Item

FORM 20-F

Satyam Computer Services Limited

Satyam Technology Center
Bahadurpallay Village
Qutbullapur Mandal, R.R. District-500855
Hyderabad, Andhra Pradesh
India
(91) 40-5523 3505
(Address and Telephone Number of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:   None

Securities registered or to be registered pursuant to Section 12(g) of the Act:
American Depositary Shares, each represented by two Equity Shares, par value Rs.2 per share.
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)

         Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 314,564,030 equity shares, including 33,639,972 underlying equity shares for 16,819,986 ADSs, were issued and outstanding as of March 31, 2004.

         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.

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

TABLE OF CONTENTS

SATYAM COMPUTER SERVICES LIMITED

CURRENCY OF PRESENTATION AND CERTAIN DEFINED TERMS

         Unless the context otherwise requires, references herein to “we,” “us,” the “company,” “SAY” or “Satyam” are to Satyam Computer Services Limited, a limited liability company organized under the laws of the Republic of India, and its consolidated subsidiaries. References to “U.S.” or the “United States” are to the United States of America, its territories and its possessions. References to “India” are to the Republic of India. We are a leading Indian information technology services company which is traded on the New York Stock Exchange under the symbol “SAY” as well as the major Indian stock exchanges. “Satyam” is a trademark owned by Satyam Computer Services. “Sify.com,” “SatyamOnline,” “Satyam: Net”, “satyamonline.com” and “Satyam iway” are trademarks used by our associate company, Sify Limited, or “Sify”, for which registration applications are pending in India. All other trademarks or tradenames used in this Annual Report on Form 20-F, or “Annual Report”, are the property of their respective owners.

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

         For your convenience, this Annual Report contains translations of some Indian rupee amounts into U.S. dollars which should not be construed as a representation that those Indian rupee or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Indian rupees, as the case may be, at any particular rate, the rate stated below, or at all.

         Except as otherwise stated in this Annual Report, all translations from Indian rupees to U.S. dollars contained in this Annual Report have been based on the noon buying rate in the City of New York on March 31, 2004 for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York. The noon buying rate on March 31, 2004 was Rs. 43.40 per $1.00.

         Information contained in our websites, including our corporate website, www.satyam.com, is not part of this Annual Report.

FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE

         IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED “ITEM 3. KEY INFORMATION—RISK FACTORS”, “ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS” AND ELSEWHERE IN THIS ANNUAL REPORT. YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT’S ANALYSIS ONLY AS OF THE DATE OF THIS ANNUAL REPORT. IN ADDITION, YOU SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS ANNUAL REPORT AND IN OUR QUARTERLY REPORTS AND OTHER DOCUMENTS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, OR SEC, FROM TIME TO TIME. OUR FILINGS WITH THE SEC ARE AVAILABLE ON ITS WEBSITE, WWW.SEC.GOV.

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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

Selected Financial Data

         You should read the following selected consolidated historical financial data in conjunction with our financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this Annual Report. The statement of operations data for the fiscal years ended March 31, 2000, 2001, 2002, 2003 and 2004 and the balance sheet data as of March 31, 2000, 2001, 2002, 2003 and 2004 are derived from our consolidated audited financial statements including the notes, included elsewhere in this report, prepared in accordance with U.S. GAAP for the fiscal years ended March 31, 2000, 2001, 2002, 2003 and 2004. As of December 9, 2002, we ceased to hold a controlling interest in Sify and have accounted for our interest in Sify using the equity method. Consequently, financial data for the years ended March 31, 2003 and 2004 are not comparable with prior periods.

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Restatement of Previously Reported Amounts

         Satyam has restated beginning shareholder’s equity as of March 31, 2001 and shareholder’s equity and net income as of and for the years ended March 31, 2003 and 2002, to reflect the impact on deferred tax liabilities and income taxes of Satyam’s equity in the losses of Sify.

Following table summarizes the effect on the Income statement during the each of the years restated:

Following table summarizes the effect on the Balance sheet for each of the years restated:

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Risk Factors

         Any investment in our ADSs involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this Annual Report, before you decide to buy our ADSs. If any of the following risks actually occur, our company could be seriously harmed. In any such case, the market price of our ADSs could decline, and you may lose all or part of the money you paid to buy our ADSs.

         We have experienced significant growth in recent periods. Our total revenues increased 23.3% in fiscal 2004 as compared to fiscal 2003. As of March 31, 2004, we had 14,456 employees, whom we refer to as associates, worldwide as compared to 9,838 associates as of March 31, 2003. We expect our growth to place significant demands on our management and other resources and will require us to continue to develop and improve our operational, financial and other internal controls, both in India and elsewhere. In particular, continued growth increases the challenges involved in:

         Sify’s ADSs are listed for trading on the Nasdaq National Market under the symbol “SIFY”, however we do not know whether Sify will be able to retain this listing in the future. The market price of Sify’s ADSs has been highly volatile, ranging from a high of $ 452 per ADS to a low of $0.88 per ADSs from its initial public offering in October 1999 through May 31, 2004, and may continue to fluctuate widely. Any decline in the market price of Sify’s ADSs is likely to cause the value of the equity shares of Sify which we hold to decline. We hold our interest in Sify in the form of equity shares for which there is no market and our ability to convert these equity shares into ADSs is restricted. Under a shareholders’ agreement to which we are a party, mergers, acquisitions and sales of substantially all the assets of Sify require the approval of two other Sify shareholders, Softbank Asia Infrastructure Fund, or SAIF, and VentureTech Solutions Private Ltd., or VentureTech. Sify has not been profitable since its founding and may continue to incur significant losses and negative cash flows in the future.

         Our reported income under U.S. GAAP has been and will continue to be affected by the grant of warrants or options under our various employee benefit plans. Under the terms of our existing plans, employees were typically granted warrants or options to purchase equity shares at a substantial discount to the current market value. These grants require us to record non-cash compensation expenses under currently applicable U.S. GAAP, amortized over the vesting period of the warrants or options. We expect to recognize amortization of deferred stock based compensation expense in respect of our three Associate Stock Option Plans, ASOP, ASOP-B and ASOP ADS, in the approximate amounts of $7.3 million in fiscal 2005 and $0.6 million in fiscal 2006 based on the price of our equity shares on March 31, 2004 and in connection with both granted and ungranted warrants and options on that date. Depending on the market value of our equity shares on the dates future grants are made, amortization of deferred stock based compensation expense with respect to ungranted warrants may cause the expected amounts to change. The size of our stock compensation expenses has contributed, and may continue to contribute to negative operating income and negative net income for purposes of U.S. GAAP. We recognized deferred stock based compensation of $0.8 million under our ASOP, ASOP B and ASOP ADS Plans in fiscal 2004 and $1.6 million was amortized and charged to earnings.

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         As at March 31, 2004, we have a significant, non-controlling interests in Sify, Satyam Venture Engineering Services Private Limited and CA Satyam ASP Private Limited that are accounted for under U.S. GAAP using the equity method of accounting. Under this method, we are obligated to report as “Equity in losses (gains) of associates” a pro rata portion of the financial results of any such company in our statement of operations even though we do not control the other company but have the ability to exercise significant influence over their operating and financial policies. Thus, our reported results of operations can be significantly increased or decreased depending on the results of Sify, Satyam Venture Engineering Services Private Limited and CA Satyam ASP Private Limited or other companies in which we may make similar investments even though we may have only a limited ability to influence their activities. We may also be required to record additional impairment charges in their carrying value if we deem the investment to be impaired due to adverse events, many of which are outside of our control, on their business, results of operations and financial condition in future periods.

