 2005, 2006 and 2007, an amount of Rs.144,001, Rs.162,249 and Rs.190,186, respectively, have been recorded as total employee equity-based compensation expense.
     Functional Currency
     Our foreign subsidiaries have different functional currencies, determined based on the currency of the primary economic environment in which they operate. For subsidiaries that operate in a highly inflationary economy, the functional currency is determined as the Indian rupee. Due to various subsidiaries operating in different geographic locations, a significant level of judgment is involved in evaluating the functional currency for each subsidiary.
     In respect of our foreign subsidiaries which market our products in their respective countries/regions, the functional currency has been determined as the Indian rupee, based on an individual and collective evaluation of the various economic factors listed below.
     The operations of these foreign subsidiaries are largely restricted to importing finished goods from us in India, sale of these products in the foreign country and remitting the sale proceeds to us. The cash flows realized from sale of goods are readily available for remittance to us and cash is remitted to us on a regular basis. The costs incurred by these subsidiaries are primarily the cost of goods imported from us. The financing of these subsidiaries is done directly or indirectly by us.
     In respect of other subsidiaries, the functional currency is determined as the local currency, being the currency of the primary economic environment in which the subsidiary operates.
     Income Taxes
     As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We are subject to tax assessments in each of these jurisdictions. A tax assessment can involve complex issues, which can only be resolved over extended time periods. Additionally, the provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws. Although we have considered all these issues in estimating our income taxes, there could be an unfavorable resolution of such issues that may affect our results of operations.
     We also assess the temporary differences resulting from differential treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recognized in our consolidated financial statements. Deferred taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We consider the scheduled reversal of the projected future taxable income and tax planning strategy in making this assessment. If we estimate that the deferred tax assets cannot be realized at the recorded value, a valuation allowance is created with a charge to the statement of income in the period in which such assessment is made.
     Litigation
     We are involved in various patent challenges, product liability, commercial litigation and claims, investigations and other legal proceedings that arise from time to time in the ordinary course of our business. We assess in consultation with our counsel, the need to accrue a liability for such contingencies and record a reserve when we determine that a loss related to a matter is both probable and

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reasonably estimable. Because litigation and other contingencies are inherently unpredictable, our assessment can involve judgments about future events.
5.A. Operating results
Financial Data
     The selected consolidated financial data presented below for fiscal year 2007 reflects first full year consolidation of the acquisition of Falcon and betapharm and therefore the results for fiscal year 2007 are not comparable to the results for prior fiscal years.
     The following table sets forth, for the periods indicated, our consolidated net operating revenues by segment:
                                 
    Fiscal Year Ended March 31,  
Segment   2005     2006     2007     2007  
    (Rs. in millions, U.S.$ in thousands)  
Formulations
  Rs. 7,822.9     Rs. 9,925.9     Rs. 12,318.9     U.S.$ 285,821  
Active pharmaceutical ingredients and intermediates
    6,944.5       8,238.0       11,826.8       274,404  
Generics
    3,577.4       4,055.8       33,224.2       770,863  
Critical care and biotechnology
    527.1       691.1       823.9       19,116  
Drug discovery
    288.4             136.8       3,174  
Custom pharmaceuticals services
    311.6       1,326.8       6,599.8       153,128  
Others
    47.5       29.4       164.7       3,824  
 
                       
Total revenues
  Rs. 19,519.4     Rs. 24,267.0     Rs. 65,095.1     U.S.$ 1,510,327  
 
                       
     The following table sets forth, for the periods indicated, our cost of revenues by segment:
                                 
    Fiscal Year Ended March 31,  
Segment   2005     2006     2007     2007  
    (Rs. in millions, U.S.$ in thousands)  
Formulations
  Rs. 2,492.8     Rs. 3,084.1     Rs. 3,651.5     U.S.$ 84,722  
Active pharmaceutical ingredients and intermediates
    5,013.5       5,916.5       7,242.3       168,035  
Generics
    1,620.3       2,168.8       18,098.6       419,921  
Critical care and biotechnology
    176.5       235.9       272.0       6,311  
Drug discovery
          0.0       121.5       2,819  
Custom pharmaceuticals services
    82.6       999.4       4,662.5       108,179  
Others
    0.1       12.6       171.1       3,972  
 
                       
Total cost of revenues
  Rs. 9,385.8     Rs. 12,417.3     Rs. 34,219.5     U.S.$ 793,957  
 
                       
     The following table sets forth, for the periods indicated, our gross profit by segment:
                                 
    Fiscal Year Ended March 31,  
Segment   2005     2006     2007     2007  
    (Rs. in millions, U.S.$ in thousands)  
Formulations
  Rs. 5,330.1     Rs. 6,841.8     Rs. 8,667.4     U.S.$ 201,099.8  
Active pharmaceutical ingredients and intermediates
    1,931.0       2,321.5       4,584.5       106,369  
Generics
    1,957.1       1,887.0       15,125.6       350,942  
Critical care and biotechnology
    350.6       455.2       551.9       12,805  
Drug discovery
    288.4       0.0       15.3       355  
Custom pharmaceuticals services
    229.0       327.4       1,937.3       44,949  
Others
    47.4       16.8       (6.4 )     (149 )
 
                       
Total gross margin
  Rs. 10,133.6     Rs. 11,849.7     Rs. 30,875.6     U.S.$ 716,370  
 
                       

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     The following table sets forth, for the periods indicated, financial data as percentages of total revenues and the increase (or decrease) by item as a percentage of the amount over the previous year. Cost of revenues and gross profit by segment are shown as a percentage of that segment’s revenues.
                                         
    Percentage of Sales   Percentage Increase (Decrease)
    Fiscal Year Ended March 31,        
    2005   2006   2007   2005 to 2006   2006 to 2007
Income Statement Data:
                                       
Revenues by segment:
                                       
Formulations
    40.1       40.9       18.9       26.9       24.1  
Active pharmaceutical ingredients and intermediates
    35.6       33.9       18.2       18.6       43.6  
Generics
    18.3       16.7       51.0       13.4       719.2  
Diagnostics, critical care and biotechnology
    2.7       2.8       1.3       31.1       19.2  
Drug discovery
    1.5       0.0       0.2       (100.0 )      
Custom pharmaceutical services
    1.6       5.5       10.1       325.8       397.4  
Other
    0.2       0.2       0.3       (38.1 )     461.1  
Total revenues
    100.0       100.0       100.0       24.3       168.2  
Cost of revenues by segment:
                                       
Formulations
    31.9       31.1       29.6       23.7       18.4  
Active pharmaceutical ingredients and intermediates
    72.2       71.8       61.2       18.0       22.4  
Generics
    45.3       53.5       54.5       33.8       734.5  
Diagnostics, critical care and biotechnology
    33.5       34.1       33.0       33.6       15.3  
Drug discovery
                88.8              
Custom pharmaceutical services
    26.5       75.3       70.6       1,111.4       366.5  
Other
    0.0       42.8       103.9             1,261.5  
Total cost of revenues
    48.1       51.2       52.6       32.3       175.6  
Gross profit by segment:
                                       
Formulations
    68.1       68.9       70.4       28.4       26.7  
Active pharmaceutical ingredients and intermediates
    27.8       28.2       38.8       20.2       97.5  
Generics
    54.7       46.5       45.5       (3.6 )     701.6  
Diagnostics, critical care and biotechnology
    66.5       65.9       67.0       29.8       21.2  
Drug discovery
    100.0             11.2       (100.0 )      
Custom pharmaceutical services
    73.5       24.7       29.4       42.9       491.7  
Other
    100.0       57.2       (3.9 )     (64.6 )     (137.9 )
Total gross profit
    51.9       48.8       47.4       16.9       160.6  
Operating expenses:
                                       
Selling, general and administrative expenses
    34.7       33.1       21.6       18.5       75.0  
Research and development expenses
    14.4       8.9       3.8       (23.2 )     14.4  
Amortization expenses
    1.8       1.7       2.4       20.0       274.1  
Write-down of intangible assets
                2.7              
Foreign exchange (gain)/loss
    2.5       0.5       (0.2 )     (74.2 )     208.2  
Other operating expense/(income)
    0.0       (1.3 )     (0.1 )           (79.1 )
Total operating expenses
    53.4       42.9       30.2       (0.1 )     88.8  
Operating income
    (1.5 )     5.9       17.2       598.8       678.4  
Equity in loss of affiliates
    (0.3 )     (0.4 )     (0.1 )     51.9       (29.0 )
Other (expense) / income, net
    2.3       2.2       (1.0 )     17.5       224.0  
Income before income taxes and minority interest
    0.5       7.8       16.1       1,663.4       456.4  
Income tax benefit / (expenses)
    0.5       (1.1 )     (1.8 )     374.1       355.5  
Minority interest
    0.1                          
Net income
    1.1       6.7       14.3       671.1       472.6  

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Fiscal Year Ended March 31, 2007 Compared to Fiscal Year Ended March 31, 2006
Revenues
     Total revenues increased by 168.2% to Rs.65,095.1 million in fiscal 2007, as compared to Rs.24,267.0 million in fiscal 2006, primarily due to revenues from sales of authorized generics, revenues from Falcon (acquired December 30, 2005) and betapharm (acquired March 3, 2006), and an increase of revenues across our other business segments. Excluding revenues from sales of authorized generics and revenues from Falcon and betapharm, revenues increased by 57.7% to Rs.35,881.2 million in fiscal 2007. In fiscal 2007, we received 43.5% of our revenues from North America (United States and Canada), 14.1% of our revenues from India, 7.3% of our revenues from Russia and other countries of the former Soviet Union, 22.8% of our revenues from Europe and 12.3% of our revenues from other countries.
     Revenues from sales to Russia and other former Soviet Union countries increased by 33.5% to Rs.4,752.0 million in fiscal 2007, as compared to Rs.3,559.5 million in fiscal 2006. The increase was primarily due to an increase in sales of our major brands such as Nise, our brand of nimesulide, Keterol, our brand of ketorolac tromethamine, Ciprolet, our brand of ciprofloxacin, Cetrine, our brand of cetrizine, and Omez, our brand of omeprazole. Revenues from sales in India increased by 11.0% to Rs.9,178.6 million in fiscal 2007, as compared to Rs.8,272.5 million in fiscal 2006, primarily due to an increase in revenues in our formulations segment and partially offset by a decline in revenues of our active pharmaceutical ingredients and intermediates segment. Revenues from sales to Europe increased by 243.0% to Rs.14,839.1 million in fiscal 2007, as compared to Rs.4,326.4 million in fiscal 2006, primarily as a result of an increase in revenues from sales in our generics, custom pharmaceuticals services and API segments, as well as revenues from betapharm. Revenues from sales to North America increased by 611.3% to Rs.28,336.5 million in fiscal 2007, as compared to Rs.3,983.9 million in fiscal 2006. Excluding the revenues from sale of authorized generics, revenues increased by 214.4% to Rs.12,523.7 in fiscal 2007, primarily due to increases in sales in our generics, CPS and API segments.
     Formulations. In fiscal 2007, we received 18.9% of our total revenues from the formulations segment, as compared to 40.9% in fiscal 2006. Revenues in this segment increased by 24.1% to Rs.12,318.9 million in fiscal 2007, as compared to Rs.9,925.9 million in fiscal 2006.
     Revenues in India constituted 52.1% of our total formulations revenues in fiscal 2007 as compared to 55.7% in fiscal 2006. Revenues from sales of formulations products in India increased by 16.1% to Rs.6,415.0 million in fiscal 2007, as compared to Rs.5,525.7 million in fiscal 2006. This was driven by increased sales volumes of our key brands such as Omez, our brand of omeprazole, Nise, our brand of nimesulide, Stamlo, our brand of amlodipine, Razo, our brand of rabeprazole, and Recliment, our brand of gliclazide and metformin. The revenue increases were led by special marketing initiatives and other product specific initiatives and focused promotion with specialist physicians. The revenue increases were also attributable to the launch of extensions of current product lines such as Omez D and Razo D. New products launched in fiscal 2007 contributed revenues of Rs.247 million (4% of revenues in India).
     Revenues from sales of formulations products outside India increased by 34.2% to Rs.5,903.9 million in fiscal 2007, as compared to Rs.4,400.3 million in fiscal 2006. Revenues from sales of formulations products in Russia accounted for 59.2% of our formulation revenues outside India in fiscal 2007, as compared to 58.7% in fiscal 2006. Revenues from sales of formulations products in Russia increased by 35.3% to Rs.3,494.3 million in fiscal 2007, as compared to Rs.2,583.1 million in fiscal 2006. The increase was primarily due to an increase in revenues from the sale of key brands such as Nise, our brand of nimesulide, Omez, our brand of omeprazole, and Cetrine, our brand of cetrizine. This increase in revenues was primarily driven by an increase in our sales volumes to hospitals, as well as increased prescription sales due to various advertising campaigns. Revenues from sales to other countries of the former Soviet Union increased by 35.2% to Rs.1,117.6 million for fiscal 2007, as compared to Rs.826.8 million for fiscal 2006, primarily driven by an increase in revenues from sales in Ukraine, Uzbekistan and Kazakhstan.
     Revenues from sales of formulations products in Europe increased by 45.3% to Rs.376.6 million in fiscal 2007 as compared to Rs.259.2 million in fiscal 2006, primarily due to an increase in revenues from sales in Romania. The increase in revenues from Romania was primarily due to an increase in sales volume attributable to an increase in Romanian government spending on medical reimbursement to comply with EU standards, as well as promotional campaigns.
     Revenues from sales to the rest of the world increased by 25.2% to Rs.915.3 million in fiscal 2007, as compared to Rs.731.1 million in fiscal 2006. This increase was primarily due to an increase in revenues from sales of products in South Africa, Myanmar, Venezuela and Jamaica, and was offset by a decrease in revenues from sales of products in Vietnam.
     Active Pharmaceutical Ingredients and Intermediates. In fiscal 2007, we received 18.2% of our total revenues from this

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segment, as compared to 33.9% in fiscal 2006. Revenues in this segment increased by 43.6% to Rs.11,826.8 million in fiscal 2007, as compared to Rs.8,238.0 million in fiscal 2006.
     During fiscal 2007, revenues from sales in India accounted for 17.5% of our revenues from this segment, as compared to 27.9% in fiscal 2006. Revenues from sales in India decreased by 9.6% to Rs.2,075.0 million in fiscal 2007, as compared to Rs.2,296.4 million in fiscal 2006. This decrease was primarily due to a decrease in revenues from sales of quinolones (antibiotics), due to a significant decline in prices resulting from increased competition.
     Revenues from sales outside India increased by 64.1% to Rs.9,751.8 million in fiscal 2007, as compared to Rs.5,941.6 million in fiscal 2006. Revenues from sales in Europe increased by 47.0% to Rs.2,089.4 million in fiscal 2007, as compared to Rs.1,420.9 million in fiscal 2006, primarily due to an increase in revenues from sales of sertraline, finasteride, losartan and ramipril. Revenues from sales of API in North America (United States and Canada) increased by 22.6% to Rs.2,029.6 million in fiscal 2007, as compared to Rs.1,655.0 million in fiscal 2006, primarily due to an increase in sales volumes of naproxen sodium, ibuprofen, naproxen and sertraline, as well as increase in sales volumes of API used by our customers in the development of their formulations. Revenues from sales of API in the rest of the world increased from Rs.2,865.8 million in fiscal 2006 to Rs.5,632.7 in fiscal 2007, driven primarily by the growth of revenues from Israel, South Korea, Brazil and Japan.
     Generics. In fiscal 2007, we received 51.0% of our total revenues from this segment, as compared to 16.7% in fiscal 2006. This segment’s revenues increased by 719.2% to Rs.33,224.2 million in fiscal 2007, as compared to Rs.4,055.8 million in fiscal 2006. Revenues from sales of products in North America increased to Rs.23,619.4 million in fiscal 2007, as compared to Rs.1,630.6 million in fiscal 2006. The increase was primarily due to revenues of Rs.15,812.8 million from sales of simvastatin and finasteride (our authorized generic versions of Merck’s Zocor® and Proscar®, respectively), launched in June 2006; revenues of Rs.2,429.3 million from sales of fexofenadine (our generic version of Allegra ®), launched in April 2006; and revenues of Rs.2,890.1 million from sales of ondansetron (our generic version of Zofran®), launched at the end of December 2006 with 180 day marketing exclusivity. Excluding revenues from authorized generics, fexofenadine and ondansetron, revenues from sales of generic products increased by 52.5% to Rs.2,487.1 million, primarily on account of an increase in sales volumes as well as the launch of new products, such as pravastatin and simvastatin (a non-authorized generic product).
     Revenues from sales of generic products in Europe and other markets increased by 296.6% to Rs.9,604.8 million in fiscal 2007, as compared to Rs.2,425.2 million in fiscal 2006. Revenues of betapharm (in its first full year of consolidation) and sales of products acquired from Litaphar in Spain (in fiscal 2007) together contributed Rs.8,065.0 million to revenues in fiscal 2007, as compared to revenues contributed by betapharm of Rs.704.9 million in fiscal 2006 (which represented less than one month of revenues, as it was acquired on March 3, 2006 and the fiscal year ended March 31, 2006). In the United Kingdom, we experienced a decline in the prices of some of our key generics products, amlodipine and omeprazole. As a result, our U.K. generics revenues declined by 10.5% to Rs.1,539.8 million in fiscal 2007 from Rs.1,716.6 million in fiscal 2006.
     Custom Pharmaceutical Services. Revenues from custom pharmaceutical services, including revenues from our subsidiary Falcon, grew to Rs.6,599.8 million in fiscal 2007 as compared to Rs.1,326.8 million in fiscal 2006. Revenues contributed from Falcon increased from Rs.804.9 in fiscal 2006 (this represents approximately three months of revenues, as it was acquired on December 30, 2005 and the fiscal year ended March 31, 2006) to Rs.5,396.8 million (this represents the first full year of consolidation of Falcon’s revenues). Revenues in Falcon were driven by sales of naproxen sodium, naproxen and epoxide. Excluding revenues from Falcon, revenues in this segment grew to Rs.1,203.0 million in fiscal 2007, from Rs.521.9 in fiscal 2006, driven by growth in our customer base and product portfolio.
     Critical Care and Biotechnology. We received 1.3% of our total revenues from this segment in fiscal 2007, as compared to 2.8% in fiscal 2006. Revenues in this segment increased to Rs.823.9 million in fiscal 2007, as compared to Rs.691.1 million in fiscal 2006.
     Revenues from our critical care division increased to Rs.642.9 million in fiscal 2007 from Rs.517.51 in fiscal 2006, primarily on account of an increase in revenues from sales in India of key products such as Dacotin, our brand of oxaliplatin, Docetere, our brand of docetaxel, and Mitotax, our brand of paclitaxel. Revenues from our biotechnology division increased to Rs.181.01 million in fiscal 2007 from Rs.173.56 million, primarily due to growth in sales volumes of Grastim, our brand of filgrastim.
Cost of revenues
     Total cost of revenues increased by 175.6% to Rs.34,219.5 million for fiscal 2007, as compared to Rs.12,417.3 million for fiscal 2006. As a percentage of total revenues, total cost of revenues was 52.6% for fiscal 2007, as compared to 51.2% for fiscal 2006.