         We make estimates in the preparation of financial statements including the utility of goodwill. Changes in such estimates resulting from events many of which are outside of our control, may result in the impairment of goodwill which would negatively impact our net income under U.S. GAAP. Such impact on net income may result in a reduction of the market value of our shares.

         We derive a significant portion of our revenues from a limited number of corporate customers. In fiscal 2004, our largest customer, General Electric Company and its affiliates, accounted for 14.3% of our information technology, or IT services revenues (excluding inter-segment revenues) and 14.3% of our total revenues. In fiscal 2004, our second largest customer, State Farm Mutual Automobile Insurance Co. accounted for 9.9% of our IT services revenues (excluding inter-segment revenues) and 9.9% of our total revenues. During fiscal 2004 and fiscal 2003, our five largest customers accounted for 36.5% and 38.4%, respectively, of our IT services revenues (excluding inter-segment revenues) and 36.4% and 38.4%, respectively, of our total revenues. The volume of work performed for specific customers is likely to vary from year to year, particularly since we are usually not the exclusive outside service provider for our customers. As a result, if we were to lose one of our major customers or have it significantly reduce its volume of business with us, our profitability could be reduced.

         In addition to our offshore IT centers in India, we have established IT centers in the United States, United Kingdom, Japan, Dubai, Australia, Singapore, Malaysia and other countries and plan to open additional international facilities. Our lack of experience with facilities outside of India subjects us to risk with regard to foreign regulation and overseas facilities management. Increasing the number of IT centers and the scope of operations outside of India subjects us to a number of risks, including administrative difficulties, currency exchange rate fluctuations, restrictions against the repatriation of earnings, overlapping taxes and cost overruns and delays.

         To deliver our services to our customers, we must maintain active voice and data communications 24 hours a day between our main offices in Hyderabad, our other IT centers and the offices of our customers worldwide. Any significant loss of our ability to transmit voice and data through satellite and telephone communications could result in lost customers and curtailed operations which would reduce our profitability.

         Our ability to execute projects and to obtain new customers depends, in large part, on our ability to attract, train, motivate and retain highly skilled technical associates, particularly project managers, project leaders and other senior technical personnel. We believe that there is significant competition for technical associates who

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possess the skills needed to perform the services we offer. An inability to hire and retain additional qualified personnel will impair our ability to bid for or obtain new projects and to continue to expand our business. Also, we cannot assure you that we will be able to assimilate and manage new technical associates effectively. In fiscal 2004 and fiscal 2003, we experienced associate attrition at a rate of 17.5% and 15.6% respectively. Any increase in our attrition rates, particularly the rate of attrition of experienced software engineers and project managers and leaders, would harm our growth strategy. We cannot assure you that we will be successful in recruiting and retaining a sufficient number of replacement technical associates with the requisite skills to replace those technical associates who leave. Further, we cannot assure you that we will be able to redeploy and re-train our technical associates to keep pace with continuing changes in IT, evolving technologies and changing customer preferences. Historically, wage costs in the Indian IT services industry have been significantly lower than wage costs in the United States for comparably skilled technical associates. However, in recent years, wage costs in the Indian IT services industry have been increasing at a faster rate than those in the United States, driven in part by demand for Indian technical associates overseas. In the long-term, wage increases may make us less competitive unless we are able to continue increasing the efficiency and productivity of our professionals and the prices of our services.

         Our professionals working onsite at a customer’s premises in the United States are typically required to obtain visas. Although there is no limit to new L-1 petitions, there is a limit to the number of new H-1B petitions that are approved in any government fiscal year which on October 1, 2003 was reduced from 195,000 workers to 65,000 per year. In years in which this limit is reached, we may be unable to obtain H-1B visas necessary to bring critical Indian technical associates to the United States on an extended basis. Changes in existing U.S. immigration laws that make it more difficult for us to obtain visas could impair our ability to compete for and provide services to customers.

         As a core element of our business strategy, we continue to offer a portion of our services on a fixed-price basis, rather than on a time-and-materials basis. During fiscal 2004 and fiscal 2003, we derived 31.7% and 27.5%, respectively, of our total IT services revenues from fixed-price contracts. Although we use our software engineering processes and past project experience to reduce the risks associated with estimating, planning and performing fixed-price projects, we bear the risk of cost overruns, completion delays and wage inflation in connection with these projects. Many of these risks may be beyond our control. Our failure to estimate accurately the resources and time required for a project, future rates of wage inflation and currency exchange rates or our failure to complete our contractual obligations within the time frame committed could reduce the profitability of our fixed-price contracts.

         Many of our contracts involve projects that are critical to the operations of our customers’ businesses and provide benefits that may be difficult to quantify. Any failure in a customer’s system could result in a claim for substantial damages against us, regardless of our responsibility for such failure. Although we attempt to limit our contractual liability for damages arising from negligent acts, errors, mistakes or omissions in rendering our services, we cannot assure you that the limitations of liability set forth in our service contracts will be enforceable in all instances or will otherwise protect us from liability for damages. We do not maintain liability insurance to cover losses from such claims for damages. Assertions of one or more large claims against us could result in lost customers, and could increase our costs and reduce our profitability.

         The market for IT services is rapidly evolving and highly competitive. We expect that competition will continue to intensify. We face competition in India and elsewhere from a number of companies, including:

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         We expect that future competition will increasingly include firms with operations in other countries, potentially including countries with lower personnel costs than those prevailing in India. A significant part of our competitive advantage has historically been the cost advantage relative to service providers in the United States and Europe. Since wage costs in this industry in India are presently increasing at a faster rate than those in the United States and Europe, our ability to compete effectively will become increasingly dependent on our reputation, the quality of our services and our expertise in specific markets. Many of our competitors have significantly greater financial, technical and marketing resources and generate greater revenues than us, and we cannot assure you that we will be able to compete successfully with such competitors and will not lose existing customers to such competitors. We believe that our ability to compete also depends in part on a number of factors outside our control, including the ability of our competitors to attract, train, motivate and retain highly skilled technical associates, the price at which our competitors offer comparable services and the extent of our competitors’ responsiveness to customer needs.

         We have developed a growth strategy based on, among other things, expanding our presence in existing and new markets and selectively pursuing attractive joint venture and acquisition opportunities. Under Indian law, an Indian company is usually required to obtain the approval of the Reserve Bank of India, or RBI, and/or the government of India to acquire a non-Indian company. If we are unable to obtain such approvals or are delayed in obtaining them, we may not be able to fully execute our growth strategy, which could adversely affect our operations.

         Our quarterly operating results have historically fluctuated and may fluctuate significantly in the future. This is primarily because we derive our revenue from fees for services generated on a project-by-project basis. Our projects vary in size, scope and duration. For example, we have some projects that employ only several people for a few weeks and we have other projects that employ over 100 people for six months or more. A customer that accounts for a significant portion of our revenue in a particular period may not account for a similar portion of our revenue in future periods. In addition, customers may cancel contracts or defer projects at any time for a number of different reasons. As a result, our revenues and our operating results in a particular period are difficult to predict, may decline in comparison to corresponding prior periods regardless of the strength of our business, and may not meet the expectations of securities analysts or investors. If this were to occur the share price of our equity shares and our ADSs would likely decline significantly.

         Any failure to meet a customer’s expectations could result in a cancellation or non-renewal of a contract. Our contracts with customers do not commit our customers to provide us with a specific volume of business and can typically be terminated by our customers with or without cause, with little or no advance notice and without penalty, which could significantly reduce our revenues. Additionally, our contracts with customers typically are limited to a specific project and not any future work. There are also a number of factors other than our performance and not within our control that could cause the loss of a customer. Our customers may demand price reductions, change their outsourcing strategy by moving more work in-house, or replace their existing software with packaged software supported by licensors, any of which could reduce our profitability.

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         We are incorporated in India, and a substantial portion of our assets and our employees are located in India. Consequently, our financial performance and the market price of our ADSs will be affected by changes in exchange rates and controls, interest rates, government of India policies, including taxation policies, as well as political, social and economic developments affecting India.

         South Asia has from time to time experienced instances of civil unrest and hostilities among neighboring countries, including between India and Pakistan. In April 1999, India and Pakistan conducted long-range missile tests. Since May 1999, military confrontations between India and Pakistan have occurred in the Himalayan region of Kargil and other border areas. In October 1999, the leadership of Pakistan changed as a result of a coup led by the military. In September 2001, terrorist attacks were conducted in the United States, which caused various adverse consequences, including adverse economic consequences. In addition, in October 2001 the United States commenced military operations against various targets located in Afghanistan. In December 2001, terrorist attacks were conducted on the Indian Parliament building resulting in heightened diplomatic and military tension between India and Pakistan. In early 2003, the United States and United Kingdom jointly conducted military operations against Iraq. These events are widely believed to have provoked a significant slow-down in worldwide economic activity. Events of this nature could influence the Indian and/or United States economy, from which the majority of our revenues are derived, and could have a material adverse effect on the market for securities of Indian companies, including our ADSs, and the market for our services.

         During the past decade, the government of India has pursued policies of economic liberalization, including significantly relaxing restrictions on the private sector. Nevertheless, the role of the Indian central and state governments in the Indian economy as producers, consumers and regulators has remained significant. The General Elections to the lower house of the Indian Parliament have just been completed. No party has won absolute majority and a coalition government has been formed again. We cannot assure you that these liberalization policies will continue in the future. Government corruption scandals and protests against privatization could slow down the pace of liberalization and deregulation. The rate of economic liberalization could change, and specific laws and policies affecting technology companies, foreign investment, currency exchange rates and other matters affecting investment in our securities could change as well. A significant change in India’s economic liberalization and deregulation policies could disrupt business and economic conditions in India generally and our business in particular.

         Our equity shares are listed and traded on the Stock Exchange, Mumbai (formerly known as the Stock Exchange, Bombay), the National Stock Exchange of India Limited and the Hyderabad Stock Exchange Limited and they may trade on these stock exchanges at a discount or premium to the ADSs traded on the NYSE in part because of restrictions on foreign ownership of the underlying shares.

         Under prior Indian laws and regulations, our depositary could not accept deposits of outstanding equity shares and issue ADRs evidencing ADSs representing such equity shares without prior approval of the Government of India. The RBI has announced fungibility regulations permitting, under limited circumstances, the conversion of ADSs to equity shares and the reconversion of equity shares to ADSs provided that the actual number of ADSs outstanding after such reconversion is not greater than the original number of ADSs outstanding. If you elect to surrender your ADSs and receive equity shares, you will only be able to trade those equity shares on an Indian stock exchange and, under present law, likely will not be permitted to reconvert those equity shares to ADSs. Additionally, investors who exchange ADSs for the underlying equity shares and are not holders of record will be required to declare to us details of the holder of record, and the holder of record will be required to disclose the details of the beneficial owner. Any investor who fails to comply with this requirement

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may be liable for a fine of up to Indian Rs.1,000 for each day such failure continues. Such restrictions on foreign ownership of the underlying equity shares may cause our equity shares to trade at a discount or premium to the ADSs.

         Except for limited circumstances, the RBI must approve the sale of equity shares underlying ADSs by a non-resident of India to a resident of India. Since currency exchange controls are in effect in India, the Reserve Bank of India will approve the price at which equity shares are transferred based on a specified formula, and a higher price per share may not be permitted. Additionally, except in 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 Reserve Bank of India approval for each transaction. We cannot assure our ADS holders that any required approval from the RBI or any other government agency can be obtained on any terms or at all.

         The exchange rate between the rupee and the U.S. dollar has changed substantially in recent years and may fluctuate substantially in the future. In fiscal 2004 and fiscal 2003, our U.S. dollar-denominated revenues represented 84.5% and 81.2%, respectively, of our total revenues. We expect that a majority of our revenues will continue to be generated in U.S. dollars for the foreseeable future and that a significant portion of our expenses, including personnel costs as well as capital and operating expenditures, will continue to be denominated in rupees. Consequently, our results of operations will be adversely affected to the extent that the rupee appreciates against the U.S. dollar. Depreciation of the rupee will result in foreign currency translation losses in respect of foreign currency borrowings, if any. In fiscal 2004, our foreign currency gains were approximately $49.5 million while it was $16.6 million in fiscal 2003. Fluctuations in the exchange rate between the rupee and the U.S. dollar will also affect the U.S. dollar conversion by the depositary of any cash dividends paid in rupees on the equity shares represented by the ADSs. In addition, fluctuations in the exchange rate between the Indian rupee and the U.S. dollar will affect the U.S. dollar equivalent of the Indian rupee price of our equity shares on the Stock Exchange, Mumbai, the National Stock Exchange and the Hyderabad Stock Exchange, which we refer to collectively as the Indian stock exchanges. As a result, these fluctuations are likely to affect the prices of our ADSs. These fluctuations will also affect the dollar value of the proceeds a holder would receive upon the sale in India of any equity shares withdrawn from the depositary under the deposit agreement. We cannot assure you that holders of ADSs will be able to convert rupee proceeds into U.S. dollars or any other currency or with respect to the rate at which any such conversion could occur. In addition, our market valuation could be seriously harmed by the devaluation of the rupee if U.S. investors analyze our value based on the U.S. dollar equivalent of our financial condition and results of operations.

         We have historically benefited from significant tax incentives provided under Indian tax laws. The principal applicable incentives are:

         As a result, the majority of our income is not subject to Indian tax and, accordingly, our effective tax rate is far below the Indian statutory income tax rate of 35% plus an applicable surcharge. The Software Technology Park tax exemption scheme has been modified effective as of April 1, 2001. All facilities registered in the program before March 31, 2001, which include all of our existing facilities in India and registrations for 2 new facilities which have not yet been constructed, will continue to benefit from this program under present law. Over time, as we construct additional facilities, however, the overall benefits of this tax program to our company will decrease with a resulting increase in our effective tax rate. We cannot assure you as to what action the present or future governments of India will take regarding tax incentives for the IT industry.

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         We are incorporated under the laws of the Republic of India and many of our directors and key managerial personnel, and some of the experts named in this document, reside outside the United States. In addition, virtually all of our assets and the assets of many of these persons are located outside the United States. As a result, you may be unable to:

         We have been advised by our Indian counsel, Crawford Bayley & Co., that the United States and India do not currently have a treaty providing for reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States on civil liability, whether or not predicated solely upon the federal securities laws of the United States, would not be enforceable in India. However, the party in whose favor such final judgment is rendered may bring a new suit in a competent court in India based on a final judgment which has been obtained in the United States. If and to the extent Indian courts were of the opinion that fairness and good faith so required, it would, under current practice, give binding effect to the final judgment which had been rendered in the United States unless such a judgment contravened principles of public policy of India.

         The Indian securities markets are smaller and more volatile than securities markets in more developed economies. The Indian stock exchanges have in the past experienced substantial fluctuations in the prices of listed securities and the price of our equity shares has been especially volatile. The high and low prices of our shares on the Stock Exchange, Mumbai from 2000 until the present are set forth in the table below.