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     Formulations. Cost of revenues in this segment increased by 18.4% to Rs.3,651.5 million in fiscal 2007, as compared to Rs.3,084.1 million in fiscal 2006. Cost of revenues in this segment was 29.6% of revenues for fiscal 2007, as compared to 31.1% of revenues for fiscal 2006. As a percentage of revenues, cost of revenues decreased by 1.5% primarily on account of a decrease in excise duties in fiscal 2007. This decrease in excise duties was due to our new formulations facility at Baddi (operational from July 2006), which enjoys excise duty exemption.
     Active Pharmaceutical Ingredients and Intermediates. Cost of revenues increased by 22.4% to Rs.7,242.3 million in fiscal 2007, as compared to Rs.5,916.5 million in fiscal 2006. Cost of revenues in this segment as a percentage of revenue decreased to 61.2% of this segment’s revenues in fiscal 2007, as compared to 71.8% of this segment’s revenues in fiscal 2006. One reason for this decrease was an increase in the proportion of higher margin revenues from sales outside of India from 72.1% of total revenues in fiscal 2006 to 82.5% of total revenues in fiscal 2007. Another reason for this decrease was an increase of sales of high gross margin products, such as our generic version of sertraline (launched in June, 2006).
     Generics. Cost of revenues in this segment increased by 734.5% to Rs.18,098.6 million in fiscal 2007, as compared to Rs.2,168.8 million in fiscal 2006. Cost of revenue was 54.5% of this segment’s revenues in fiscal 2007, as compared to 53.5% in fiscal 2006. The increase in cost of revenues as a percentage of sales in this segment was primarily as a result of revenues from newly launched authorized generics, which contributed 47.6% to total revenues of this segment and have gross margins which are significantly below the average gross margin of this segment. The increase in cost of revenues associated with sales of these lower margin products was substantially offset by increased sales of ondansetron and fexofenadine, which have gross margins which are significantly above the average gross margin of this segment.
     Custom Pharmaceutical Services. Cost of revenues in this segment increased by 366.5% from Rs.999.4 million in fiscal 2006 (this represents approximately three months of revenues from Falcon, as it was acquired on December 30, 2005 and the fiscal year ended March 31, 2006) to Rs.4,662.5 million in fiscal 2007 (this represents the first full year of consolidation of the cost of Falcon’s revenues). Cost of revenues was 70.6% of this segment’s revenues in fiscal 2007, as compared to 75.3% in fiscal 2006. This decrease was primarily on account of increased sales of naproxen sodium and naproxen, which are higher margin products.
Gross profit
     As a result of the trends described in “Revenues” and “Cost of revenues” above, our gross profit increased by 160.6% to Rs.30,875.6 million for fiscal 2007 from Rs.11,849.7 million for fiscal 2006. Gross margin percentage was 47.4% in fiscal 2007, as compared to 48.8% in fiscal 2006.
     Gross profit of the formulations segment increased to 70.4% in fiscal 2007, as compared to 68.9% in fiscal 2006. The gross profit for our active pharmaceutical ingredients segment increased to 38.8% in fiscal 2007, as compared to 28.2% in fiscal 2006. The gross profit for our generics segment decreased to 45.5% in fiscal 2007, as compared to 46.5% in fiscal 2006. The gross profit for our custom pharmaceutical services segment was 29.4% in fiscal 2007, as compared to 24.7% in fiscal 2006.
Selling, general and administrative expenses
     Selling, general and administrative expenses, as a percentage of total revenues, were 21.6% for fiscal 2007 as compared to 33.1% for fiscal 2006. The decrease in these expenses as a percentage of revenues was due to an increase in our total revenues with no commensurate increase in costs. Selling, general and administrative expenses increased by 75.0% to Rs.14,051.1 million in fiscal 2007, as compared to Rs.8,028.9 million in fiscal 2006.
     The increase in selling, general and administrative expenses as a whole was largely due to the full year consolidation of expenses of betapharm and Falcon, as well as an increase in employee costs and marketing costs. After excluding expenses of betapharm and Falcon, employee costs increased by 41.1% in fiscal 2007, primarily due to annual compensation increases and market corrections as well as an increase in the number of employees. Marketing expenses increased by 33.2% in fiscal 2007, primarily on account of higher selling expenses and higher shipping costs, all incurred in connection with the increase in total revenues.
Research and development expenses
     Research and development costs increased by 14.4% to Rs.2,462.7 million for fiscal 2007, as compared to Rs.2,153.0 million for fiscal 2006. As a percentage of total revenue, research and development expenses were 3.8% of our total revenue in fiscal 2007 as compared to 8.9% in fiscal 2006.
     Under the terms of our research and development partnership agreement with I-VEN Pharma Capital Limited (“I-VEN”), we

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received Rs.985.4 million (U.S.$22.5 million) in March 2005 to be applied to research and development costs in our generics segment, of which Rs.452.8 million (U.S.$10.5 million) was recorded as a reduction in the research and development expense line item in fiscal 2007 as compared to Rs.384.5 million (U.S.$8.6 million) recognized in fiscal 2006. Furthermore, in fiscal 2007, our research and development expenses in our drug discovery segment were lower on account of our receipt of Rs.372.6 million from Perlecan Pharma Private Limited (“Perlecan”) as reimbursement of expenses incurred by us in the development of New Chemical Entities (“NCEs”) assigned to Perlecan under the terms of our research and development partnership agreement. This reimbursement payment was recorded as a reduction in research and development expenses. Excluding the impact of the above arrangements with I-VEN and Perlecan, expenses increased to Rs.3,288.1 million in fiscal 2007 as compared to Rs.2,537.5 million in fiscal 2006. The increase in expenses was primarily on account of an increase in product development studies in our formulations and generics segments, as well as an increase in clinical trials expenses in our discovery segment.
Amortization expenses
     Amortization expenses increased by 274.1% to Rs.1,570.9 million in fiscal 2007 from Rs.419.9 million in fiscal 2006. The increase was primarily on account of amortization of intangibles acquired in the acquisition of betapharm and Falcon amounting to Rs.1,247.8 million and Rs.26.8 million, respectively, in fiscal 2007.
Write-down of Intangible Assets
     During fiscal 2007, we wrote-down certain intangible assets in an aggregate amount of Rs.1,770.2 million. These write-downs primarily consisted of :
    Write-down expense amounting to Rs.213.5 million associated with core technology rights and other product related intangible assets acquired through Trigenesis Therapeutics, Inc. During the fourth quarter ended March 31, 2007, we completed our detailed review of business opportunities against each of the core technology rights, licenses and marketing rights. As a result of this review, we determined that the further commercialization of the intangible assets that are being carried forward may not be economically viable because of further regulatory and approval process requirements and unfeasible partnering prospects, and therefore discontinued our efforts to further develop these assets.
 
    Due to legislative reforms in Germany designed to control healthcare spending, including the WSG and the AVWG, severe pricing pressures thereafter, and impact of the Salutas contract amendment, certain of our product-related intangibles faced loss in economic value. Consequently, based on a detailed review carried out by management, an impairment provision of Rs.1,556.7 million was recorded in the current year financial statements.
Foreign exchange gain/loss
     Foreign exchange gain was Rs.136.8 million for fiscal 2007, as compared to a loss of Rs.126.3 million for fiscal 2006. In fiscal 2007, the rupee appreciated by 2.57%. The fiscal 2007 foreign exchange gain was primarily on account of our marking to market of our outstanding forward foreign exchange contracts (entered into in order to hedge our receivables exchange risk) and foreign currency loans, which gains were partially offset by our marking to market of our U.S.$ deposits and receivables. In contrast to this, the rupee depreciated by 1.99% in fiscal 2006. Foreign exchange loss in fiscal 2006 was primarily on account of our marking to market of our forward foreign exchange contracts and foreign currency loans.
Other operating expense/(income), net
     Other operating income, net, amounted to Rs.67.0 million in fiscal 2007, as compared to Rs.320.4 million in fiscal 2006. This includes a profit of Rs.387.3 million in fiscal 2006 resulting from the sale of our finished dosages manufacturing facility located in Goa, India.
Operating income
     As a result of the foregoing, our operating income was Rs.11,224.4 million in fiscal 2007, as compared to operating income of Rs.1,442.0 million in fiscal 2006. Operating income as a percentage of total revenues was 17.2% in fiscal 2007, as compared to 5.9% in fiscal 2006.
Other income (expense), net
     For fiscal 2007, our net other expense was (Rs.661.5 million), as compared to net other income of Rs.533.6 million for fiscal 2006.

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This was primarily on account of net interest expense of Rs.1,054.7 million in fiscal 2007 compared to net interest income Rs.418.8 million in fiscal 2006. Net interest expense was primarily on account of interest expense incurred on a loan in the original principal amount of 400 million (Rs.21,598.30 million) taken for the acquisition of betapharm in fiscal 2006, partially offset by interest income on fixed deposits.
Equity in loss of affiliates
     Equity in loss of affiliates was Rs.62.7 million for fiscal 2007, a decline from Rs.88.2 million for fiscal 2006. The fiscal 2007 loss consists of a loss pick-up from Perlecan Pharma Private Limited of Rs.63.3 million offset by a gain pick-up from Kunshan Rotam Reddy Pharmaceuticals of Rs.0.7 million. In fiscal 2006, equity in loss of affiliates consisted of a Rs.40.0 million loss pick-up from Perlecan Pharma Private Limited plus a Rs.48.2 million loss pick-up from Kunshan Rotam Reddy Pharmaceuticals.
Income before income taxes and minority interest
     As a result of the foregoing, income before income taxes and minority interest increased to Rs.10,500.3 million in fiscal 2007, as compared to Rs.1,887.3 million in fiscal 2006. As a percentage of revenues, income before income taxes and minority interest was 16.1% of revenues in fiscal 2007, as compared to 7.8% of revenues in fiscal 2006.
Income tax expense
     Income tax expense for fiscal 2007 was Rs. 1,176.9 million as compared to an income tax expense of Rs. 258.4 million for fiscal 2006. As a percentage of income before taxes and minority interest, income tax expense decreased from 13.7% for fiscal 2006 to 11.2% for fiscal 2007. In absolute terms, the income tax expense increased primarily a result of significantly higher income from operations in fiscal 2007 as compared to fiscal 2006. The effective tax rate decreased primarily on account of increased sales in generics business, which in India enjoys tax exemptions. Further, whilst a significant portion of the increased profitability has been out of North America generics operations, the corresponding tax expense has been lower since the business had net operating losses, which were utilized in the current year. The Company had recorded a full valuation allowance on the deferred tax assets on net operating losses, which was reversed in the current year.
Minority interest
     Minority interest for fiscal 2007, was a gain of Rs.3.5 million resulting from the allocation of our minority’s share in the losses of Dr. Reddy’s Laboratories (Proprietary) Limited, our partially owned subsidiary in South Africa. During fiscal 2006, we realized a loss of Rs.0.1 million representing our minority share in the profits of this partially owned subsidiary.
Net income
     As a result of the above factors, our net income increased to Rs.9,326.8 million in fiscal 2007, as compared to Rs.1,628.9 million in fiscal 2006. Net income as a percentage of total revenues increased to 14.3% in fiscal 2007 from 6.7% in fiscal 2006.
Fiscal Year Ended March 31, 2006 Compared to Fiscal Year Ended March 31, 2005
Revenues
     Total revenues increased by 24.3% to Rs.24,267.0 million in fiscal 2006, as compared to Rs.19,591.4 million in fiscal 2005, primarily due to an increase in revenues in our formulations segment and our active pharmaceutical ingredients and intermediates segment, as well as new revenues contributed by our recently acquired subsidiaries, Falcon in Mexico (starting December 30, 2005) and betapharm in Germany (starting March 3, 2006). Excluding revenues from Falcon and betapharm, revenues increased by 16.6% to Rs.22,758.2 million. betapharm contributed Rs.704.9 million and Falcon contributed Rs.804.0 million to our revenues for fiscal 2006. In fiscal 2006, we received 16.4% of our revenues from North America (United States and Canada), 34.1% of our revenues from India, 14.7% of our revenues from Russia and other countries of the former Soviet Union, 17.8% of our revenues from Europe and 17.0% of our revenues from other countries.
     Revenues from sales to Russia and other former Soviet Union countries increased by 27.9% to Rs.3,559.5 million in fiscal 2006, as compared to Rs.2,782.2 million in fiscal 2005. The increase was primarily due to an increase in sales of our major brands such as Nise, our brand of nimesulide, Keterol, our brand of ketorolac tromethamine, Ciprolet, our brand of ciprofloxacin, and Omez, our brand of omeprazole. Revenues from sales in India increased by 23.6% to Rs.8,272.5 million in fiscal 2006, as