         On May 31, 2004, the closing price of our shares on the Stock Exchange, Mumbai was Rs. 313.60 ($ 6.90). For comparison purposes, these prices have been adjusted to give effect to our September 1, 1999 two-for-one stock split and our August 25, 2000 five-for-one stock split and an exchange rate of Rs. 45.42 per $1.00 as on May 28, 2004 has been used.

         The Indian stock exchanges have also experienced problems that have affected the market price and liquidity of the securities of Indian companies. These problems have included temporary exchange closures, the suspension of stock exchange administration, broker defaults, settlement delays and strikes by brokers. In addition, the governing bodies of the Indian stock exchanges have from time to time restricted securities from trading, limited price movements and restricted margin requirements. Further, from time to time, disputes have occurred between listed companies and stock exchanges and other regulatory bodies, which in some cases may have had a negative effect on market sentiment. Similar problems could occur in the future and, if they do, they could harm the market price and liquidity of our equity shares and our ADSs.

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         The laws of India do not protect intellectual property rights to the same extent as the laws in the United States. Further, the global nature of our business makes it is difficult for us to control the ultimate destination of our products and services. The misappropriation or duplication of our intellectual property could curtail our operations or reduce our profitability.

         We rely upon a combination of non-disclosure and other contractual arrangements and copyright, trade secret and trademark laws to protect our intellectual property rights. Ownership of software and associated deliverables created for customers is generally retained by or assigned to our customers, and we do not retain an interest in such software and deliverables.

         We have applied for the registration of “Satyam” and other related marks as trademarks in India, the United States and in other jurisdictions where we carry on business. We currently require our technical employees to enter into non-disclosure and assignment of rights agreements to limit use of, access to and distribution of confidential and proprietary information. We cannot assure you that the steps taken by us in this regard will be adequate to prevent misappropriation of confidential and proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights.

         Although we believe that our services and products do not infringe upon the intellectual property rights of others, we cannot assure you that such a claim will not be asserted against us in the future. Assertion of such claims against us could result in litigation, and we cannot assure you that we would prevail in such litigation or be able to obtain a license for the use of any infringed intellectual property from a third party on commercially reasonable terms. We expect that the risk of infringement claims against us will increase if more of our competitors are able to obtain patents for software products and processes. Any such claims, regardless of their outcome, could result in substantial cost to us and divert management’s attention from our operations. In the future, litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any infringement claim or litigation against us could therefore result in substantial costs and diversion of resources.

         Generally, capital gains, whether short-term or long-term, arising on the sale of the underlying equity shares in India are subject to Indian capital gains tax. For the purpose of computing the amount of capital gains subject to tax, Indian law specifies that the cost of acquisition of the equity shares will be deemed to be the share price prevailing on the Stock Exchange, Mumbai or the National Stock Exchange on the date the Depositary advises the custodian to redeem receipts in exchange for underlying equity shares. The period of holding of such equity shares, for determining whether the gain is long-term or short-term, commences on the date of the giving of such notice by the Depositary to the custodian. Investors are advised to consult their own tax advisers and to consider carefully the potential tax consequences of an investment in our ADSs.

         There is a difference between the level of regulation and monitoring of the Indian securities markets and the activities of investors, brokers and other participants and that of markets in the United States and other developed economies. The Securities and Exchange Board of India, or SEBI, is responsible for improving disclosure and other regulatory standards for the Indian securities markets. SEBI has issued regulations and guidelines on disclosure requirements, insider trading and other matters. There may, however, be less publicly available information about Indian companies than is regularly made available by public companies in developed economies.

         Under the Companies Act, 1956 of India, or the Companies Act, a company incorporated in India must offer its holders of equity shares preemptive rights to subscribe and pay for a proportionate number of shares to

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maintain their existing ownership percentages before the issuance of any new equity shares, unless the preemptive rights have been waived by adopting a special resolution by holders of three-fourths of the shares which are voted on the resolution. As U.S. holders of ADSs represent 10.69% of our outstanding equity shares, you may be unable to exercise preemptive rights for equity shares underlying ADSs unless a registration statement under the Securities Act of 1933, as amended, or the Securities Act, 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 any given registration statement as well as the perceived benefits of enabling the holders of our ADSs to exercise their preemptive rights and any other factors that we deem appropriate to consider at the time the decision must be made. We may elect not to file a registration statement related to preemptive rights otherwise available by law to you. In the case of future issuances, the new securities may be issued to our Depositary, which may sell the securities for your benefit. The value, if any, our Depositary would receive upon the sale of such securities cannot be predicted. To the extent that you are unable to exercise preemptive rights granted in respect of the equity shares represented by your ADSs, your proportional interests in our company would be reduced.

         At our request, the depositary bank will mail to you any notice of shareholders’ meeting received from us together with information explaining how to instruct the depositary bank to exercise the voting rights of the securities represented by ADSs. If the depositary bank timely receives voting instructions from you, it will endeavor to vote the securities represented by your ADSs in accordance with such voting instructions. However, the ability of the depositary bank to carry out voting instructions may be limited by practical and legal limitations and the terms of the securities on deposit. We cannot assure you that you will receive voting materials in time to enable you to return voting instructions to the depositary bank in a timely manner. Securities for which no voting instructions have been received will not be voted.

         Under Indian law, subject to the presence in person at a stockholder meeting of persons holding equity shares representing a quorum, all resolutions proposed to be approved at that meeting are voted on by a show of hands unless a stockholder present in person and holding at least 10% of the total voting power or on which an aggregate sum of not less than Rs.50,000 has been paid-up, at the meeting demands that a poll be taken. Equity shares not represented in person at the meeting, including equity shares underlying ADSs for which a holder has provided voting instructions to the depositary bank, are not counted in a vote by show of hands. As a result, only in the event that a stockholder present at the meeting demands that a poll be taken will the votes of ADS holders be counted. Securities for which no voting instructions have been received will not be voted on a poll.

         As a foreign private issuer, we are not subject to the SEC’s proxy rules, which regulate the form and content of solicitations by United States-based issuers of proxies from their stockholders. To date, our practice has been to provide advance notice to our ADS holders of all stockholder meetings and to solicit their vote on such matters through the depositary, and we expect to continue this practice. The form of notice and proxy statement that we have been using does not include all of the information that would be provided under the SEC’s proxy rules.

         We cannot predict the extent to which an active, liquid public trading market for our ADSs will exist. Active, liquid trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors. The lack of an active, liquid trading market could result in the loss of market makers, media attention and analyst coverage. If there is no longer a market for our equity shares, or if we fail to continue to meet eligibility requirements, we may be required to delist from the New York Stock Exchange and this may cause our stock prices to decrease significantly. In addition, if there is a prolonged decline in the price of our equity shares, we may not be able to issue equity securities to fund our growth, which would cause us to limit our growth or to incur higher cost funding, such as short-term or long-term debt.

         Liquidity of a securities market is often a function of the volume of the underlying shares that are publicly held by unrelated parties. Although you are entitled to withdraw the equity shares underlying the ADSs from the depositary at any time, there is no public market for our equity shares in the United States.

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         The market price of our ADSs or our equity shares could decline as a result of sales of a large number of ADSs or equity shares or the perception that such sales could occur. Such sales also might make it more difficult for us to sell ADSs or equity securities in the future at a time and at a price that we deem appropriate. As of May 31, 2004, we have an aggregate of 314,958,768 equity shares outstanding, which includes underlying equity shares of 33,652,880 for 16,826,940 ADSs. All ADSs are freely tradable, other than ADSs purchased by our affiliates. The remaining equity shares outstanding may be sold in the United States only pursuant to a registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, including Regulation S.