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compared to Rs.6,693.0 million in fiscal 2005, primarily due to an increase in revenues in our formulations and active pharmaceutical ingredients and intermediates segments. Revenues from sales to Europe increased by 50.8% to Rs.4,326.3 million in fiscal 2006, as compared to Rs.2,868.2 million in fiscal 2005, primarily as a result of an increase in revenues from sales in our generics segment and active pharmaceutical ingredients and intermediates segment, as well as new revenues contributed from betapharm. Excluding betapharm revenues, revenues from sales to Europe increased by 26.3% to Rs.3,621.4 million in fiscal 2006. Revenues from sales to North America decreased by 8.4% to Rs.3,983.9 million in fiscal 2006, as compared to Rs.4,349.2 million in fiscal 2005, primarily due to a decrease in sales in our generics segment and active pharmaceutical ingredients and intermediates segment.
     Formulations. In fiscal 2006, we received 40.9% of our total revenues from the formulations segment, as compared to 40.1% in fiscal 2005. Revenues in this segment increased by 26.9% to Rs.9,925.9 million in fiscal 2006, as compared to Rs.7,822.9 million in fiscal 2005.
     Revenues in India constituted 55.7% of our total formulations revenues in fiscal 2006, which is the same percentage it constituted in fiscal 2005. Revenues from sales of formulations in India increased by 26.7% to Rs.5,525.7 million in fiscal 2006, as compared to Rs.4,360.2 million in fiscal 2005. This was driven by an increase in revenues from increased sales volumes of our key brands such as Omez, our brand of omeprazole, Nise, our brand of nimesulide, Stamlo our brand of amlodipine, and Recliment, our brand of gliclazide and metformin. The increase was also attributable to our focused marketing strategy, in which we reorganized our Indian sales force by therapeutic categories, as well as the positive impact of inventory restocking by stockists and retailers after implementation of India’s Value Added Tax system in April 2005.
     Revenues from sales of formulations outside India increased by 27.1% to Rs.4,400.3 million in fiscal 2006, as compared to Rs.3,462.7 million in fiscal 2005. Revenues from sales of formulations in Russia accounted for 58.7% of our formulation revenues outside India in fiscal 2006, as compared to 60.9% in fiscal 2005. Revenues from sales of formulations in Russia increased by 22.6% to Rs.2,583.1 million in fiscal 2006, as compared to Rs.2,107.2 million in fiscal 2005. The increase was primarily due to an increase in sales volumes as a result of marketing activities as well as the Russian government’s implementation in January 2005 of the Dopolnitelnoye Lekarstvennoye Obespechenoye (“DLO”) program pursuant to which the Russian government purchases drugs for free distribution to low income individuals. Revenues from sales to other countries of the former Soviet Union increased by 39.4% to Rs.826.8 million for fiscal 2006 as compared to Rs.593.3 million for fiscal 2005, primarily driven by an increase in revenues in the Ukraine and Kazakhstan. Revenues from sales to the rest of the world increased by 19.2% to Rs.731.1 million in fiscal 2006, as compared to Rs.613.1 million in fiscal 2005. This increase was primarily due to higher revenues from sales to South Africa, Myanmar, Vietnam and Jamaica and was offset by a decrease in revenues from sales to Venezuela and Sri Lanka.
     Active Pharmaceutical Ingredients and Intermediates. In fiscal 2006, we received 33.9% of our total revenues from this segment as compared to 35.6% in fiscal 2005. Revenues in this segment increased by 18.6% to Rs.8,238.0 million in fiscal 2006, as compared to Rs.6,944.5 million in fiscal 2005.
     During fiscal 2006, revenues from sales in India accounted for 27.8% of our revenues from this segment, as compared to 28.4% in fiscal 2005. Revenues from sales in India increased by 16.1% to Rs.2,296.4 million in fiscal 2006, as compared to Rs.1,972.1 million in fiscal 2005. This increase was primarily due to an increase in sales volumes of ciprofloxacin, sparfloxacin and ranitidine as well as an increase in the sales price of ciprofloxacin.
     Revenues from sales outside India increased by 19.5% to Rs.5,941.7 million in fiscal 2006, as compared to Rs.4,972.5 million in fiscal 2005. Revenues from sales in Europe increased by 30.2% to Rs.1,420.9 million in fiscal 2006, as compared to Rs.1,091.2 million in fiscal 2006, primarily due to an increase in revenues from new product launches. Revenues from sales in North America (United States and Canada) decreased by 10.5% to Rs.1,655.0 million in fiscal 2006, as compared to Rs.1,849.0 million in fiscal 2005, primarily due to a decrease in sales of ranitidine Hcl Form 1. Revenues from sales in the rest of the world increased from Rs.2,032.3 million in fiscal 2005 to Rs.2,865.7 in fiscal 2006, driven primarily by the growth of sales in Israel, Turkey, Mexico and Brazil.
     Generics. In fiscal 2006, we received 16.7% of our total revenues from this segment, as compared to 18.3% in fiscal 2005. This segment’s revenues, including revenues contributed by betapharm (starting March 3, 2006), increased by 13.4% to Rs.4,055.8 million in fiscal 2006, as compared to Rs.3,577.4 million in fiscal 2005. Excluding revenues contributed by betapharm, this segment’s revenues declined by 6.3% to Rs.3,350.8 million. Revenues from sales in North America (United States and Canada) decreased by 26.9% to Rs.1,630.6 million in fiscal 2006, as compared to Rs.2,230.1 million in fiscal 2005. This was primarily on account of a decrease in prices of tizanidine and fluoxetine due to increased competition. Together, these products contributed Rs.437.8 million in revenue in fiscal 2006, as compared to Rs.1,134.7 million in fiscal 2005. This decline was partially offset by the revenues from new product launches of glimpiride and zonisamide as well as an increase in sales of ibuprofen and naproxen. The benefit of high pricing in omeprazole and amlodipine was more than offset by a decline in revenues from sales of key products in North America. Revenues from sales in Europe increased by 80.8% to Rs.2,421.5 million in fiscal 2006, as compared to Rs.1,339.6 million in fiscal 2005. Revenues contributed by betapharm (starting March 3, 2006) of Rs.704.9 million have been included in this segment’s fiscal 2006 revenues. Excluding revenues contributed by betapharm, revenues from sales in Europe increased by 28.1% to Rs.1,716.6 million in

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fiscal 2006 primarily due to growth of sales volume and higher pricing of omeprazole and amlodipine maleate in the U.K. market.
     Critical Care and Biotechnology. We received 2.8% of our total revenues from this segment in fiscal 2006, as compared to 2.7% in fiscal 2005. Revenues in this segment increased to Rs.691.1 million in fiscal 2006, as compared to Rs.527.1 million in fiscal 2005.
     Revenues from our critical care division increased by Rs.109.6 million in fiscal 2006, primarily on account of an increase in revenues from sales in India of key products such as Dacotin, our brand of oxaliplatin, Docetere, our brand of docetaxel, and Mitotax, our brand of paclitaxel. Revenues from our biotechnology division increased by Rs.54.4 million in fiscal 2006, primarily due to growth in sales volumes of Grastim, our brand of filgrastim.
     Discovery Research. There were no revenues from discovery research in fiscal 2006, as compared to Rs.288.4 million in fiscal 2005 (which was attributable to the recognition of Rs.235.6 million from Novartis Pharma A.G. and Rs.52.8 million from Novo Nordisk as the result of termination of license agreements with both of these companies)
     Custom Pharmaceutical Services. Revenues from custom pharmaceutical services, including revenues from our recently acquired subsidiary Falcon, grew to Rs.1,326.8 million in fiscal 2006 as compared to Rs.311.6 million in fiscal 2005. Excluding revenues from Falcon, revenues grew by 67.8% to Rs.522.8 million driven by growth in our customer base and product portfolio.
     Others. Revenues from our other businesses (consisting of service income in Aurigene Discovery Technologies Limited) were Rs.29.4 million in fiscal 2006 as compared to Rs.47.5 million in fiscal 2005.
Cost of revenues
     Cost of revenues increased by Rs.3,031.6 million to Rs.12,417.4 million for fiscal 2006, as compared to Rs.9,385.8 million for fiscal 2005. As a percentage of total revenues, cost of revenues was 51.2% for fiscal 2006, as compared to 48.1% for fiscal 2005. Excluding revenues and cost of revenues from betapharm and Falcon, cost of revenues increased by Rs.1,987.9 million to Rs.11,373.8 million, which was 50% of total revenues for fiscal 2006, as compared to 48.1% for fiscal 2005.
     Formulations. Cost of revenues in this segment was 31.1% of revenues for fiscal 2006, as compared to 31.9% of revenues for fiscal 2005. Cost of revenues increased by 23.7% to Rs.3,084.1 million in fiscal 2006, as compared to Rs.2,492.8 million in fiscal 2005 which is roughly in line with our overall increase in this segment’s revenues.
     Active Pharmaceutical Ingredients and Intermediates. Cost of revenues in this segment decreased to 71.8% of this segment’s revenues in fiscal 2006, as compared to 72.2% of the segment’s revenues in fiscal 2005. Cost of revenues increased by 18.0% to Rs.5,916.6 million in fiscal 2006, as compared to Rs.5,013.5 million in fiscal 2005. The decrease in cost of revenues as a percentage of revenues was primarily due to an overall increase in sales.
     Generics. Cost of revenues, including revenues from betapharm, was 53.5% of this segment’s revenues in fiscal 2006, as compared to 45.3% in fiscal 2005. Cost of revenues increased by 33.8% to Rs.2,168.8 million in fiscal 2006, as compared to Rs.1,620.3 million in fiscal 2005. The increase in cost of revenues as a percentage of sales in this segment was primarily as a result of a decline in average price realization in our U.S. generics businesses due to continued pricing pressure.
     Critical Care and Biotechnology. Cost of revenues in this segment increased to 34.1% of this segment’s revenues in fiscal 2006, as compared to 33.5% in fiscal 2005. Cost of revenues increased by 33.6% to Rs.235.9 million in fiscal 2006, as compared to Rs.176.5 million in fiscal 2005. The increase was due to a decrease in prices of key products as well as an increase in production overhead costs.
     Custom Pharmaceutical Services. Cost of revenues in this segment increased from Rs.82.6 million to Rs.999.4 million primarily as a result of the acquisition of Falcon, which is included within this segment. The cost of revenue as a percentage of revenue was at 75.3% as compared to 26.5% in the previous year. This increase was primarily a result of increased sales of API products having lower margins.
Gross profit
     As a result of the trends described in “Revenues” and “Cost of revenues” above, our gross profit, including profit from betapharm and Falcon, increased by 16.9% to Rs.11,849.6 million for fiscal 2006 from Rs.10,133.6 million during fiscal 2005. Excluding profit from betapharm and Falcon, gross profit increased by 12.3% to Rs.11,384.4 million for fiscal 2006. Gross margin percentage was

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48.8% in fiscal 2006, as compared to 51.9% in fiscal 2005.
     Gross margin of the formulations segment increased to 68.9% in fiscal 2006, as compared to 68.1% in fiscal 2005. The gross margin for our active pharmaceutical ingredients segment increased to 28.2% in fiscal 2006, as compared to 27.8% in fiscal 2005. The gross margin for our generics segment decreased to 46.5% in fiscal 2006, as compared to 54.7% in fiscal 2005. The gross margin for our critical care and biotechnology segment was 65.9% in fiscal 2006, as compared to 66.5% in fiscal 2005. The gross margin for our custom pharmaceutical services segment reduced to 24.7% in fiscal 2006, as compared to 73.5% in fiscal 2005.
Selling, general and administrative expenses
     Selling, general and administrative expenses, including expenses of betapharm and Falcon, increased by 18.5% to Rs.8,028.9 million in fiscal 2006, as compared to Rs.6,774.6 million in fiscal 2005. Excluding expenses of betapharm and Falcon, selling, general and administrative expenses increased 13.4% to Rs.7,687.4 million for fiscal 2006. Selling, general and administrative expenses, including expenses of betapharm and Falcon, as a percentage of revenues were 33.1% for fiscal 2006 as compared to 34.7% for fiscal 2005.
     The increase in selling, general and administrative expenses as a whole was largely due to an increase in employee costs as well as marketing costs, largely offset by a decrease in legal and professional expenses. Employee costs increased by 18.0% primarily due to annual compensation increases and market corrections as well as an increase in the number of employees. Marketing expenses increased by 36.0% primarily on account of higher selling expenses and higher shipping costs. Legal and professional expenses decreased by 10.6% primarily due to lower legal and consultancy activity in fiscal 2006.
Research and development expenses
     Research and development costs decreased by 23.2% to Rs.2,153.0 million for fiscal 2006, as compared to Rs.2,803.3 million for fiscal 2005. The acquisitions of betapharm and Falcon did not have any significant impact on research and development expenditure. As a percentage of revenue, research and development expenses were 8.9% of our total revenue in fiscal 2006 as compared to 14.4% in fiscal 2005. The decrease was primarily on account of lower research and development costs in our drug discovery segment and lower research and development costs in our generics segment, which includes costs for research and development related to our specialty pharmaceuticals business, offset by an increase in expenses in our formulations, biotechnology and CPS segments. Under the terms of the research and development partnership agreement with I-VEN Pharma Capital Limited, we received Rs.985.4 million (U.S.$22.5 million) in March 2005 to be applied to research and development costs in our generics segment, of which Rs.384.5 million (U.S.$8.6 million) was recorded as a reduction in the research and development expense line item in fiscal 2006 as compared to Rs.96.2 million (U.S.$2.2 million) recognized in fiscal 2005.
Amortization expenses
     Amortization expenses, including expenses of betapharm and Falcon, increased by 20.0% to Rs.419.9 million from Rs.350.0 million. The increase was primarily on account of amortization of intangibles acquired in the acquisition of betapharm and Falcon amounting to Rs.87.2 million and Rs.6.8 million, respectively.
Foreign exchange gain/loss
     Foreign exchange loss was Rs.126.3 million for fiscal 2006 as compared to a loss of Rs.488.8 million for fiscal 2005. In fiscal 2006, the rupee depreciated by 1.95%, resulting in a gain on translation and realization of foreign currency receivables and a loss on translation of foreign currency loans. This also caused a loss on forward foreign exchange contracts entered into to hedge receivables.
Other operating expense/(income), net
     Other operating income net amounted to Rs.320.4 million in fiscal 2006, as compared to Rs.6.0 million in fiscal 2005. This includes profit of Rs.387.3 million in fiscal 2006 on sale of our finished dosages manufacturing facility located in Goa, India.
Operating income
     As a result of the foregoing, our operating income was Rs.1,441.9 million in fiscal 2006, as compared to an operating loss of Rs.289.2 million in fiscal 2005. Operating gain as a percentage of total revenues was 5.9% in fiscal 2006, as compared to (1.5%) in fiscal 2005.

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Other income, net
     For fiscal 2006 our other income was Rs.533.6 million, as compared to Rs.454.2 million for fiscal 2005. This includes net interest income of Rs.418.8 million in fiscal 2006 as compared to Rs.271.9 million in fiscal 2005. The increase in other income was primarily a result of an increase in interest income earned on investment of surplus funds.
Equity in loss of affiliates
     Equity in loss of affiliates increased by Rs.30.1 million to Rs.88.2 million for fiscal 2006 from Rs.58.1 million for fiscal 2005, primarily due to a loss allocation from Perlecan Pharma Private Limited of Rs.40 million for fiscal 2006. However, the increase was offset by a decrease in loss allocation from Kunshan Rotam Reddy Pharmaceuticals by Rs.9.9 million on account of a reduction in losses.
Income before income taxes and minority interest
     As a result of the foregoing, income before income taxes and minority interest increased to Rs.1,887.3 million in fiscal 2006, as compared to Rs.107 million in fiscal 2005. As a percentage of revenues, income before income taxes and minority interest was 7.8% of revenues in fiscal 2006, as compared to 0.5% of revenues in fiscal 2005.
Income tax expense
     Income tax expense for fiscal 2006 was Rs.258.4 million as compared to an income tax net benefit of Rs.94.3 million for fiscal 2005. The income tax expense increase in fiscal 2006 was primarily a result of significantly higher income from operations in fiscal 2006 as compared to fiscal 2005, in which year we recorded a tax loss. Further, we had a higher weighted average deduction in fiscal 2005 as a result of research and development expenses principally related to increased research and development spending and lower credits arising from the I-VEN transaction.
Minority interest
     Minority interest for fiscal 2006 was an expense of Rs.0.1 million representing minority’s share in the profits of Dr. Reddy’s Laboratories (Proprietary) Limited, our subsidiary in South Africa. During fiscal 2005, we realized a gain of Rs.9.9 million on account of allocation of minority’s share in the losses of this subsidiary.
Net income
     As a result of the above, our net income increased to Rs.1,628.9 million in fiscal 2006, as compared to Rs.211.1 million in fiscal 2005. Net income as a percentage of total revenues increased to 6.7% in fiscal 2006 from 1.1% in fiscal 2005.