Forward-looking statements contained in this Annual Report may not be ealized.

         We have included statements in this document which contain words or phrases such as “may,” “will,” “will likely result,” “believe,” “expect,” “will continue,” “anticipate,” “estimate,” “intend,” “plan,” “contemplate,” “seek to,” “future,” “objective,” “goal,” “project,” “should” and similar expressions or variations of such expressions, that are “forward-looking statements.” Actual results may differ materially from those suggested by the forward-looking statements due to risks or uncertainties associated with our expectations with respect to, but not limited to, our ability to implement our strategy and our growth and expansion.

         In addition, other factors that could cause results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to, general economic and political conditions in India, Southeast Asia, and other countries which have an impact on our business activities, changes in Indian and foreign laws, regulations and taxes, changes in competition and other factors beyond our control, including the factors described in this “Risk Factors” section. We do not intend to update any of the forward-looking statements after the date of this Annual Report to conform such statements to actual results.

ITEM 4.  INFORMATION ON THE COMPANY

History and Development

         Our IT professionals work onsite, offshore or offsite to provide customized IT solutions for companies in several industry sectors. Our development centers in India, United States, United Kingdom, Japan, Dubai, Australia, Singapore, Malaysia and other countries serve over 300 global companies, of which 101 are Fortune Global 500 corporations. Our marketing network spans 45 countries, across 6 continents.

         The full legal name of our company is Satyam Computer Services Limited. Satyam was organized as a limited liability company under the laws of the Republic of India pursuant to the provisions of the Indian Companies Act on June 24, 1987. Our registered office is located at Mayfair Center, SP Road, Secunderabad 500 003, Andhra Pradesh, India. Our principal place of business is the Satyam Technology Center located at Bahadurpally Village, Qutbullapur Mandal, R.R. District 500 855, Hyderabad, Andhra Pradesh, India, telephone number (91) 40-5523 3505. Our agent for service in the United States is CT Corporation System, 111 8th Avenue, New York, New York 10011, telephone number 1 (212) 894-8940. Our operations are primarily conducted in India and majority of our revenues are derived from the United States.

         We effected a two-for-one stock split (in the form of stock dividend) of our equity shares in September 1999 and a five-for-one stock split of our equity shares in August 2000.

         In May 2001, we completed an offering of 16,675,000 ADSs (representing 33,350,000 equity shares) in the United States and elsewhere outside of India a price of $9.71 per ADS. We received approximately $152.7 million, net of underwriting discounts, commissions and other costs of this offering. On May 15, 2001, our ADSs were listed on the New York Stock Exchange.

         Our principal capital expenditures for the fiscal years 2004, 2003 and 2002 were comprised mainly of expansion of infrastructure facilities in India and abroad. Our capital expenditures amounted to $16.7 million in

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fiscal 2004, $11.0 million in fiscal 2003 and $34.2 million in fiscal 2002. In fiscal 2004 and fiscal 2003, capital expenditures were incurred mainly for the purchase of computers and other electrical equipment. In fiscal 2002, our capital expenditures were incurred mainly for expansion of offshore facilities in acquisition/long lease of land in Bangalore and expansion of facilities in Hyderabad and Chennai.

Business Overview

         We are a global professional IT services company. We offer a comprehensive range of services, including software development, system maintenance, packaged software integration, and engineering design services. We use our global infrastructure to deliver value-added services to our customers to address IT needs in specific industries and to facilitate eBusiness initiatives. We began providing IT services to businesses in 1988 and as of March 31, 2004 we had 13,120 technical associates servicing over 300 customers worldwide. In addition to our core business of providing IT services, we have also selectively invested in related businesses.

         We recognized the importance of the Internet to India and, in December 1995, created Sify Limited (formerly Satyam Infoway Limited), which we believe is the largest integrated Internet, network and electronic commerce services company in India, offering end-to-end solutions with a comprehensive range of products delivered over a common Internet backbone infrastructure. Sify’s shares are listed only in the United States and are quoted on the Nasdaq National Market under the symbol “SIFY”. In February 2002, we acquired Sify’s software services business for approximately $6.9 million in a transaction approved by Sify’s shareholders and subjected to an independent valuation. The objective of this acquisition was to permit us to focus on our core business of software services and Sify to focus on Internet Services. During the year ended March 31, 2003, due to the sale of new shares by Sify to Softbank Asia Infrastructure Fund, or SAIF, and VentureTech Solutions Private Ltd. or VentureTech, our ownership interest in Sify was reduced from 52.51% to 37.15%. As a result of this reduced ownership interest, we deconsolidated Sify on December 9, 2002 and have since accounted for our interest in Sify using the equity method. VentureTech invested an additional $1.8 million in Sify in April 2003, and our ownership interest was further reduced to 36.0%. Further, during the year ended March 31, 2004, we completed the sale of one million equity shares in Sify Ltd. through the latter’s sponsored ADS program for a consideration of $ 3.4 million (net of tax). Consequent to this sale, our ownership interest was further reduced to 32.04%.

         We owned 100% of the outstanding stock of VisionCompass Inc., or VCI, which had developed and marketed our software product, VisionCompass. Following our decision to discontinue the operations of VisionCompass so as to focus on our core business of IT services, VCI was formally dissolved on March 24, 2004.

         On June 5, 2002 we formed Nipuna Services Limited or Nipuna, a wholly owned subsidiary in Secunderabad, Andhra Pradesh, India to provide various services connected with business process outsourcing. As of March 31, 2004, we had invested $4.0 million in Nipuna.

         In May 2003, Gartner Dataquest forecasted that the worldwide IT services market would grow from $536.3 billion in 2002 to $727.4 billion in 2007, representing an annual compound growth rate of 6.3%. We believe the growth of this industry is driven by the following factors and trends:

         Increased importance of IT to businesses. In today’s increasingly competitive business environment, companies have become dependent on technology not only to conduct day-to-day operations, but also as a strategic tool to enable them to re-engineer business processes, restructure organizations and react quickly to competitive, regulatory and technological changes. As systems continually become more complex, companies increasingly turn to external IT service providers to develop and implement new technologies and integrate them with existing applications in which a company may have already made a considerable investment.

         Impact of the Internet and the emergence of eBusiness. Businesses are increasingly using the Internet to interact with new and existing customers and create new revenue opportunities. Business conducted electronically over the Internet, or eBusiness, extends beyond Internet-based applications, such as eCommerce websites and corporate intranets, to include packaged software tools such as customer and supply chain management software. eBusiness initiatives are often large and difficult to manage and must keep pace with

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constantly evolving business processes and technological innovations. In addition, managing and upgrading existing systems has also become more critical given the importance of these systems to eBusiness initiatives. Internal IT departments often do not have the appropriate resources or breadth of skills necessary to execute these initiatives. As a result, companies increasingly turn to outside service providers to design, integrate, implement and maintain their eBusiness applications.

         Emergence of a high-quality IT services industry in India. India has emerged as a destination for companies seeking to engage IT service providers in a variety of areas, including eBusiness and software design, development, integration and system maintenance. India’s National Association of Software and Service Companies, or NASSCOM estimates that export revenue generated from the software and service industry in India was approximately $12.2 billion in fiscal 2003 and is expected to reach $50.0 billion by fiscal 2008. The key factors contributing to this rapid growth include the availability of a large pool of highly skilled, English-speaking engineers and professionals, the ability to produce high quality software applications, low personnel costs relative to the United States and a time difference which permits work to be done during non-business hours in the United States and Europe.