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Recent Accounting Pronouncements
     In July 2006, the Financial Accounting Standard Board (“FASB”) issued FASB Interpretation No. 48, Uncertainty in Income Taxes (“FIN 48”). FIN 48 applies to all tax positions within the scope of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, and clarifies when and how to recognize tax benefits in the financial statements with a two-step approach of recognition and measurement. FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 also requires the enterprise to make explicit disclosures about uncertainties in their income tax positions, including a detailed roll forward of tax benefits taken that do not qualify for financial statement recognition. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. We have evaluated the impact of this pronouncement and do not believe that our adoption of FIN 48 for the fiscal year beginning April 1, 2007 will have a material effect on our financial position, cash flows or results of operations.
     In September 2006, the FASB issued Statement of Financial Accounting Standards No.157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 provides guidance on determination of fair value, and lays down the fair value hierarchy to classify the source of information used in fair value measurements. We will be required to adopt this new standard for the fiscal year beginning April 1, 2008. We are currently evaluating the requirements of SFAS 157 and have not yet determined the impact on our consolidated financial statements.
     In February 2007, the FASB released Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. We will be required to adopt this new standard for the fiscal year beginning April 1, 2008. We are currently evaluating the requirements of SFAS 159 and have not yet determined the impact on our consolidated financial statements.
     In June 2007, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to be Used in Future Research and Development Activities. EITF Issue No. 07-3 provides guidance concerning the accounting for non-refundable advance payments for goods and services that will be used in future research and development activities and requires that they be expensed when the research and development activity has been performed and not at the time of payment. The provisions of EITF Issue No. 07-3 are effective for fiscal years beginning after December 15, 2007, with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. We are currently evaluating the impact of adopting EITF Issue No. 07-3 on our consolidated financial statements.
5.B. Liquidity and capital resources
Liquidity
     We have primarily financed our operations through cash flows generated from operations and through short-term borrowings for working capital. Our principal liquidity and capital needs are for making investments, the purchase of property, plant and equipment, regular business operations and drug discovery.
     Our principal sources of short-term liquidity are internally generated funds and short-term borrowings, which we believe are sufficient to meet our working capital requirements and currently anticipated capital expenditures over the near term. As part of our growth strategy, we continue to review opportunities to acquire companies, complementary technologies or product rights. To fund the acquisition of betapharm in Germany in fiscal 2006, we borrowed 400 million under a bank loan facility with a maturity period of five years. If our future acquisitions involve significant cash payments, rather than the issuance of shares, we may need to further borrow from banks or raise additional funds from the debt or equity markets.
     As of March 31, 2007 we anticipate expenditures of approximately U.S. $115 million over the next two fiscal years in connection with the addition of manufacturing capacity in and expansion of infrastructure requirements for our business.
     The following table summarizes our statements of cash flows for the periods presented:

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    Fiscal Year Ended March 31,  
    2005     2006     2007     2007  
    (Rs. in million, U.S.$ in thousands)  
Net cash provided by /(used in):
                               
Operating activities
  Rs. 2,291.6     Rs. 1,643.1     Rs. 11,804.5     U.S.$ 273,887  
Investing activities
    632.9       (34,524.4 )     592.5       13,746  
Financing activities
    1,931.3       27,210.9       1,753.7       40,689  
Effect of exchange rate changes on cash
    55.8       95.1       118.1       2,741  
 
                       
Net increase / (decrease) in cash and cash Equivalents
  Rs. 4,911.6     Rs. (5,575.2 )   Rs. 14,268.8     U.S.$ 331,063  
 
                       
Cash Flow from Operating Activities
     Net cash provided by operating activities increased from Rs.1,643.1 million in fiscal 2006 to Rs.11,804.5 million in fiscal 2007. The significant increase in net cash was primarily attributable to the increase in our overall revenues and profits as there was growth in our operations in North America (United States and Canada) resulting from the launch of key products such as simvastatin, finasteride and fexofenadine.
     Net cash provided by operating activities in fiscal 2007 is based upon our fiscal 2007 net income (which was Rs.9,326.8 million), as increased to add back non-cash items (resulting in an increase of Rs.5,597.0 million) and as decreased to account for the fiscal 2007 increase in working capital (resulting in a decrease of Rs.3,119.6 million).
     The increase in working capital was caused by an increase in accounts receivable by Rs.2,705.8 million and inventories by Rs.995 million, partly offset by an increase in trade payables by Rs.889.6 million, all in line with our increased sales and anticipated product launches.
Cash Flow from Investing Activities
     Net cash provided by investing activities was Rs.592.5 million for fiscal 2007, as compared to net cash used by investing activities of Rs.34,524.4 million for fiscal 2006. This was primarily on account of a decrease in restricted cash by Rs.5,468.9 million during fiscal 2007, partly offset by additional expenditures of Rs.4,477.1 million on property, plant and equipment and Rs.325.8 million on intangible assets.
Cash Flows from Financing Activities
     Net cash provided by financing activities for fiscal 2007 decreased to Rs.1,753.7 million, as compared to Rs.27,210.9 million for fiscal 2006. Net cash provided by financing activities for fiscal 2007 was primarily due to Rs.10,029.5 million in cash inflows resulting from our November 2006 public offering of American Depositary Shares, partly offset by the repayment of borrowings and short term loans from banks net of proceeds from a short term loan of Rs.5,870.7 million, repayment of long-term debt of Rs.1,888.5 million and payment of dividends of Rs.437.5 million. In comparison, net cash provided by financing activities for fiscal 2006 was primarily due to short-term borrowings from banks of Rs.6,322.0 million and long-term borrowings from banks incurred in connection with the acquisition of betapharm of Rs.21,598.30 million.
Principal obligations
     The following table summarizes our principal debt obligations outstanding as of March 31, 2007:
                                         
    Payments due by period    
    (Rs. in millions)    
Financial Contractual           Less than                   After    
Obligations   Total   1 year   1-3 years   3-5 years   5 years   Annual Interest Rate
Short-term borrowings
from banks
   
3,212.7
     
3,212.7
     
     
   
 
LIBOR + 60bps for foreign currency denominated
loans and 8% to 10% for rupee denominated loans
 
                                       
Long term debt
    21,288.7       3,664.6       6,187.8       11,436.3        
From Indian Renewable Energy Development Agency
    19.2       5.9       11.8       1.5       2%*
For betapharm acquisition
    21,269.5       3,658.7       6,176.0       11,434.8         EURIBOR + 70 bps – 200 bps
 
                                       
Total obligations
    24,501.4       6,877.3       6,187.8       11,436.3        
 
                                       

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*   Loan received at a subsidized rate of interest from Indian Renewable Energy Development Agency Limited promoting use of alternative sources of energy.
     Subject to obtaining certain regulatory approvals, there are no legal or economic restrictions on the transfer of funds between us and our subsidiaries or for the transfer of funds in the form of cash dividends, loans or advances.
     The maturities of our short-term borrowings from banks vary from one month to approximately six months. Our objective in determining the borrowing maturity is to ensure a balance between flexibility, cost and the continuing availability of funds. All of our debts except for short-term working capital loans from banks are at fixed rates of interest.
     Cash and cash equivalents are primarily held in Indian rupees, U.S. dollars, U.K. pounds sterling, Singapore dollars, Brazilian real, Euros, Russian roubles, Chinese yuan, South African rand and Hong Kong dollars.
     As of March 31, 2006 and 2007, we had committed to spend approximately Rs.744.0 million and Rs.1,186.0, respectively, under agreements to purchase property and equipment and other capital commitments. These amounts are net of capital advances paid in respect of such purchases and we anticipate funding them from internally generated funds.
5.C. Research and development, patents and licenses, etc.
Research and Development
     Our research and development activities can be classified into several categories, which run parallel to the activities in our principal areas of operations:
  Formulations, where our research and development activities are directed at the development of product formulations, process validation, bioequivalency testing and other data needed to prepare a growing list of drugs that are equivalent to numerous brand name products for sale in the emerging markets.
 
  Active pharmaceutical ingredients and intermediates, where our research and development activities concentrate on development of chemical processes for the synthesis of active pharmaceutical ingredients for use in our generics and formulations segments and for sales in the emerging and developed markets to third parties.
 
  Generics, where our research and development activities are directed at the development of product formulations, process validation, bioequivalency testing and other data needed to prepare a growing list of drugs that are equivalent to numerous brand name products whose patents and regulatory exclusivity periods have expired or are nearing expiration in the regulated markets of the United States and Europe.
 
  Critical care and biotechnology, where research and development activities are directed at the development of oncology and biotechnology products for the emerging as well as regulated markets. Our new biotechnology research and development facility caters to the highest development standards, including cGMP, Good Laboratory Practices and bio-safety level IIA. We are in the process of building our bio-generics pipeline. During fiscal 2005, we entered into an agreement with a U.S. based biotechnology company for the development of a bio-generics portfolio.
 
  Drug discovery, where we are actively pursuing discovery and development of NCEs. Our research programs focus on the following therapeutic areas:
  §   Metabolic disorders
 
  §   Cardiovascular disorders
 
  §   Bacterial infections
 
  §   Inflammation
 
  §   Cancer
  Custom pharmaceutical services, where we intend to leverage the strength of our process chemistry and finished dosage development expertise to target innovator as well as emerging pharmaceutical companies. The research and development is directed toward providing services to support the entire pharmaceutical value chain — from discovery all the way to the market.
     In fiscal 2005, 2006 and 2007, we expended Rs.2,803.3 million, Rs.2,153.0 million and Rs.2,462.7, respectively, on research and development activities.
Patents, Trademarks and Licenses

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     We have filed and been issued numerous patents in our principal areas of operations: drug discovery, active pharmaceutical ingredients and intermediates and generics. We expect to continue to file patent applications seeking to protect our innovations and novel processes in several countries, including the United States. Any existing or future patents issued to or licensed by us may not provide us with any competitive advantages for our products or may even be challenged, invalidated or circumvented by our competitors. In addition, such patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products. We have filed 1,058 trademarks with the Registrar of Trademarks in India of which 558 are already registered. We also have made application for registration for non-U.S. trademarks in other countries in which we do business. We market several products under licenses in several countries where we operate.
5.D. Trend information
     Formulations. According to ORG IMS in its March 2007 Moving Annual Total (“MAT”) report, our sales of formulations in India had a growth rate of 17%, as compared to the industry growth rate of 14% in India. According to the Center for Marketing and Advertising Research Consultancy (“CMARC”) report for the period November to February 2007, which measures doctors’ prescriptions, we were the fastest growing company among the top 10 companies in terms of sales of formulations in India. We launched 21 new products (including extentions of existing product lines) in India during fiscal 2007. We expect to grow at a rate higher than the pharmaceutical industry growth rate in India.
     The competitive environment in the developing markets outside of India is changing, with most countries having moved or moving towards recognizing product patents. This implies that the new product launches in the future will depend either on the innovator patent expiries or developing non-infringing processes and/or invalidating the patents. Further, the governments in several countries are in the process of implementing various healthcare reforms to promote the consumption of generic drugs in order to contain their healthcare costs. This will present growth opportunities in several of these markets though we could experience a reduction of the reimbursement prices. However, an increasing number of patent expiries over the next few years and changing demographic conditions also present additional growth opportunities.
     As part of our global business development program, we will continue to explore in-licensing and other opportunities to strengthen our product pipeline. Among our international markets, Russia is our single largest market. In 2006, the pharmaceutical market in Russia grew by 27% driven by 20% growth in the retail segment and 78% growth in the Dopolnitelnoye lekarstvennoye obespechenoye (“DLO”) program. Pursuant to the DLO program, the Russian government purchases drugs for free distribution to low income individuals. During fiscal 2007, we launched several new products in Russia through a combination of owned as well as in-licensed products. Our entry into the hospitals and over-the-counter segments also added to our overall growth in Russia. We expect our growth momentum to continue in Russia as a result of the above initiatives. We are also focusing on driving growth in other countries in the former Soviet Union, South Africa and China through new product launches.
     Active Pharmaceutical Ingredients and Intermediates. In this segment, we are focused on increasing our level of customer engagement in key markets globally to market additional products from our product portfolio to key customers. We are also focused on identifying unique product opportunities in key markets and protecting them through patenting strategies. As of March 31, 2007, we had a pipeline of 104 drug master filings (“DMFs”) in the United States. With patent expiries in several markets in the next few years, we intend to promote growth in fiscal 2008 and beyond by leveraging our portfolio of markets and products. During fiscal 2007, our sales growth and gross profit margins were positively impacted by an increase in sales of high margin products, particularly benefiting from the launch of commercial supplies of sertraline (Zoloft®) in the United States as well as one-time supply of rabeprazole to Teva. Following expiration of the 180 days of marketing exclusivity in sertraline, the selling price has normalized. The success of our API products in our key markets is contingent upon the extent of competition in the generics market, and we anticipate that such competition will continue to be significant.
     Generics. In this segment, we are focused on the regulated markets of North America (the United States and Canada) and Europe. In the United States, our revenues during fiscal 2007 benefited significantly from the launch of fexofenadine, the generic version of Allegra® (launched at risk (i.e., prior to resolution of patent infringement claims) in April 2006), simvastatin, the authorized generic version of Zocor®, finasteride 5 mg, the authorized generic version of Proscar®, and ondansetron, the generic version of Zofran®. See “Recent developments” for a discussion of litigation related to fexofenadine.
     In January 2006, we entered into an agreement with Merck allowing us to distribute and sell authorized generic versions of two of their products, finasteride and simvastatin (sold by Merck under the brand names Zocor® and Proscar®), provided that some other company obtained 180-day exclusivity after the expiration of the patents for either product. Subsequently, the patents for both of these products expired and other companies obtained 180-day marketing exclusivity. Accordingly, we launched sales of these products on June 19, 2006 and June 23, 2006, respectively. Upon the expiration of the 180-days of marketing exclusivity (towards the end of December 2006), we launched simvastatin under our own Abbreviated New Drug Application. The prices and volume of simvastatin have decreased significantly following the expiration of the 180-day marketing exclusivity period. On December 27, 2006, we launched a generic version of GSK’s Zofran® (ondansetron) tablets with 180-days of marketing exclusivity. The prices and volume of ondansetron have decreased significantly following the expiration of the 180-day marketing exclusivity period in June 2007.

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     We intend to expand our portfolio over the next few years by adding solid dosages forms as well as alternate dosage forms of each product through alliances to complement our internal product development effort. In the U.S., we have been pursuing a strategy to increase our operating leverage by selling our pipeline into new channels for meaningful incremental revenue and margin generation with limited incremental selling, general and administrative expenses and research and development. During fiscal 2008, we expect to implement this strategy along two lines. The first aspect of this strategy is our decision to enter the private label OTC business following the suspension of OTC packaging and distribution activities at Leiner. The initial response from various customer groups has been positive. The first product (ranitidine 150 mg) was successfully launched and launch planning for additional products has been progressing well. The second aspect of this strategy is an opportunity to supply generics to U.S. government agencies such as veteran affairs and department of defense. In support of this opportunity, Dr. Reddy’s has become an authorized supplier to the U.S. government. The first product to be supplied to the U.S. government is finasteride 5mg.
     We are also expanding our presence in Canada by leveraging the infrastructure and assets that we have established for the U.S. market. The success of our existing products is contingent upon the extent of competition in the generics market, which we anticipate will continue to be significant. As of March 31, 2007, we had 76 ANDAs pending approval (including ANDAs through alliances with third parties) with the U.S. FDA. This included 33 patent challenges. The launch of these products is contingent upon the successful outcome of litigation related to such products.
     In the United Kingdom, we do not anticipate any significant product launches in fiscal 2008.
     In Germany, the first full year of revenues and net income of betapharm, which we acquired in March 2006, is reflected in our fiscal 2007 results. During fiscal 2007, the German government passed the Economic Optimization of the Pharmaceutical Care Act (“AVWG”), which became effective May 1, 2006. In addition, a new list of products for which the co-payment fee is waived came into effect in Germany from November 1, 2006. As a response to this legislation, some of the leading pharmaceutical companies in Germany announced aggressive price cuts and we responded with significant price cuts on those of our products subject to the new regulations. Further, in the quarter ended March 31, 2007, we witnessed supply constraints from our lead supplier. We have re-negotiated our supply agreement with our lead supplier, Salutas Pharma GmbH (“Salutas”) whereby we have converted the agreement to a non-exclusive supply arrangement allowing us the flexibility to move individual products out of Salutas. While the products are transferred out of Salutas to alternate manufacturing locations, we agreed to pay higher costs for the products supplied by Salutas which will be reflected in our results in fiscal 2008. The German government passed the WSG, which became effective April 1, 2007, which empowers insurance companies to influence the pricing of products through tenders and rebate contracts.
     The future growth of betapharm is based on the continued success of our existing products which are contingent upon the extent of competition in the German market, changes in the market dynamics due to the AVWG, WSG and additional healthcare reforms further impacting the pricing, the successful transfer of key products out of Salutas to alternate supply locations, the competitive environment for our key products as well as successful new product introductions.
     Critical Care and Biotechnology. We expect that we will continue to market our existing products and develop additional products in this segment. The success of our existing products is contingent upon the extent of competition in this segment. In April 2007, we launched our second biotechnology product, RedituxTM, Dr. Reddy’s brand of rituximab, a monoclonal antibody used the in the treatment of Non-Hodgkin’s Lymphoma. We expect to continue with our investments in building the infrastructure and capabilities for the development and launch of additional biogenerics in the less regulated markets in the next few years. Longer-term, we intend to target launches in the regulated markets as and when the regulatory pathway becomes clear in these markets.
     Custom Pharmaceutical Services. In fiscal 2007, this segment benefited from the full year impact of the acquisition of Falcon. Excluding the impact of the Falcon acquisition, the base business in this segment almost doubled as we continue to expand the portfolio of relationships and projects with large pharmaceutical companies and emerging pharmaceutical and biotechnology companies. In fiscal 2008, we witnessed some supply constraints in the raw material for one of the our key products manufactured at Falcon due to which we were not able to service part of the customer requirements during the quarter ended June 30, 2007. We have commissioned a facility in India to supply this ingredient to Falcon. We expect to grow this business on the strength of expanding customer relationships. In addition, we are also actively pursuing inorganic growth opportunities.
     Drug Discovery. Currently, we have a pipeline of 6 NCEs of which 5 are in clinical development and 1 is in pre-clinical development. Three of these NCEs have been assigned to Perlecan under the terms of our research and development arrangement with I-VEN entered into during fiscal 2006, and one NCE is under a co-development arrangement with Denmark based Rheoscience A/S. During August 2007, Rheoscience A/S and Dr. Reddy’s announced the commencement of the Phase III clinical trials for Balaglitazone (DRF 2593), which is an insulin sensitizer that acts as a partial PPAR (peroxisome proliferator-activated receptor) gamma agonist. The study is the first in a series of planned Phase III trials which will investigate the safety and efficacy of Balaglitazone as an oral anti-diabetic drug. As we make progress in advancing our pipeline through various stages of clinical development we are building capabilities in drug development. We believe this will help to enhance the value of our NCE assets. We expect to further complement our internal research and development efforts by pursing strategic partnerships and alliances in our key focus areas.
     Specialty. We are currently in the research and development phase of our specialty pharmaceuticals business, which may become a separate segment at some point in the future. Following the acquisition of Trigenesis Therapeutics Inc. in May 2004, we commenced