         We believe that India ranks second only to the United States as the country with the largest population of English-speaking technical personnel. According to the NASSCOM Strategic Review 2004, educational institutions in India produce approximately 290,000 engineering students each year. Given the shortage of technical labor in the United States and other developed economies, the availability of people could be a competitive advantage for Indian IT services companies. Also, the English speaking ability of Indian technical engineers and professionals facilitates interaction with customers in the United States and Europe and is a significant advantage compared to non-English speaking countries which also offer IT services.

         Indian companies have developed high-quality methodologies. A January 2002 NASSCOM survey of international quality standards of the top 300 Indian IT services companies showed that 216 had acquired ISO 9000 or SEI or other certifications and 58 more companies were in the process of acquiring the same. According to NASSCOM, currently 36 Indian companies have received a level five assessment under the Software Engineering Institute’s Capability Maturity Model, or SEI-CMM, developed by the Carnegie Mellon University. Level five is the highest level attainable under the SEI-CMM standards, which assess an organization’s quality management system and systems engineering processes and methodologies. The level five certification process involves periodically subjecting our management system and systems engineering processes and methodologies to stringent third party review and verification. Some of our customers look to an SEI-CMM certification as a threshold indication of the quality of our processes and methodologies.

         Need for IT service providers who can provide a range of services worldwide. Many companies today need a wide range of IT services, from high value-added services such as the integration and implementation of eBusiness and packaged software applications to lower-end services such as system maintenance and the re-engineering of older applications. As a result, companies often seek a service provider that can understand and integrate a wide spectrum of emerging technologies with existing systems and which offers a comprehensive range of services from software design and development to system maintenance. In addition, as companies become global, they increasingly require IT support on a worldwide basis. In the eBusiness environment, service providers need to have a close relationship with customers given the complexity and time sensitive nature of eBusiness.

         We believe there is a need for full service IT service providers that have expertise in both existing systems and new Internet-based technologies, access to a large pool of highly-skilled technical personnel and the ability to cost-effectively service customers on a worldwide basis.

         We believe the following aspects of our business help us to address the challenges faced by our customers in the current IT environment.

         Comprehensive range of services. We provide our customers the ability to meet all of their IT needs from one service provider. Our understanding of both existing systems and new technologies allows us to assist our customers in the management and maintenance of established systems and the development and integration of

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new technologies. We also help them understand their IT needs and work with them to develop an appropriate strategy to address these needs.

         Global delivery model. We provide our services through our offshore centers located in India, our offsite centers located in the United States, United Kingdom, Japan, Dubai, Australia, Singapore, Malaysia, and other countries and onsite teams operating on our customers’ premises. Through this global network, we can provide a flexible delivery mix that is tailored to meet our customers’ specific needs. In addition, our global network of centers allow us to service our customers on a 24-hour basis and thereby shorten the time required to complete projects. Our onsite teams and offsite centers allow us to respond quickly to customer requests, to interact closely with the customer to develop IT services where the customers’ specifications are not clearly defined and to market services tailored to meet the needs of specific geographic markets.

         In-depth industry knowledge. We have developed significant industry expertise in insurance, financial services, manufacturing and telecommunications. This allows us to better understand and address the IT needs of customers within a particular industry. Our technical associates include experienced project managers and software engineers with substantial experience in providing IT services to a particular industry. We have also hired business specialists who possess the industry knowledge our company needs to better understand the requirements of our customers in these sectors and assist our software engineers in proactively designing IT services. We believe our customers benefit from our ability to design and develop applications and services tailored to address industry-specific needs.

         Adherence to high quality standards. We have a large pool of highly trained technical associates that allows us to provide high quality services tailored to meet our customers’ needs. As of March 31, 2004, 49% of our technical associates had bachelors degrees in engineering, and 51% had masters degrees in engineering, technology or computer applications and bachelors degrees in science and others. Each new technical associate must participate in a three to six-month software engineering training program and all technical associates are expected to undertake between 40 and 80 hours per year of development training. In addition, we have implemented strict quality control programs which form an integral part of our project management methodology to ensure we provide high quality services to our customers. We have a company-wide quality management system which satisfies the ISO 9001 TickIT and received a level five assessment under the SEI-CMM standards. Among other things, our system involves a rigorous review of software development processes, testing of all work, measurement and analysis of key quality metrics and regular internal quality audits. Our adherence to this system ensures that our customers receive timely delivery of consistent and high-quality services.

         Our main goal is to be a leading worldwide provider of comprehensive IT services. We intend to accomplish our goal by.

         Continuing to focus on eBusiness and high-value added services. To better service our customers in all key industry segments, we intend to continue to focus on and expand our eBusiness offerings and our other high-value added services, such as packaged software integration and engineering design services. To continue to differentiate our services and achieve recognition as a leading worldwide provider of comprehensive IT services, we intend to broaden our range of Internet-based applications as new technologies become available.

         Leveraging our existing customer base. Our goal is to build long-term stable business relationships with our customers to generate consistent revenues. With our existing customers, we plan to continue to expand the scope and range of the services we provide by extending our capabilities into new and emerging technologies and by understanding our customers’ businesses. In fiscal 2004 and fiscal 2003, we generated 84.0% and 84.0%, respectively, of our IT services revenues (excluding inter-segment revenues) from customers who were customers in the prior year. To further strengthen our relationships and broaden the scope and range of the services we provide to existing customers, our senior corporate executives have specific relationship management responsibilities for our largest customers. In fiscal 2003, we appointed approximately 30 relationship managers to further our relations with our major customers.

         Expanding our presence in existing markets and penetrating new geographic markets. We plan to expand our presence in our existing markets and to establish a presence in new geographic markets throughout Europe

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and the Asia-Pacific region. We intend to accomplish this by leveraging our existing global customer base to serve them in other geographic locations. In fiscal 2003, we opened additional sales and marketing offices in Europe, the Asia-Pacific region and Canada and offsite centers in Australia, China and Malaysia to help us gain better access to new customers. We also plan to continue to hire local employees to staff and manage our offsite centers. We believe that the use of locally hired technical associates and managers working from offsite centers will enable us to increase our share of the local market and compete more effectively with local IT service providers.

         Continuing to enhance our specific industry expertise. We aim to have an in-depth understanding of targeted industries in order to identify customer needs in those industries and be able to proactively design and offer tailored IT services to address those needs. By focusing on targeted industries, we believe we can develop services that are reusable within an industry and thereby lower our cost of delivering those services. We intend to enhance our health care, government and retail IT services capabilities by hiring additional specialists with expertise in these industries.

         Attracting and retaining quality technical associates and augmenting their training. To attract, retain and motivate our technical associates, we plan to continue to provide an environment that rewards entrepreneurial initiative and performance, including competitive salaries and benefits as well as incentives in the form of cash bonuses and stock options. We also intend to continue to devote significant resources to training our technical associates through our Satyam Learning Center in a variety of software languages and computer platforms.

         Enhancing our capabilities through joint ventures, technology alliances and acquisitions. We plan to continue to broaden our network of joint ventures and technology alliances with technology providers, customers, and IT service providers, particularly in markets in which we are not currently involved. We enter into these joint ventures and alliances to acquire expertise in high-end software products and emerging technologies, to add qualified personnel, to gain access to additional customers to invest in companies which service niche markets. We will also consider acquiring companies to gain ownership of specific technologies and to exploit other synergies with our existing business. While we currently have not identified any specific candidates, we regularly engage in discussions and negotiations relating to potential investment, joint ventures, technology alliances and acquisitions in the ordinary course of our business.