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the pursuit of the development of dermatology products targeted towards specialty prescription dermatology segment, which products will have patent protected franchises.
     Research and Development Expenses. In fiscal 2007, our research and development investments benefited from the recognition of income under the Perlecan and I-VEN agreements described above. The income recognition under the agreement with I-VEN was completed in fiscal 2007. Based on our historical research and development expense trends, we expect our research and development expenses to be higher in the first half of fiscal 2008 as compared to the first half of fiscal 2007, and higher in the second half of fiscal 2008 as compared to the first half of fiscal 2008.
5.E. Off-Balance Sheet Arrangements
     Guarantees. We adopted the provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. The Interpretation requires that we recognize the fair value of guarantee and indemnification arrangements issued or modified by us after December 31, 2002, if these arrangements are within the scope of that Interpretation. In addition, under previously existing generally accepted accounting principles, we continue to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses can be estimated.
     Kunshan Rotam Reddy Pharmaceutical Co. Limited (“KRRP”) secured a credit facility of Rs.32 million from Citibank, N.A. (“Citibank”). To enhance the credit standing of KRRP, during fiscal 2006 we issued a corporate guarantee amounting to Rs.45.0 million in favor of Citibank. The guarantee is required to be renewed every year and our liability may arise in case of non-payment or non-performance of other obligations of KRRP under its credit facility agreement with Citibank. As of March 31, 2007, we believe that the fair value of such liability is not material.
5.F. Tabular Disclosure of Contractual Obligations
     The following summarizes our contractual obligations as of March 31, 2007 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
                                         
    Payments Due by Period  
    (Rs. in millions)  
            Less than                     More than  
Contractual Obligations   Total     1 year     1-3 years     3-5 years     5 years  
Operating lease obligations
  Rs.474.3     Rs.136.6     Rs.159.3     Rs.111.2     Rs.67.2  
 
                             
 
                                       
Capital lease obligations
    252.5       5.7       12.4       14.1       220.3  
 
                             
Current portion
    5.7       5.7                    
 
                             
Non-current portion
    246.8             12.4       14.1       220.3  
 
                             
 
                                       
Purchase obligations
                                       
Agreements to purchase property and equipment and other capital commitments(1)
    1,186.0       1,186.0                    
 
                             
 
                                       
Borrowings from banks
    3,212.7       3,212.7                    
 
                             
 
                                       
Long term debt obligations
    21,288.7       3,664.6       6,187.8       11,436.3        
 
                             
Current portion
    3,664.6       3,664.6                    
Non-current portion
    17,624.1             6,187.8       11,436.3        
 
                                       
Total contractual obligations
  Rs.24,414.2     Rs.8,205.6     Rs.6,359.5     Rs.11,561.6     Rs.297.5  
 
(1)   These amounts are net of capital advances paid in respect of such purchases and are expected to be funded from internally generated funds.
     In accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 106, "Employers’ Accounting for Postretirement Benefits Other Than Pensions,” as amended by SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R),” the total accrued benefit liability for defined benefit and contribution plans recognized as of March 31, 2007, was Rs.39 million. This accrued liability is included under other long-term liabilities in the consolidated balance sheet. This amount is impacted by, among other items, pension expense funding levels, change in plan demographics and assumptions, return on plan assets, etc. Because the accrued liability does not represent expected liquidity needs, we did not include this amount in the contractual obligation table.
5.G. Safe harbor

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     See page 2.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors and senior management
     The list of our directors and executive officers and their respective age and position as of March 31, 2007 are as follows:
     Directors
         
Name(1)   Age (in yrs)   Position
Dr. K. Anji Reddy(2)
  68   Chairman
Mr. G.V. Prasad(2),(3)
  46   Chief Executive Officer and Executive Vice Chairman
Mr. Satish Reddy(2),(4)
  39   Chief Operating Officer and Managing Director
Mr. Anupam Puri
  61   Director
Prof. Krishna G. Palepu
  52   Director
Dr. Omkar Goswami
  50   Director
Mr. P.N. Devarajan
  72   Director
Mr. Ravi Bhoothalingam
  61   Director
Dr. V. Mohan(5)
  52   Director
 
(1)   Except for Dr. K. Anji Reddy, Mr. G.V. Prasad and Mr. Satish Reddy, all of the directors are independent directors under the corporate governance rules of the New York Stock Exchange.
 
(2)   Full-time director.
 
(3)   Son-in-law of Dr. K Anji Reddy.
 
(4)   Son of Dr. K Anji Reddy.
 
(5)   Dr. V. Mohan ceased to be a Director of the Company with effect from July 28, 2006.
     In addition, Dr. J.P. Moreau and Ms. Kalpana Morparia joined our Board as additional Directors on May 18, 2007 and June 5, 2007, respectively. Our shareholders approved appointment of Dr. J. P. Moreau and Ms. Kalpana Morparia as Directors on July 24, 2007.
Executive Officers
     Our policy is to classify our officers as “executive officers” if they have membership on our Management Council. Our Management Council consists of various business and functional heads and is our senior management organization. As of March 31, 2007, the Management Council consisted of:
                             
                        Date of    
    Education/           Experience in   commencement of    
Name and Designation   Degrees Held   Age   years   employment   Particulars of last employment
 
G.V. Prasad(1)
Vice Chairman and Chief Executive Officer
  B. Sc.(Chem. Eng.), M.S. (Indl. Admn.)     46     23       June 30, 1990   Promoter Director, Benzex
Labs Private Limited
 
                           
Satish Reddy (2)
Managing Director and Chief Operating Officer
  B.Tech., M.S.     39     15       January 18,1993   Director, Globe Organics
Limited
 
                           
Abhijit Mukherjee
President — Developing Businesses
  B. Tech. (Chem.)     48     26       January 15, 2003   President, Atul Limited
 
                           
Alan Sheppard(3)
Executive Vice President — Europe Generics
  B. Tech. (Hons.)     59     36       November 1, 2004   Vice President — Global Corporate Strategy, Pliva
 
                           
Andrew J. Miller (4)
Executive Vice President and U.S. General Counsel
  B.A., J.D.     51     27       January 8, 2002   Shareholder, Budd Larner, P.C.
 
                           
Arun Sawhney
President — API
  B. Com. PGDBM     51     30       June 1, 2001   Chief Executive, Max-GB Ltd.
 
                           
Ashwani Kumar Malhotra
Executive Vice President — Formulations TechOps
  M. Pharma., PGD-IE&M, PGD-CD     51     27       February 8, 2001   Unit Head, Cipla Limited

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                        Date of    
    Education/           Experience in   commencement of    
Name and Designation   Degrees Held   Age   years   employment   Particulars of last employment
 
Jaspal Singh Bajwa
President — Branded Formulations (Rest Of the World)(5)
  MBA     55     30       April 10, 2003   Executive Director and COO, Marico Industries Limited
 
                           
Jeffrey Wasserstein
Executive Vice President — Specialty Operations
  B.A., J.D.     48     24       January 31, 2005   EVP & Chief Business Officer -Avigenics, Inc.
 
                           
K. B. Sankara Rao
Executive Vice President — Integrated Product Development
  M. Pharma.     53     29       September 29, 1986   Production Executive, Cipla Limited
 
                           
Mark Hartman
President — North America Generics
  B.Sc. Dairy Science     48     22       January 4, 2002   VP Sales & Marketing -
Generics, Watson Laboratories
 
                           
Dr. R. Rajagopalan
President — Discovery Research
  Ph.D.     57     34       April 18, 1994   Principal Research Scientist,
Hoechst India Limited
 
                           
Raghu Cidambi
Advisor
  B.Sc., PGDBM, LLB.     56     37       October 1,.2001   Director — Eenadu, Margadarsi Group
 
                           
Saumen Chakraborty
Chief Financial Officer and President Information Technology and Business Process Excellence
  PGDM     46     23       July 2, 2001   Vice President, Tecumseh
 
                           
Dr. Uday Saxena
Chief Scientific Officer
  Ph.D.     49     17       March 3, 2003   Vice President, Preclinical Research, AtheroGenics Inc.
 
                           
V. S. Vasudevan
President — Eurpoean Generics Business
  B. Com. ACA     56     33       April 1, 1986   Finance Head, Standard
Equity Fund Limited
 
(1)   Son-in-law of Dr. K Anji Reddy.
 
(2)   Son of Dr. K Anji Reddy.
 
(3)   Ceased to be our employee effective March 31, 2007.
 
(4)   Term of employment expired on July 31, 2006.
 
(5)   Does not include North America and Europe.
In addition, the following new members joined the Management Council after March 31, 2007:
             
Name   Age   Position
Dr. Rajinder Kumar(1)
    51     President — Research, Development and Commercialization
Mr. Prabir Jha(2)
    40     Senior Vice President and Global Chief of Human Resources
Mr. Amit Patel(3)
    32     Vice President — Corporate Development and Strategic Planning
Mr. Cartikeya Reddy(3)
    37     Vice President and Head Biologics
 
(1)   Joined in April 2007
 
(2)   Joined in May 2007
 
(3)   Joined in August 2007
There was no arrangement or understanding with major shareholders, customers, suppliers or others pursuant to which any director or executive officer referred to above was selected as a director or member of senior management.
Biographies
  Directors
     Dr. K. Anji Reddy is our Founder and Chairman of our Board of Directors. He is also the Founder of Dr. Reddy’s Research Foundation and Dr. Reddy’s Foundation. He has an undergraduate degree in Technology of Pharmaceuticals and Fine Chemicals from the University of Bombay and a Ph.D. in Chemical Engineering from National Chemical Laboratories, Pune. He has six years experience with Indian Drugs and Pharmaceuticals Limited in the manufacture and implementation of new technologies in bulk drugs. He is a member of the Board of Trade as well as the Prime Minister’s Task force on pharmaceuticals and knowledge-based industries. The government of India bestowed the Padmashri Award upon him for his distinguished service in the field of trade and commerce. In addition to positions held in our subsidiaries and joint ventures, he is a Director in Diana Hotels Limited, OOO JV

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Reddy Biomed Limited, Pathenco APS and GAIN Foundation, Switzerland.
     Mr. G.V. Prasad is a member of our Board of Directors and serves as our Vice-Chairman and Chief Executive Officer. He was the Managing Director of Cheminor Drugs Limited, a Dr. Reddy’s Group Company, prior to its merger with us. He has a Bachelor of Science degree in Chemical Engineering from Illinois Institute of Technology, Chicago, U.S.A. and an M.S. in Industrial Administration from Purdue University, U.S.A. He is also an active member of several associations including the National Committee on Drugs & Pharmaceuticals. In addition to positions held in our subsidiaries and joint ventures, he is a Director of Diana Hotels Limited, Nipuna Services Limited and Ocimum Bio Solutions Limited.
     Mr. Satish Reddy is a member of our Board of Directors and serves as our Managing Director and Chief Operating Officer. He has a Master of Science degree in Medicinal Chemistry from Purdue University, U.S.A. and a Bachelor of Technology degree in Chemical Engineering from Osmania University, Hyderabad. He is the member of the Confederation of Indian Industries for Andhra Pradesh. In addition to positions held in our subsidiaries and joint ventures, he is also a Director of Diana Hotels Limited and OOO JV Reddy Biomed Limited..
     Mr. Anupam Puri has been a member of our Board of Directors since 2002. He retired from McKinsey & Company in late 2000. He was a Director and played a variety of other leadership roles during his 30-year career there. Before joining McKinsey & Company, he was Advisor for Industrial Development to the President of Algeria, and consultant to General Electric’s Center for Advanced Studies. He holds a Bachelor of Arts degree in Economics from St. Stephen’s College, Delhi University, and Master of Arts and M. Phil. degrees from Oxford University. He is also on the Boards of ICICI Bank Limited, Mahindra & Mahindra Limited and Tech Mahindra Limited.
     Professor Krishna G. Palepu has been a member of our Board of Directors since 2002. He is the Ross Graham Walker Professor of Business Administration at the Harvard Business School. He holds the title of Senior Associate Dean, Director of Research. Professor Palepu has a Masters degree in physics from Andhra University, an M.B.A. from the Indian Institute of Management and a Ph.D. from the Massachusetts Institute of Technology. He is also a recipient of an honorary M.A. from Harvard, and an honorary Doctorate from the Helsinki School of Economics. He teaches finance, control and strategy in Harvard’s M.B.A. and Executive programs. He has published numerous research papers and is also the co-author of the book titled “Business Analysis & Valuation: Text and Cases.” He serves as a consultant to a wide variety of businesses and is on the boards of Satyam Computer Services Limited, Exetor Group, Enamics Limited and Harvard Business School Publishing Company.
Dr. Omkar Goswami has been a member of our Board of Directors since 2000. He is a founder and Chairman of CERG Advisory Private Limited, a corporate advisory and economic research and consulting company. He was a senior consultant and chief economist at the Confederation of Indian Industry for six years. He has also served as editor of Business India, associate professor at the Indian Statistical Institute, Delhi, and as an honorary advisor to the Ministry of Finance. He holds a Bachelor of Economics degree from St. Xavier’s College, Calcutta University, a Master of Economics degree from the Delhi School of Economics, Delhi University and a Ph.D. degree from Oxford University. He is also a Director on the Boards of Infosys Technologies Limited, DSP-Merrill-lynch Fund Managers Limited, Crompton Greaves Limited, Infrastructure Development Finance Company Limited, SRF Limited, Gujarat Ambuja Cements Limited, Sona Koyo Steering Systems Limited and Cairn India Limited.
     Mr. P.N. Devarajan has been a member of our Board of Directors since 2000. He has previously served as a Director of Cheminor Drugs Limited. He was a member of the Planning Board of Madhya Pradesh, Chairman of Research at the Council of National Environment Engineering Research Institute, member of the Assessment Committee of the Council of Scientific and Industrial Research and a member of the Research Council of National Chemical Laboratory. He has previously served as a Director of the Bank of Baroda, a member of the Central Board of Directors of the Reserve Bank of India and Group President and consultant of Reliance Industries Limited. Currently, he is also a Director on the Board of Kothari Sugars and Chemicals Limited, Shriram EPC Ltd. and Tropical Technologies Pvt Ltd.
     Mr. Ravi Bhoothalingam has been a member of our Board of Directors since 2000. He has served as the President of The Oberoi Group and was responsible for its worldwide operations. He has also served as the Head of Personnel at BAT Plc, Managing Director of VST Industries Limited, and as a Director of ITC Limited. He holds a Bachelor of Science degree in physics from St. Stephens College, Delhi and a Master of experimental psychology degree from Gonville and Caius College, Cambridge University. He is also a Director of Nicco Internet Ventures Limited and Sona Koyo Steering Systems Limited.
     Dr. V. Mohan has been a member of our Board of Directors since 1996. He is also a visiting professor of Diabetology at Sri Ramachandra Medical College and a professor of International Health at the University of Minnesota, U.S.A. He holds a Bachelor of Medicine degree, Doctor of Medicine degree, Ph.D. and a Doctor of Science degree from Madras University. He was awarded the prestigious Dr. B.C. Roy National Award by the Medical Council of India in 2005. He is also the Chairman and Managing Director of Dr. Mohan’s Diabetes Specialties Centre Private Limited and Dr. Mohan’s Diabetes Specialties Centre (Hyderabad) Private Limited