IT Services

         We offer a comprehensive range of IT services based on existing and emerging technologies that are tailored to meet the specific needs of our customers. Our IT services include:

         Software development. We design, develop and install software for a variety of IT systems. Our applications range from single-platform, single-site systems to multi-platform, multiple-site systems. A project may involve the development of new applications or new functions for existing software applications. Each development project typically involves all aspects of the software development process, including definition, prototyping, design, pilots, programming, testing, installation and maintenance.

         System maintenance. We provide maintenance services for large software systems, which may include modifications and enhancements to the system and product support. We also assist customers in migrating to new technologies while extending the useful life of existing systems. Projects may involve re-engineering software to migrate applications from mainframe to client/server architectures or to migrate from existing operating systems to UNIX or Windows NT. For companies with extensive proprietary software applications, implementing such technologies may require rewriting and testing millions of lines of software code. We perform most of the maintenance work at our offshore facilities using satellite links to our customer’s system. In addition, we maintain a small team on the customer’s premises to coordinate support functions.

         Packaged software integration. We work with providers of packaged software in the areas of enterprise resource planning, customer relationship management and supply chain management to install and integrate these packages with our customers’ existing computer systems and with various Internet applications as required to address the eBusiness needs of our customers. These packaged software applications help enable companies to strengthen relationships with their customers and business partners, create new revenue opportunities, enhance operating efficiencies and improve communications. We also customize this software to meet the specific needs of our customers and provide ongoing maintenance and support services. We have established

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alliances with providers of enterprise resource planning systems, such as Oracle and SAP. We have also established alliances with other companies who supply customer relationship or supply chain management systems and eBusiness applications for building on-line businesses. In addition, we offer our customers applications in the areas of business and customer intelligence, data-mining and data-warehousing to enable them to analyze trends.

         Engineering design services. We provide engineering design services using computer aided design, modeling and engineering tools. Our engineering design services include component design, product and process analysis, and simulations and range from basic drawing changes to complex designs. In addition, our services may involve customizing the latest computer aided design, modeling and engineering software to specific user requirements.

         We offer our customers flexible delivery alternatives through our offshore centers located in India, through offsite centers which we have established in our major markets and through onsite teams operating at the customers’ premises.

         Offshore centers. We typically assign a team of technical associates to visit a customer’s premises and determine the scope and requirements of a particular project. Some members of the initial team remain onsite to facilitate direct liaison with the customer, while others return to India to establish and supervise a larger project team of suitably qualified technical associates to implement the project. Typically 20% of a project team will be on site depending on the nature and complexity of the project. Projects completed in our offshore centers in India contributed 43.9% and 47.0% to our IT services revenues in fiscal 2004 and fiscal 2003, respectively.

         We have also entered into arrangements with several customers where an entire project team is assigned to a single customer. Such teams, called dedicated offshore centers, work from our facilities in India and are staffed and managed by us. Once the project priorities are established by the customer, we, in conjunction with the customer’s IT department, manage the execution of the project. When needed, our dedicated offshore centers will have equipment specific to the customer, or will have a separate work area with its own security protocols. We have an established dedicated offshore centers for, among others, General Electric Appliances Products LLP, and Ford Motor Company.

         Offsite centers. We believe that a key success factor in meeting our customers’ needs is our physical presence near the customer. Accordingly, we have expanded and improved the offshore development model by establishing offsite centers in our major markets. In the United States, we currently operate offsite centers located in Atlanta, Georgia; Chicago, Illinois; Parsippany, New Jersey; and Santa Clara, California. Outside of the United States, we have offsite centers located in Tokyo, Japan; Basingstoke, U.K.; Singapore; Sydney, Australia; Dubai, Malaysia and other countries. We believe our offsite centers allow us to respond quickly to customer requests, to interact closely with the customer to develop IT services where the customer’s specifications are not clearly defined and to market services tailored to meet the needs of specific geographic markets. In addition, we staff our offsite centers with locally-hired managers, marketers and technical associates which we believe enable us to compete more effectively with local IT service providers.

         Onsite teams. Some customers require the presence of our project teams at their premises, particularly for mission critical or high-end projects. The customer’s team and our project team collaborate to develop IT services that meet the customer’s specifications.

         Projects completed at onsite and offsite centers contributed 56.1% of our IT services revenues in fiscal 2004 and 53.0% in fiscal 2003.

         As of March 31, 2004, 3,456 of our technical associates worked in our customers’ premises and offsite centers compared to 2,386 as of March 31, 2003.

         We believe that quality is a culture, expressed in the way we interact and cater to the needs of our clients, and in the products and processes we deliver to them. So while we have met several external quality parameters, we are even more stringent about setting and meeting our own exacting standards.

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         To minimize disruptions and financial loss in the event of a disaster or disruption to our business operations, we have implemented a business continuity management system. This integrated enterprise wide process explores possible failure scenarios, assesses their impact on our business and puts in place appropriate controls to mitigate and manage the risks.

         Our global Business Continuity Center in Singapore is designed to ensure that our clients receive seamless and uninterrupted support in case we are unable to provide our services from India or elsewhere and equips us with an alternate site for our critical projects when required. We are the first major Indian software company to establish such operations in Singapore. We chose Singapore as the site for this center based on its excellent connectivity to the rest of the world, low risk profile and new visa scheme to facilitate disaster recovery and business continuity operations.

         Our multiple international locations provide us with numerous options for alternate sites in any eventuality. Our business continuity plans, backed by redundant network connectivity and replication/back-up facilities, are intended to ensure a high level of preparedness.

         During fiscal 2003, we launched a new initiative known as ORBIT 5 (Organizational and Business Transformation), aimed at transforming the efficiency of our processes to deliver a higher standard and service.

         The ORBIT 5 initiative aims not only to achieve and maintain our processes and sub-processes at the highest level but also to help us to create world-class infrastructure and systems.

         To further improve our business processes, we have also adopted the iSTRIVETM methodology. This methodology involves systematic data gathering and statistical analysis to enable us pinpoint errors in our processes.

         We market our services primarily to companies in the United States, Europe, the Middle East and the Asia-Pacific region. Our strategy is to seek new customers and at the same time secure additional engagements from existing customers by providing high quality services and by being responsive to customer needs. The strength of our relationships has resulted in significant recurring revenue from existing customers. We generated $ 474.8 million, $385.0 million and $348.4 million in IT services revenues in fiscal 2004, fiscal 2003 and fiscal 2002 respectively, from customers who were customers in the prior fiscal year. We also derive a significant proportion of our IT services revenues from a limited number of customers. Our largest customer, General Electric Company and its affiliates, accounted for 14.3%, 16.2% and 18.3%, of our IT services revenues (excluding inter-segment revenues) and 14.3%, 16.1% and 18.3%, of our total revenues in fiscal 2004, fiscal 2003 and fiscal 2002 respectively. During the same periods, our second largest customer, accounted for 9.9%, 8.7% and 6.9% respectively, of our IT services revenues (excluding inter-segment revenues) and 9.9%, 8.7% and 6.9% respectively, of our total revenues. Our five largest customers accounted for 36.5%, 38.4% and 38.5% of our IT services revenues (excluding inter-segment revenues) and 36.4%, 38.4% and 38.4% of our total revenues in fiscal 2004, fiscal 2003 and fiscal 2002 respectively.

         We sell and market our services through 22 sales and marketing offices spread across the globe. We target our efforts towards Fortune 500 & Global 1000 corporations. Our sales efforts are complemented by our marketing team, which assists in brand building, Alliance management and other corporate level marketing efforts. Our sales efforts are largely decentralized and conducted within each of our business segments. As of March 31, 2004, we had 199 sales (including pre-sale, support) and marketing employees.