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and he is also the President of the Madras Diabetes Research Foundation. He retired from the Board on July 28, 2006.
     Dr. J.P. Moreau joined our Board as a member on May 18, 2007. He is presently working as Executive Vice-President and Chief Scientific Officer of the IPSEN Group where he is responsible for the Group’s research and development programs in Paris, London, Barcelona and Boston. Before that, he was IPSEN Group’s Vice-President, Research from April 1994 and has been a member of the Executive Committee of IPSEN Group since that date. Dr. Moreau has a degree in Chemistry from the University of Orléans and a D.Sc in biochemistry. He has also conducted post-doctorate research at the École polytechnique. He has published over 50 articles in scientific journals and is named as inventor or co-inventor in more than 30 patents. He is a regular speaker at scientific conferences and a member of Nitto Denko Scientific Advisory Board. In October 1976, Dr. Moreau founded Biomeasure Incorporated, based near Boston, and has been its President and CEO since then. He was also responsible for establishing Kinerton Ltd. in Ireland in March 1989, a wholesale manufacturer of therapeutic peptides, of which he is currently a Director.
     Ms. Kalpana Morparia joined our Board as a member on June 5, 2007. She is Chief Strategy and Communications Officer of ICICI Group. She was previously the Joint Managing Director of ICICI Bank Limited and was responsible for the Corporate Centre at ICICI Bank Limited, comprising operations, planning and strategy, risk management, human resources management, legal and corporate communications and corporate brand management. A graduate in law from Bombay University, Ms. Morparia joined ICICI Limited in 1975. She worked in the areas of planning, treasury, resources and corporate legal services. In 2001, she led the ICICI Group’s major corporate structuring initiative, the merger of ICICI Limited with ICICI Bank to create India’s second largest bank. Ms. Morparia has served on several committees constituted by the Government of India. In November 2005, she was honored with the Economic Times ‘Business Women of the Year’ award. In September 2006, she was named one of ‘The 100 Most Powerful Women’ by Forbes Magazine. She also serves on the Board of ICICI Lombard General Insurance Company Limited, ICICI Prudential Life Insurance Company Limited, ICICI Prudential Asset Management Company Limited and ICICI Securities Limited.
Executive Officers
     Mr. Abhijit Mukherjee is our President of Developing Business. Before joining us, he worked with Atul Limited for 10 years, where he held numerous positions of increasing responsibility. In his last assignment there he was President, Bulk Chemicals and Intermediates Business, and Managing Director, Amal Products Limited. He started his career as a management trainee in Hindustan Lever Limited (“HLL”) and put in 13 years in that company including 3 years in a Unilever company. He was primarily involved in the technical assignments in Aroma chemicals business in HLL and Unilever and also in detergents and sulphonation plants of HLL. He is a graduate in Chemical Engineering from the Indian Institute of Technology, Kharagpur.
     Mr. Alan Shepard was our Executive Vice President — Europe Business. He had joined us from Pliva, where he was Vice President for Global Corporate Strategy. He has a unique combination of experience in areas of commercial, general management, research and development, manufacturing and strategic planning across a variety of product lines, including generics, ethical branded, over the counter and vaccines. He has been associated with several pharmaceutical companies and held several management positions such as General Manager of Rhone-Poulenc Rorer (now Aventis), European Marketing Director for Medeva and held various positions with Institute Merieux, Smith Kline and Upjohn. He has a Bachelors of Technology (Honors) degree from Bradford University and is an honorary lecturer for the University of Wales Medical faculty. He has served on several U.K. government committees and been a long-standing member of the Association of British Pharmaceutical Industry’s code of practice committee. He resigned as Executive-Vice President -Europe business effective March 31, 2007.
     Mr. Andrew Miller was Executive Vice President Legal and Intellectual Property Management. He is also a principal at Budd Larner, P.C., our legal counsel in the United States. He has represented us since the formation of our first U.S. entity in 1992. He is a graduate of the University of Michigan Law School where he was an Editor of the University of Michigan’s Journal of Law Reform. He holds a B.A. degree from the State University of New York at Buffalo, where he graduated summa cum laude in 1977 and was elected a member of Phi Beta Kappa. Mr. Miller’s term of employment ended on July 31, 2006.
     Mr. Arun Sawhney is President of our Europe and Global API businesses. He joined us in 2001 as President of our API business from Max-GB Limited, where he was Chief Executive. Prior to that he headed the Global Business Development function at Ranbaxy Laboratories Limited. He has also had successful stints as Manager Exports with Hindustan Ciba Geigy and as Regional Sales Manager with Bayer India, earlier in his career. He is an MBA and silver-medalist (an award for being at the top of his class) from the International Management Institute, New Delhi, and a Bachelor’s degree in Commerce from Sydenham College of Commerce and Economics, Mumbai.
     Mr. Ashwani Kumar Malhotra is Executive Vice President of our Formulations Technical Operations and from March 2004 is responsible for formulation manufacturing operations, supply chain management and projects. He joined us as Vice President in February 2001, and was responsible for the India operations supporting our generics and specialty businesses with new product

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development filings and manufacturing and supply of products to regulated markets such as the United States, Canada, Europe, the United Kingdom, South Africa, Australia and New Zealand. Prior to joining us, he worked with Cipla Limited for 13 years in various capacities and with Warner Hindustan, a division of Parke Davis in formulations development and manufacturing for 7 years. He holds a postgraduate degree in Pharmacy from the Institute of Technology, Banaras Hindu University. He also holds a Diploma in Industrial Engineering & Management and a Postgraduate Diploma in Computer Systems from the Institute of Public Enterprises, government of India.
     Mr. Jaspal Singh Bajwa is President of our Branded Formulations (Rest of the World) business. He joined us from Marico Industries, where he was Executive Director and Chief Operating Officer. He has 27 years of diverse experience in the consumer and healthcare products industries, having worked with Nestlé, S.A. and Bausch and Lomb, Inc. He started his career with Nestlé, S.A. After 15 years with Nestlé, S.A. in Sales and Marketing, his last position was Chief of Marketing in India. Subsequently, he spent over 10 years with Bausch and Lomb, Inc., where he held several senior management positions including those of Managing Director for India/ SAARC, and Head of their Canadian Subsidiary. He has a Bachelor’s degree in Food Technology and an MBA from the Indian Institute of Management, Ahmedabad.
     Mr. Jeffrey Wasserstein is Executive Vice President of our North America Specialty business and head of our North America business. He joined us in January 2005. He focuses on building our specialty business in North America and in addition works with the North American Management Team on selected opportunities for adding value to our other businesses in North America. He is also head of our New Jersey office where he leads our North America Operations function. Immediately prior to joining us he was EVP and Chief Business Officer of Avigenics, Inc., a biotechnology company engaged in the development of therapeutic proteins. He had a long career with Schering Plough Corporation where he was Senior Vice President of Corporate Consent Decree Integration. Prior to this role, he was the President of Schering Canada. He also held several positions of increasing responsibility at the Vice President level over Corporate Business Development, Strategic Planning and Internal Consulting and as Associate General Counsel-Commercial. Prior to joining Schering Plough Corporation, he was an Associate Attorney with Wachtell, Lipton, Rosen & Katz. He holds a Bachelor of Arts degree from Franklin & Marshall College and a J.D. degree from New York University School of Law.
     Mr. K.B. Sankara Rao is Executive Vice President responsible for Integrated Product Development for our Branded Formulations, Generics, API and specialty businesses and for formulation development of NCEs. He has been with us since 1986 in various capacities, establishing the manufacturing facilities, quality assurance systems, formulation research and development and managing supply chain for our formulations business. He also upgraded manufacturing facilities to the present day business needs, which resulted in the attainment of various statutory approvals, including U.K. MHRA approval. He is also responsible for the design and implementation of the “Self Managed Team” concept in two of our formulations manufacturing units. He holds a Masters degree in Pharmacy from Andhra University. He is a life member of the Indian Pharmaceutical Association, Indian pharmacy graduates association amongst his other affiliations. He has also been a member of CII-Southern Regional Quality & Productivity Sub-committee.
     Mr. Mark Hartman is President of our North America Generics business. He has 22 years of experience in the pharmaceutical industry. Before joining us, Mark spent five years at Watson Laboratories. His last three positions at Watson were Director of Marketing for Trade and Managed Care, Executive Director, Sales and Marketing — Watson Generics, and Vice President, Sales and Marketing, Watson Generics. He was involved in multiple product and company acquisitions during his tenure with Watson. Before Watson, he was Director of Marketing for Alpharma USPD, Marketing Manager at Geneva Pharmaceuticals, and held various brand and generic sales and marketing positions during his 10 years at Lederle Laboratories. He holds a bachelors degree in Dairy Science from Virginia Tech, Virginia.
     Dr. R..Rajagopalan is the President of our Discovery Research division. A distinguished postgraduate student from the University of Madras, Rajagopalan obtained his doctoral degree from the University of Bombay. He began his career about three decades ago in Hoechst India Ltd. and made impressive contributions in cardiovascular and general pharmacology research. He joined Dr. Reddy’s Discovery Research in 1994, and was instrumental in building discovery biology capabilities in Hyderabad. He has headed the Discovery Research Program as President since 2001, and under his management, our company has created a leadership position in the areas of metabolic disorders and cardiovascular research. He has several research publications and patents to his credit, and is associated with several academic and professional organizations. He has also been the recipient of a number of prestigious awards, including the R. N. Chopra Oration Award as an accomplished “Discovery Research Pharmacologist” in 2005.
     Mr. Raghu Cidambi is Advisor and Head of Corporate Intellectual Property Management and Strategic Planning. Prior to joining us, he served with the Eenadu Group, a large south India-based media conglomerate, where he was responsible for its legal affairs. He has graduated from the Indian Institute of Management, Calcutta and thereafter obtained a Bachelor’s Degree in Law from the Osmania University in Hyderabad.
     Mr. Saumen Chakraborty is currently our Chief Financial Officer and President- Information Technology & Business Process

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Excellence. Prior to this role he was our Global Chief of HR. He has 23 years of experience in strategic and operational aspects of management. Prior to joining us, he held various positions including line manager and a human resources facilitator, with diverse portfolios such as Senior Manager (Finance and Accounts) in Eicher, and Vice President (Operations) in Tecumseh. A member of various industry forums including the CII and the National HRD Network, he graduated with honors as the valedictorian of his class from Visva-Bharati University in Physics, and went on to pursue management from the Indian Institute of Management, Ahmedabad. He continues to be responsible for Information Technology and Business Process Excellence.
     Dr. Uday Saxena is our Chief Scientific Officer. Since 2000, he has also been the President and CEO of Reddy US Therapeutics, Inc., our subsidiary located in Atlanta, Georgia. Reddy US Therapeutics, Inc. is engaged in drug discovery in the areas of diabetes, inflammation and cardiovascular disease. He has been in the pharmaceutical/biotech industry for over a decade. From 1997 to early 2000, he was Vice President of Research and a member of the executive committee at AtheroGenics, Inc, a publicly traded biopharmaceutical company located in Alpharetta, Georgia. While at AtheroGenics, he directed several drug discoveries and early development programs that lead to identification of novel compounds currently in late phase clinical trails for restenosis, atherosclerosis and chronic inflammation. Prior to that he was at Parke-Davis Research Division, Ann Arbor, Michigan, where he was responsible for establishing a discovery program in inflammation and atherosclerosis.
     Mr. V.S. Vasudevan is currently the President — European Generics business. Prior to this role he was our Chief Financial Officer. In the position of Chief Financial Officer, he was responsible for managing our finance organization. He also was the head of the Secretarial, Legal, Compliance, Investor Relations and Internal Audit functions. He played an important role in establishment of our corporate governance framework. Under his leadership, we received external recognition for our corporate governance and financial reporting practices from the Institute of Company Secretaries of India and the Institute of Chartered Accountants of India. He played a key role in the integration of Cheminor Drugs Limited with us, the acquisition of betapharm in Germany and in our growth through various other corporate initiatives, including the acquisition of other companies in India and overseas and the acquisition of brands in India. He is a Chartered Accountant by qualification, and a member of the Peer Review Board of the Institute of Chartered Accountants of India.
     Dr. Rajinder Kumar is our President — Research, Development and Commercialization. He is a graduate of University of London, University of Birmingham and University of Dundee. After receiving his degree in Medicine and Surgery, he obtained his post-graduate diploma in psychiatry and neurology from The Royal College of Surgeons in Ireland in 1990. He has held various leadership roles in the vision, development and implementation of the overall brand strategies to support the research and development and business development operations across different therapeutic areas within the pharmaceutical industry. He has extensive experience in drug development, regulatory affairs, and commercial strategy in North America, Europe, Japan and Asia. He has presented at various international meetings, has chaired international symposia and scientific advisory boards and has to his credit a range of highly respected publications. He is a member of many international scientific and clinical organizations, including Fellow of the Royal Society of Medicine and is a member of the Institute of Directors in the United Kingdom. He has an extensive history of building and managing strong result-focused teams. With his wide array of experience across research and development, expertise in regulatory affairs across the globe and clinical expertise, coupled with membership in various international forums, Dr. Kumar adds significant strength to our organizational capabilities. Prior to joining us, he was an independent consultant to several organizations in the areas of medical and commercial strategy and in the development of early stage molecules to proof-of-concept.
     Prabir Jha is our Senior Vice President and Global Chief of Human Resources. He moved to the private sector after almost 10 years in the Indian government. He has worked for organizations such as Thermax and Mahindra British Telecom prior to joining us, where he has been key to many of the high-end human resources interventions. He has handled all areas in human resources, with special interest in change management, global human resources strategy, employer branding and leadership capability development. He is an alumnus of St. Stephen’s College, Delhi and XLRI Jamshedpur. During his time as a government employee, he handled the entire gamut of human resources and industrial relations issues in the Indian Ordinance Factories. A recipient of several academic and professional awards, he has been on the CII Panel for human resources and industrial relations for Andhra Pradesh.
     Amit Patel is Vice President of Corporate Development & Strategic Planning. His responsibilities include chairing our Global Business Development Council, pursuing alliances and M&A, and driving global strategic initiatives to accelerate growth in various businesses and regions. He is also responsible for select long-term strategic business planning efforts and for coordination of external relations activities in North America. Prior to joining us in 2003, Amit was co-founder and CEO of a healthcare services startup called MedOnTime that was later acquired by CTIS, at which he served as Vice President of Corporate Development. Earlier, he was a strategy consultant with Marakon Associates where he focused on value-based management and M&A. He received a Bachelor of Science degree in Economics from the Wharton School of Business at the University of Pennsylvania, a Bachelor of Applied Science degree in Systems Engineering from the Moore School at the University of Pennsylvania, and a Master of Business Administration degree from Harvard Business School.

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     Cartikeya Reddy is a Vice President and heads our Biologics division that focuses on the development of biosimilar molecules for the Indian and global markets. Prior to joining us in 2004, he worked with Genentech Inc, where he was a Group Leader in the area of Cell Culture Process Development. Before that, he was with the Biotechnology Division of Bayer Corporation, where he successfully led teams in the areas of Bioprocess Development & Pilot Scale Manufacturing. He holds a Master of Science degree and Ph.D. in Chemical Engineering from the University of Illinois, Urbana-Champaign, and was a Visiting Scholar at the Massachusetts Institute of Technology, Cambridge, USA. He also graduated with a Bachelor of Technology degree in Chemical Engineering from the Indian Institute of Technology, Chennai, India.
6.B. Compensation of directors and executive officers
Directors’ compensation
     Full-Time Directors. The compensation of our Chairman, Chief Executive Officer and Chief Operating Officer (who we refer to as our “full-time directors”) is divided into salary, commission and benefits. They are not eligible to participate in the stock option plan. The compensation committee of the Board of Directors initially recommends the compensation for full-time directors. If the Board of Directors (the “Board”) approves the recommendation, it is then submitted to the shareholders for approval at the general shareholders meeting.
     On July 28, 2006, our shareholders re-appointed Dr. K. Anji Reddy as Chairman with effect from July 13, 2006 and Mr. G. V. Prasad as Vice Chairman and CEO with effect from January 30, 2006. On May 18, 2007, our Board recommended re-appointment of Mr. Satish Reddy as Managing Director and COO for a period of 5 years. The re-appointment was approved by the shareholders at its meeting on July 24, 2007. Our Managing Director and COO and Vice Chairman and CEO are each entitled to receive a maximum commission of up to 0.75% of our net profit (as defined under the Indian Companies Act, 1956) for the fiscal year. Our Chairman is entitled to receive a maximum commission of up to 1.0% of our net profit (as defined under the Indian Companies Act, 1956) for the fiscal year. The compensation committee, which is composed of independent directors, recommends the commission for our Chairman, Vice Chairman and CEO and Managing Director and COO within the limits of 1%, 0.75% and 0.75%, respectively, of the net profits (as defined under the Indian Companies Act, 1956) for each fiscal year.
     Non-Full Time Directors. Each of our non-full time directors receives an attendance fee of Rs.5,000 (U.S.$115.02) for every Board meeting and Board committee meeting they attend. In fiscal 2007, we paid an aggregate of Rs.350,000 (U.S.$8,051.5) to our non-full time directors as attendance fees. Non-full time directors are also eligible to receive a commission on our net profit (as defined under the Indian Companies Act, 1956) for the fiscal year. Our shareholders have approved a maximum commission of up to 0.5% of the net profits (as defined under the Indian Companies Act, 1956) for the fiscal year for all non-full time directors in a year. The Board determines the entitlement of each of the non-full time directors to commission within the overall limit. The non-full time directors were granted stock options under the Dr. Reddy’s Employee Stock Option Scheme, 2002 in fiscal 2007 as provided in the table below.
     For fiscal 2007, the directors were entitled to the following amounts as compensation:
                                                 
            Amount Rs.                
            (in thousands)                
Name of Directors   Attendance fees   Commission   Salary   Perquisites   Total   Stock Options
Dr. K. Anji Reddy
          139,196       4,384       382       143,962        
Mr. G.V. Prasad
          104,400       3,600       679       108,679        
Mr. Satish Reddy
          104,400       3,600       679       108,679        
Mr. Anupam Puri
    60       2,608                   2,668       1,500  
Prof. Krishna G. Palepu
    40       2,608                   2,648       1,500  
Dr. Omkar Goswami
    80       2,608                   2,688       1,500  
Mr. P.N. Devarajan
    100       2,608                   2,708       1,500  
Mr. Ravi Bhoothalingam
    65       2,608                   2,673       1,500  
Dr. V. Mohan(1)
    5                         5       1,500  
 
(1)   ceased to be our Director effective July 28, 2006.
     The options granted to directors in fiscal 2007 have an exercise price of Rs.5 per option, vest in one year, and expire five years from the date of vesting.
Executive officers’ compensation
     The initial compensation to all our executive officers is determined through appointment letters issued at the time of employment. The appointment letter provides the initial amount of salary and benefits the executive officer will receive as well as a confidentiality provision and a non-compete provision applicable during the course of the executive officer’s employment with us. We provide salary,

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certain perquisites, retirement benefits, stock options and variable pay to our executive officers. The compensation committee of the Board reviews the compensation of executive officers on a periodic basis.
     All of our employees at the managerial and staff levels are eligible to participate in a variable pay program, which consists of performance bonuses based on the performance of their function or business unit, and a profit sharing plan through which part of our profits can be shared with our employees. Our variable pay program is aimed at rewarding performance of the individual, business unit/function and the organization, with significantly higher rewards for superior performances.
     We also have two employee stock option schemes: the Dr. Reddy’s Employee Stock Option Scheme, 2002 and the Dr. Reddy’s Employees ADR Stock Option Scheme, 2007. The stock option schemes are applicable to all of our employees and directors and employees and directors of our subsidiaries. The stock option schemes are not applicable to promoter directors, promoter employees and persons holding 2% or more of our outstanding share capital. The compensation committee of the Board of Directors awards options pursuant to the stock option schemes based on the employee’s performance appraisal. Some employees have also been granted options upon joining us.
     Compensation for executive officers who are full time directors is summarized in the table under “Directors’ compensation,” above. The following table presents the annual compensation paid for services rendered to us for fiscal 2007 and stock options held by all of our other executive officers as of March 31, 2007:
                                         
    Compensation   Stock Options
            Fiscal Year                   Vesting and
Name   Rs.   of Grant   No. of options   Exercise price   Expiration Date
 
Mr. Abhijit Mukherjee
  Rs. 10,517,204       2005       3,200     Rs. 5.00       (1 )
 
            2006       7,500       5.00       (1 )
 
            2007       8,000       5.00       (1 )
Mr. Arun Sawhney
    12,373,847       2005       9,140       5.00       (1 )
 
            2006       6,000       5.00       (1 )
 
            2007       6,400       5.00       (1 )
Mr. Ashwani Kumar Malhotra
    8,561,095       2005       6,004       5.00       (1 )
 
            2006       5,250       5.00       (1 )
 
            2007       5,000       5.00       (1 )
Mr. Jaspal Singh Bajwa
    14,028,455       2005       7,000       5.00       (1 )
 
            2006       7,500       5.00       (1 )
 
            2007       8,000       5.00       (1 )
Mr. Jeffrey Wasserstein
    22,787.701       2005       15,000       5.00       (1 )
 
            2007       8,000       5.00       (1 )
Mr. K.B. Sankara Rao
    8,521,312       2005       6,160       5.00       (1 )
 
            2006       6,000       5.00       (1 )
 
            2007       6,400       5.00       (1 )
Mr. Mark Hartman
    37,378,470       2004       20,000       441.50       (1 )
 
            2005       12,000       442.50       (1 )
 
            2006       12,000       5.00       (1 )
 
            2007       8,000       5.00       (1 )
Dr. R. Rajagopalan
    8,359,076       2005       7,240       5.00       (1 )
 
            2006       4,500       5.00       (1 )
 
            2007       5,000       5.00       (1 )
Mr. Raghu Cidambi
    8,200,000       2005       7,000       5.00       (1 )
 
            2006       7,500       5.00       (1 )
 
            2007       5,000       5.00       (1 )
Mr. Saumen Chakraborty
    11,588,887       2004       5,000       441.50       (1 )
 
            2005       5,100       5.00       (1 )
 
            2006       7,500       5.00       (1 )
 
            2007       8,000       5.00       (1 )
Dr. Uday Saxena
    18,669,027       2005       7,000       5.00       (1 )
 
            2006       6,000       5.00       (1 )
 
            2007       6,400       5.00       (1 )
Mr. V.S. Vasudevan
    10,589,454       2003       11,480       531.51       (1 )
 
            2004       20,000       441.50       (1 )
 
            2005       20,000       442.50       (1 )
 
            2006       50,000       362.50       (1 )
 
            2007       8,000       5.00       (1 )
 
(1)   The expiration date is five years from the date of vesting. The options vest in annual increments over a period of four years.

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Retirement benefits.
     We provide the following benefit plans to our employees:
     Gratuity benefits: In accordance with applicable Indian laws, we provide for gratuity, a defined benefit retirement plan (the “Gratuity Plan”) covering certain categories of employees. The Gratuity Plan provides a lump sum payment to vested employees, at retirement or termination of employment, an amount based on the respective employee’s last drawn salary and the years of employment with the Company. Effective September 1, 1999, we established Dr. Reddy’s Laboratories Gratuity Fund (the “Gratuity Fund”). Liabilities with regard to the Gratuity Plan are determined by an actuarial valuation, based upon which we make contributions to the Gratuity Fund. Trustees administer the contributions made to the Gratuity Fund. The amounts contributed to the Gratuity Fund are invested in specific securities as mandated by Indian law and generally consist of federal and state Indian government bonds and the debt instruments of Indian government-owned corporations. The net contribution amounts recognized by us were Rs.21.2 million, Rs.52.3 million and Rs.31.5 million during the years ended March 31, 2005, 2006 and 2007, respectively.
     Superannuation benefits. Apart from being covered under the Gratuity Plan described above, our senior officers also participate in superannuation, a defined contribution plan administered by the LIC. We make annual contributions based on a specified percentage of each covered employee’s salary. We have no further obligations under the plan beyond our annual contributions. We contributed Rs.27.0 million, Rs.24.8 million and Rs.28.0 million to the superannuation plan during the years ended March 31, 2005, 2006 and 2007, respectively.
     Provident fund benefits. In addition to the above benefits, all employees receive benefits from a provident fund, a defined contribution plan. Both the employee and employer each make monthly contributions to the plan each equal to 12% of the covered employee’s basic salary. We have no further obligations under the plan beyond our monthly contributions. We contributed Rs.64.2 million, Rs.64.4 million and Rs.75.5 million to the provident fund plan during the years ended March 31, 2005, 2006 and 2007, respectively.
6.C. Board practices
     Our Articles of Association require us to have a minimum of three and a maximum of 20 directors. As of March 31, 2007, we have eight directors on our Board, of which five are non-full time independent directors.
     The Companies Act, 1956 and our Articles of Association require that at least two-thirds of our directors be subject to re-election by our shareholders in rotation. At every annual general meeting, one-third of the directors who are subject to re-election must retire and, if eligible for re-election, may be reappointed at the annual general meeting. Our full time directors are not subject to re-election.
     The terms of each of our directors and their expiration dates are provided in the table below.
             
    Expiration of Current        
Name   Term of Office   Term of Office   Period of Service
Dr. K. Anji Reddy (1)
  July 12, 2011   5 years   23 years
Mr. Satish Reddy (1)
  September 30, 2007   5 years   14 years
Mr. G.V. Prasad (1)
  January 30, 2011   5 years   21 years
Mr. Anupam Puri (2)
  Retirement by rotation   Due for retirement by rotation in 2007   5 years
Dr. Krishna G. Palepu (2)
  Retirement by rotation   Due for retirement by rotation in 2008   5 years
Mr. P.N. Devarajan (2)
  Retirement by rotation   Due for retirement by rotation in 2006   6.5 years
Dr. Omkar Goswami (2)
  Retirement by rotation   Due for retirement by rotation in 2007   6.5 years
Mr. Ravi Bhoothalingam (2)
  Retirement by rotation   Due for retirement by rotation in 2008   6.5 years
Dr. V. Mohan (2)(4)
  Retirement by rotation   Due for retirement by rotation in 2006   11 years
 
(1)   Full time director.
 
(2)   Non-full time independent director.
 
(3)   Reappointed at the 22nd Annual General Meeting of Shareholders held on July 28, 2006.
 
(4)   Retired at the 22nd Annual General Meeting of Shareholders held on July 28, 2006.
     The terms of the contracts with our full-time directors are also disclosed to all the shareholders in the notice of the general meeting. The directors are not eligible for any termination benefit on the termination of their tenure with us.
Committees of the Board
     Committees appointed by the Board focus on specific areas and take decisions within the authority delegated to them. The Committees also make specific recommendations to the Board on various matters from time-to-time. All decisions and recommendations of the Committees are placed before the Board for information or approval. We have seven Board-level Committees:

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    Audit Committee.
 
    Compensation Committee.
 
    Nomination Committee.
 
    Shareholders’ Grievance Committee.
 
    Management Committee.
 
    Investment Committee.
 
    Strategy Committee.
     The details of the Audit Committee, Compensation Committee and Nomination Committee are discussed hereunder.
     Audit Committee. Our management is primarily responsible for our internal controls and financial reporting process. Our statutory auditors are responsible for performing independent audits of our financial statements in accordance with generally accepted auditing standards and for issuing reports based on such audits. The Board of Directors has entrusted the Audit Committee to supervise these processes and thus ensure accurate and timely disclosures that maintain the transparency, integrity and quality of financial controls and reporting.
     The Audit Committee consists of the following five non-full time independent directors:
    Dr. Omkar Goswami (Chairman)
 
    Mr. Anupam Puri
 
    Prof. Krishna G. Palepu
 
    Mr. P. N. Devarajan
 
    Mr. Ravi Bhoothalingam
     Our Company Secretary is the Secretary of the Audit Committee. This Committee met on four occasions during fiscal 2007. Our statutory auditors were present at all Audit Committee meetings during the year.
     The primary responsibilities of the Audit Committee are to:
    Supervise the financial reporting process;
 
    Review the financial results, along with the related public filings, before recommending them to the Board;
 
    Review the adequacy of our internal controls, including the plan, scope and performance of our internal audit function;
 
    Discuss with management our major policies with respect to risk assessment and risk management;
 
    Hold discussions with statutory auditors on the nature and scope of audits, and any views that they have about the financial control and reporting processes;
 
    Ensure compliance with accounting standards, and with listing requirements with respect to the financial statements;
 
    Recommend the appointment and removal of external auditors and their fees;
 
    Review the independence of our auditors;
 
    Ensure that adequate safeguards have been taken for legal compliance both for us and for our Indian and foreign subsidiaries;
 
    Review related party transactions; and
 
    Review the functioning of our whistle blower policies and procedures.
     Compensation Committee. The Compensation Committee considers and recommends to the Board the compensation of the full time directors and executives above Vice-President level, and also reviews the remuneration package that we offer to different grades/levels of our employees. The Compensation Committee also administers our Employee Stock Option Scheme.
     The Compensation Committee consists of the following five non-full time, independent directors:
    Mr. Ravi Bhoothalingam (Chairman)
 
    Mr. Anupam Puri
 
    Prof. Krishna G. Palepu
 
    Dr. Omkar Goswami
 
    Mr. P. N. Devarajan
     The Chief of Human Resources is the Secretary of the Committee. The Compensation Committee met three times during fiscal 2007.

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     Nomination Committee. The primary function of the Nomination Committee is to assist the Board of Directors in fulfilling its responsibilities by reviewing and making recommendations to the Board regarding the Board’s composition and structure, establishing criteria for Board membership and evaluating corporate policies relating to the recruitment of Board members and establishing, implementing and monitoring policies and processes regarding principles of corporate governance in order to ensure the Board’s compliance with its fiduciary duties.
     The Nomination Committee consists of the following five non-full time, independent directors:
    Mr. Anupam Puri (Chairman)
 
    Prof. Krishna G. Palepu
 
    Dr. Omkar Goswami
 
    Mr. P. N. Devarajan
 
    Mr. Ravi Bhoothalingam
     Our Company Secretary is the Secretary of the Committee. The Nomination Committee met once during fiscal 2007.
Corporate Governance
     Companies listed on the New York Stock Exchange (“NYSE”) must comply with certain standards regarding corporate governance as codified in Section 303A of the NYSE’s Listed Company Manual. Listed companies that are foreign private issuers (as such term is defined in Rule 3b-4 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are permitted to follow home country practice in lieu of the provisions of this Section 303A, except that such companies are required to comply with the requirements of Sections 303A.06, 303A.11 and 303A.12(b) and (c), which are as follows:
  (i)   establish an independent audit committee that has specified responsibilities;
 
  (ii)   provide prompt certification by its chief executive officer of any material non-compliance with any corporate governance rules;
 
  (iii)   provide periodic written affirmations to the NYSE with respect to its corporate governance practices; and
 
  (iv)   provide a brief description of significant differences between its corporate governance practices and those followed by U.S. companies.
     The following table compares our principal corporate governance practices to those required of U.S. NYSE listed companies.
     
Standard for U.S. NYSE Listed Companies   Our practice
Listed companies must have a majority of “independent directors,” as defined by the NYSE.
  We comply with this standard. Seven of our ten directors are “independent directors,” as defined by the NYSE.
 
   
The non-management directors of each listed company must meet at regularly scheduled executive sessions without management.
  We comply with this standard. Our non-management directors meet periodically without management directors in scheduled executive sessions.
 
   
Listed companies must have a nominating/corporate governance committee composed entirely of independent directors. The nominating/corporate governance committee must have a written charter that addresses the committee’s purpose and responsibilities, subject to the minimum purpose and responsibilities established by the NYSE, and an annual evaluation of the committee.
  We have a Nomination Committee composed entirely of independent directors which meets these requirements. The committee has a written charter that meets these requirements. We do not have a practice of evaluating the performance of the Nomination Committee.
 
   
Listed companies must have a compensation committee composed entirely of independent directors. The compensation committee must have a written charter that addresses the committee’s purpose and responsibilities, subject to the minimum purpose and responsibilities established by the NYSE, and an annual evaluation of the committee.
  We have a Compensation Committee composed entirely of independent directors which meets these requirements. The committee has a written charter that meets these requirements. We do not have a practice of evaluating the performance of our Compensation Committee.

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Standard for U.S. NYSE Listed Companies   Our practice
Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act.
  Our Audit Committee satisfies the requirements of Rule 10A-3 under the Exchange Act.
 
   
The audit committee must have a minimum of three members all being independent directors. The audit committee must have a written charter that addresses the committee’s purpose and responsibilities, subject to the minimum purpose and responsibilities established by the NYSE, and an annual evaluation of the committee.
  We have an Audit Committee composed of five members, all being independent directors. The committee has a written charter that meets these requirements. We also have an internal audit function. We do not have a practice of evaluating the performance of our Audit Committee.
 
   
Each listed company must have an internal audit function.
   
 
   
Shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, with limited exceptions.
  We comply with this standard. Our Employee Stock Option Plan was approved by our shareholders.
 
   
Listed companies must adopt and disclose corporate governance guidelines.
  We have not adopted corporate governance guidelines.
 
   
All listed companies, U.S. and foreign, must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.
  We comply with this standard. More details on our Code of Business Conduct and Ethics are given under Item 16.B.
 
   
Listed foreign private issuers must disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under NYSE listing standards.
  This requirement is being addressed by way of this table.
 
   
Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards, qualifying the certification to the extent necessary.
  We filed our most recent written certification on October 11, 2006.
 
   
Each listed company CEO must promptly notify the NYSE in writing after any executive officer of the listed company becomes aware of any material non-compliance with any applicable provisions of this Section 303A.
  There are no such instances.
 
   
Each listed company must submit an executed Written Affirmation annually to the NYSE. In addition, each listed company must submit an interim Written Affirmation each time a change occurs to the board or any of the committees subject to Section 303A. The annual and interim Written Affirmations must be in the form specified by the NYSE.
  We filed our most recent written affirmation on October 11, 2006.
6.D. Employees
     The following table sets forth the number of our employees during fiscal 2005, 2006 and 2007.
For the Fiscal Year Ended March 31, 2007
                                 
    North America     Europe     Rest of the World     Total  
Manufacturing(1)
          29       3,566       3,595  
Sales and Marketing(2)
    21       299       2,546       2,866  
Research and Development
    18       158       1,381       1,557  
Others(3)
    58       24       920       1,002  
 
Total
    97       510       8,413       9,020  
 
For the Fiscal Year Ended March 31, 2006
                                 
    North America     Europe     Rest of the World     Total  
Manufacturing(1)
          56       2,841       2,897  
Sales and Marketing(2)
    27       291       2,268       2,586  
Research and Development
    19             1,167       1,186  
Others(3)
    32       129       695       856  
 
Total
    78       476       6,971       7,525  
 

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For the Fiscal Year Ended March 31, 2005
                                 
    North America     Europe     Rest of the World     Total  
Manufacturing(1)
          45       2,517       2,562  
Sales and Marketing(2)
    21       4       1,833       1,858  
Research and Development
    15       2       1,106       1,123  
Others(3)
    45       13       534       592  
 
Total
    81       64       5,990       6,135  
 
 
(1)   Includes quality, technical services and warehouse.
 
(2)   Includes business development.
 
(3)   Includes shared services, corporate business development and the intellectual property management team.
     We have not experienced any material work stoppages in the last three fiscal years and we consider our relationship with our employees and labor unions to be good. Approximately 10% of our employees belong to labor unions. We did not experience any strikes at our manufacturing facilities in fiscal 2007.
6.E. Share ownership
     The following table sets forth, as of March 31, 2007 for each of our directors and executive officers, the total number of our equity shares and options owned by them:
                                                 
            % of                          
    No. of shares     outstanding     No. of     Fiscal Year              
Name   held(1),(3)     capital     options held     of the Grant     Exercise price     Expiration date  
 
Dr. K. Anji Reddy(2),(4)
    800,956       0.48 %                        
Mr. G.V. Prasad(4)
    1,365,940       0.81 %                        
Mr. Satish Reddy(4)
    1,205,832       0.72 %                        
Mr. Anupam Puri
    5,500             4,500       2006     Rs. 5.00       (5 )
 
                    3,000       2007       5.00       (6 )
Prof. Krishna G Palepu
    2,500             4,500       2006       5.00       (5 )
 
                    3,000       2007       5.00       (6 )
Dr. Omkar Goswami
    1,500             4,500       2006       5.00       (5 )
 
                    3,000       2007       5.00       (6 )
Mr. P.N. Devarajan
    1,700             4,500       2006       5.00       (5 )
 
                    3,000       2007       5.00       (6 )
Mr. Ravi Bhoothalingam
    1,500             4,500       2006       5.00       (5 )
 
                    3,000       2007       5.00       (6 )
Mr. Abhijit Mukherjee
    5,700             3,200       2005       5.00       (5 )
 
                    7,500       2006       5.00       (5 )
 
                    8,000       2007       5.00       (5 )
Mr. Arun Sawhney
    16,620       0.01 %     9,140       2005       5.00       (5 )
 
                    6,000       2006       5.00       (5 )
 
                    6,400       2007       5.00       (5 )
Mr. Ashwani Kumar Malhotra
    10,562             6,004       2005       5.00       (5 )
 
                    5,250       2006       5.00       (5 )
 
                    5,000       2007       5.00       (5 )
Mr. Jaspal Singh Bajwa
    11,500       0.01 %     7,000       2005       5.00       (5 )
 
                    7,500       2006       5.00       (5 )
 
                    8,000       2007       5.00       (5 )
Mr. Jeffrey Wasserstein
                15,000       2005       5.00       (5 )
 
                    8,000       2007       5.00       (5 )
Mr. K.B. Sankara Rao
    42,324       0.03 %     6,160       2005       5.00       (5 )
 
                    6,000       2006       5.00       (5 )
 
                    6,400       2007       5.00       (5 )
Mr. Mark Hartman
                20,000       2004       441.50       (5 )
 
                    12,000       2005       442.50       (5 )
 
                    12,000       2006       5.00       (5 )
 
                    8,000       2007       5.00       (5 )
Dr. R. Rajagopalan
    13,620             7,240       2005       5.00       (5 )
 
                    4,500       2006       5.00       (5 )
 
                    5,000       2007       5.00       (5 )
Mr. Raghu Cidambi
    11,500       0.01 %     7,000       2005       5.00       (5 )
 
                    7,500       2006       5.00       (5 )
 
                    5,000       2007       5.00       (5 )
Mr. Saumen Chakraborty
    21,800       0.01 %     5,000       2004       441.50       (5 )
 
                    5,100       2005       5.00       (5 )
 
                    7,500       2006       5.00       (5 )

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            % of                          
    No. of shares     outstanding     No. of     Fiscal Year              
Name   held(1),(3)     capital     options held     of the Grant     Exercise price     Expiration date  
 
 
                    8,000       2007       5.00       (5 )
Dr. Uday Saxena
    40,000       0.02 %     7,000       2005       5.00       (5 )
 
                    6,000       2006       5.00       (5 )
 
                    6,400       2007       5.00       (5 )
Mr. V.S. Vasudevan
                11,480       2003       531.51       (5 )
 
                    20,000       2004       441.50       (5 )
 
                    20,000       2005       442.50       (5 )
 
                    50,000       2006       362.50       (5 )
 
                    8,000       2007       5.00       (5 )
 
(1)   Shares held in their individual name only.
 
(2)   Does not include shares held beneficially. See Item 7.A. for beneficial ownership of shares by this individual.
 
(3)   All shares have voting rights.
 
(4)   Not eligible for grant of Stock Options.
 
(5)   The expiration date is five years from the date of vesting. The options vest in annual increments over a period of four years.
 
(6)   The expiration date is five years from the date of vesting. The options vest in one year.
Employee Stock Incentive Plans
Dr. Reddy’s Employees Stock Option Plan-2002 (the “DRL 2002 Plan”)
     We instituted the DRL 2002 Plan for all eligible employees in pursuance of the special resolution approved by the shareholders in the Annual General Meeting held on September 24, 2001. The DRL 2002 Plan covers all employees of us and each of our subsidiaries. Under the DRL 2002 Plan, the Compensation Committee of the Board (the “Compensation Committee”) administers the DRL 2002 Plan and grants stock options to eligible employees of us and our subsidiaries. The Compensation Committee determines the employees eligible for receiving the options, the number of options to be granted, the exercise price, the vesting period and the exercise period. The vesting period is determined for all options issued on the date of the grant.
     The DRL 2002 Plan was amended on July 28, 2004 at the annual general meeting of shareholders to provide for stock option grants in two categories:
Category A: 1,721,700 stock options out of the total of 2,295,478 reserved for grant of options having an exercise price equal to the fair market value of the underlying equity shares on the date of grant; and
Category B: 573,778 stock options out of the total of 2,295,478 reserved for grant of options having an exercise price equal to the par value of the underlying equity shares (i.e., Rs.5 per option).
     The DRL 2002 Plan was further amended on July 27, 2005 at the annual general meeting of shareholders to provide for stock option grants in two categories:
Category A: 300,000 stock options out of the total of 2,295,478 reserved for grant of options having an exercise price equal to the fair market value of the underlying equity shares on the date of grant; and
Category B: 1,995,478 stock options out of the total of 2,295,478 reserved for grant of options having an exercise price equal to the par value of the underlying equity shares (i.e., Rs.5 per option).
     The fair market value of a share on each grant date falling under Category A above is defined as the average closing price for 30 days prior to the grant in the stock exchange where there is highest trading volume during that period. Notwithstanding the foregoing, the Compensation Committee may, after obtaining the approval of the shareholders in the annual general meeting, grant options with a per share exercise price other than fair market value and par value of the equity shares.
     After the stock dividend on August 30, 2006 (in which we distributed one equity share for each equity share and ADS issued and outstanding as of August 29, 2006), the options authorized and outstanding under the DRL 2002 Plan were as follows:
                         
    Number of options   Number of options    
    granted under   granted under    
Particulars   Category A   Category B   Total
 
Options authorized for issuance under original Plan
    300,000       1,995,478       2,295,478  
 
                       
Options exercised prior to stock dividend date of August 30, 2006 (A)
    94,061       147,793       241,854  
Balance of shares that can be issued upon the exercise of outstanding options (B)
    205,939       1,847,685       2,053,624  
Options arising from stock dividend (C)
    205,939       1,847,685       2,053,624  
 
                       
Options authorized for issuance after stock dividend (A+B+C)
    505,939       3,843,163       4,349,102  
     Stock option activity under the DRL 2002 Plan in the two categories of options (i.e., fair market value and par value options) was as follows:

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Category A - Fair Market Value Options   Fiscal Year Ended March 31, 2005
                            Weighted-
                            average
                    Weighted-   remaining
    Shares arising   Range of exercise   average   contractual life
    out of options   prices   exercise price   (months)
Outstanding at the beginning of the year
    1,822,076     Rs. 441.5-698     Rs. 484.48       66  
Granted during the year
    933,000       373.5-442.5       436.41       82  
Expired / forfeited during the year
    (705,314 )     382.5-531.51       459.42        
Surrendered by employees during the year in exchange of category B options
    (1,451,862 )     373.5-698       464.04        
Exercised during the year
                       
 
                               
Outstanding at the end of the year
    597,900       373.5-574.5       488.66       50  
 
                               
Exercisable at the end of the year
    377,076     Rs. 441.5-574.5     Rs. 498.27       35  
 
                               
                                 
Category A - Fair Market Value Options   Fiscal Year Ended March 31, 2006
                            Weighted-
                            average
                    Weighted-   remaining
    Shares arising   Range of exercise   average   contractual life
    out of options   prices   exercise price   (months)
Outstanding at the beginning of the year
    597,900     Rs. 373.5-574.50     Rs. 488.66       50  
Granted during the year
    65,000       362.50       362.50       81  
Expired / forfeited during the year
    (93,400 )     362.5-574.50       472.18        
Surrendered by employees during the year
    (180,000 )     488.65-531.51       517.23        
Exercised during the year
    (155,000 )     441.5-488.65       471.92        
 
                               
Outstanding at the end of the year
    234,500       362.5-531.51       439.43       64  
 
                               
Exercisable at the end of the year
    75,764     Rs. 362.5-531.51     Rs. 471.93       45  
 
                               
                                 
Category A - Fair Market Value Options   Fiscal Year Ended March 31, 2007
                            Weighted-
                            average
                    Weighted-   remaining
    Shares arising   Range of exercise   average   contractual life
    out of options   prices   exercise price   (months)
Outstanding at the beginning of the year
    234,500       362.5-531.51       439.43       64  
Granted during the year
                       
Expired / forfeited during the year
    (11,600 )     441.5-574.5       527.8        
Exercised during the year
    (31,320 )     441.5-531.51       477.4        
 
                               
Outstanding at the end of the year
    191,580       362.5-531.51       427.9       54  
 
                               
Exercisable at the end of the year
    103,680     Rs. 362.5-531.51     Rs. 447.58       38  
 
                               
                                 
Category B - Par Value Options   Fiscal Year Ended March 31, 2005
                            Weighted- average
                    Weighted-   remaining
    Shares arising   Range of exercise   average   contractual life
    out of options   prices   exercise price   (months)
Outstanding at the beginning of the year
                       
Granted during the year
In exchange for category A surrendered options
    561,746     Rs. 5     Rs. 5       84  
New options
    205,300       5       5       84  
Forfeited during the year
    (7,948 )     5       5        
Exercised during the year
                       
 
                               
Outstanding at the end of the year
    759,098     Rs. 5     Rs. 5       84  
 
                               
Exercisable at the end of the year
                       
 
                               

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Category B - Par Value Options   Fiscal Year Ended March 31, 2006
                            Weighted- average
                    Weighted-   remaining
    Shares arising   Range of exercise   average   contractual life
    out of options   prices   exercise price   (months)
Outstanding at the beginning of the year
    759,098     Rs. 5     Rs. 5       84  
Granted during the year
    433,720       5       5       81  
Forfeited during the year
    (266,608 )     5       5        
Exercised during the year
    (196,242 )     5       5        
 
                               
Outstanding at the end of the year
    729,968       5       5       81  
 
                               
Exercisable at the end of the year
    36,272     Rs. 5     Rs. 5       59  
 
                               
                                 
Category B - Par Value Options   Fiscal Year Ended March 31, 2007
                            Weighted- average
                    Weighted-   remaining
    Shares arising   Range of exercise   average   contractual life
    out of options   prices   exercise price   (months)
Outstanding at the beginning of the year
    729,968     Rs. 5     Rs. 5       81  
Granted during the year
    427,060       5       5       81  
Forfeited during the year
    (76,056 )     5       5        
Exercised during the year
    (191,720 )     5       5        
 
                               
Outstanding at the end of the year
    889,252       5       5       77  
 
                               
Exercisable at the end of the year
    43,256     Rs. 5     Rs. 5       51  
 
                               
     The weighted average grant date fair value of options granted under the DRL 2002 Plan at fair market value during the years ended March 31, 2005 and 2006 was Rs. 377.60 and Rs.293.42, respectively. The weighted average grant date fair value for options granted under the DRL 2002 Plan at par value during the years ended March 31, 2005, 2006 and March 31, 2007 was Rs.707.40, Rs.705.88 and Rs.575.36, respectively.
Dr. Reddy’s Employees ADR Stock Option Plan-2007 (the “DRL 2007 Plan”).
     We instituted the DRL 2007 Plan for all eligible employees in pursuance of the special resolution approved by the shareholders in the Annual General Meeting held on July 27, 2005. The DRL 2007 Plan became effective upon its approval by the Board of Directors on January 22, 2007. The DRL 2007 Plan covers all of our employees and all employees and directors of our subsidiaries. Under the DRL 2007 Plan, the Compensation Committee of the Board (the “Compensation Committee”) administers the DRL 2007 Plan and grants stock options to eligible employees of us and eligible employees and directors of our subsidiaries. The Compensation Committee determines the employees eligible to receive options, the number of options to be granted, the exercise price, the vesting period and the exercise period. The vesting period is determined for all options issued on the date of the grant. No options were granted under this plan in fiscal 2007.
Aurigene Discovery Technologies Limited ESOP Plan 2003.
     Aurigene Discovery Technologies Limited (“Aurigene”), a consolidated subsidiary, adopted the Aurigene Discovery Technologies Limited Employee Stock Option Plan (the “Aurigene Employee Plan”) to provide for issuance of stock options to employees of Aurigene and its subsidiary, Aurigene Discovery Technologies Inc., who have completed one full year of service with Aurigene and its subsidiary. Aurigene has reserved 4,550,000 of its ordinary shares for issuance under this plan. Under the Aurigene Employee Plan, stock options may be granted at an exercise price as may be determined by Aurigene’s compensation committee. As of March 31, 2007, there were 1,183,583 stock options outstanding under the Aurigene Employee Plan.
Aurigene Discovery Technologies Limited, Management Group Stock Grant Plan.
     In fiscal 2004, Aurigene adopted the Aurigene Discovery Technologies Limited Management Group Stock Grant Plan (the “Aurigene Management Plan”) to provide for issuance of stock options to management employees of Aurigene and its subsidiary Aurigene Discovery Technologies Inc. Aurigene has re