         We have in the past entered into, and plan to continue to enter into, joint ventures and alliances with technology providers, customers, and IT service providers, particularly in markets in which we are not currently involved. We enter into these joint ventures and alliances to gain access to additional customers, to acquire expertise in high-end software products and emerging technologies, to add qualified personnel and to make investments in companies engaged in providing services to niche markets.

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         The IT services industry is highly competitive and served by numerous national, regional and local firms, all of which are either existing or potential competitors of our company. Our primary India based competitors include Infosys Technologies Limited, Wipro Limited and Tata Consultancy Services. Our primary U.S. based competitors include Computer Sciences Corporation, Electronic Data Systems, Accenture, Cambridge Technology Partners and Keane Inc. Generally, our competitors include participants from a variety of market segments, including major international accounting firms, systems consulting and implementation firms, applications software firms, service groups of computer equipment companies, general management consulting firms, programming companies and temporary staffing firms. Many of these competitors have substantially greater financial, technical and marketing resources and greater name recognition than us. We believe that the principal competitive factors in the IT services industry include the range of services offered, technical expertise, responsiveness to customer needs, speed in delivering IT services, quality of service and perceived value. We believe that we compete favorably with respect to these factors. There are relatively few barriers to entry into our markets such that we may face additional competition from new entrants into our markets. In addition, there is a risk our customers may elect to increase their internal IT resources to satisfy their IT services needs.

         A key component of our IT services delivery model is the linking of a customer’s onsite system with our offsite and offshore centers through a privately owned Frame Relay Network consisting of satellite and fiber communications links. Our data and voice network, SatyamNet, connects our facilities worldwide through a high speed network with a backbone of satellite, fiber optic and land lines. Video Conferencing facilities are available at multiple locations to improve customer interaction. SatyamNet allows projects to progress and software applications to be installed without the need for extensive attendance at the customer’s premises. Similarly, day-to-day maintenance of a customer’s system can be carried out largely from one or more offsite or offshore centers with only a few maintenance professionals required to be stationed at the customer’s premises. We lease dedicated telecommunication lines from VSNL, TATA, BHARATI and Software Technology Park of India which permit data communication between our facilities in India and the MCI, SPRINT and AT&T communication networks to connect to our customers’ facilities abroad. All of our Indian satellite and fiber links terminate at our U.S. communication hubs in Vienna, Virginia and Parsippany, New Jersey. From the Vienna and Parsippany communication hubs, we connect our offshore centers in India to our offsite centers in the United States through high speed networks and to customers’ systems through leased lines, the Internet, the customer’s own network or a network operated by third parties. These two locations act as back-up telecommunications centers for each other to help ensure that the connectivity to our customer premises is always available.

         In December 2001, we completed a major upgrade of SatyamNet to enhance and optimize network efficiency across all operating locations. This upgrade has enhanced our aggregate links capacity by more than 100.0% in different bandwidths, which cater to the networking requirements of approximately 7,000 workstations across various geographic locations. We currently lease two 2Mbps Fiber Optic links from Hyderabad and Chennai and three 512 Kbps international links ( one fiber and the other two satellite ) and one 64 kbps international satellite link. The aggregate bandwidth is 9.5 Mbps and consists of both fiber and satellite links to take care of media redundancy. In addition, we have 1 Mbps committed information rate high speed links aggregating to 6 Mbps connecting various cities in India. Our intra-city links are connected by 2048 kbps lines to multiple locations through multiple providers, thus providing high availability and complete redundancy. We are connected with the United Kingdom by a 256 K dedicated leased circuit and also connected to Australia and Singapore by a 128 K link framed leased circuit from our U.S. office hubs. We have also added redundant Internet Mail and Name Resolution servers in our U.S. offices as a part of our disaster recovery infrastructure.

         During business hours, the average loading of SatyamNet is currently approximately 40% of total capacity, with sudden bursts in usage reaching approximately 50%. Our network has extra capacity available to service new customers in the immediate future and to permit sudden bursts of data transfer and other contingent uses. The network utilization is monitored using a centralized management software, and the utilization reports are

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shared with senior associates on a weekly basis. When the utilization reaches 60%, the process for enhanced BW is activated.

         We have not experienced any significant downtime in our communications network during the past three years. To help minimize the likelihood of downtime in our voice and data communications network, we have built redundancy and alternative pathways into our network. For example, most of our communications take place over international links. Each office that has its own international link also has a inter-city link to another nearby office, which provides an alternative pathway for international communications if the office’s own international link breaks down. We have also provided ISDN links as a back-up for the intra-city links.

         The terms of our customer contracts often impose particular confidentiality and security standards. We have independently established a system of security measures to protect our computer systems from security breaches and computer viruses that may attempt to gain access to our communications network. We maintain a firewall at the entry point of the network which checks incoming data for viruses and unauthorized access before they are transmitted on SatyamNet. All traffic received at our facilities in India is again checked for viruses, with contaminated files quarantined. We have implemented a two tier virus protection, which includes arrangements with two virus protection vendors as a preventive countermeasure against computer viruses. Our backup process which includes daily, weekly and monthly backups. Backup tapes are stored at different locations to ensure maximum protection against losses. We have been accredited with BS7799 / ISO 17799 certification by Ministry of Information Technology, Government of India, for all our locations in India — in recognition of our high standards of network security and business continuity practices.

         Our corporate headquarters, the Satyam Technology Center, is located in Hyderabad, India. We own this facility, which provides a modern workspace for approximately 1,400 software engineers in two buildings covering an aggregate area of approximately 209,300 square feet, which are linked to our other facilities through our SatyamNet. The Satyam Technology Center also has recreational facilities and housing for up to 500 associates and covers an area of approximately 153,000 square feet. The State of art Auditorium / Convention center with 250 seat capacity, first of its kind in South India, has been constructed at our Satyam Technology Center to host meetings with large number of participants, gatherings and for live interactive sessions.

         We have additional software technology centers located in Bangalore, Bhubaneshwar, Chennai, Hyderabad and Pune, with facilities aggregating approximately 885,500 square feet. We own the facilities in Bhubaneshwar and lease our other facilities with terms ranging from six years to nine years. Each facility is equipped with computers, servers, telecommunications lines and back-up electricity generation facilities sufficient to ensure an uninterrupted power supply.

         During the fiscal 2004, we constructed a new facility with a built up area of 1,00,000 square feet on our own 23 acre campus located in Electronic City, Phase II Bangalore, India.

         In addition to the offshore centers in India, we operate offsite centers in major markets to establish a local presence closer to our customers.

         Our research and development efforts are focused on development services required by our existing customers or as needed to attract new customers. As of March 31, 2004, we employed 41 associates dedicated to our research and development activities. In addition, a number of our management and other operational personnel are also involved in research and development activities. We expect to continue to invest some of our resources in research and development. We have spent approximately $ 633 thousand in fiscal 2004, $1.4 million in fiscal 2003, $2.2 million in fiscal 2002 on company-sponsored research and development activities.

         Ownership of software and associated deliverables created for customers is generally retained by or assigned to the customer, and we do not usually retain an interest in such software or deliverables. We also develop software products and software tools which are licensed to customers and remain our property. We rely

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upon a combination of non-disclosure and other contractual arrangements and copyright, trade secret, patent and trademark laws to protect our proprietary rights in technology. We currently require our technical associates to enter into non-disclosure and assignment of rights agreements to limit use of, access to and distribution of our proprietary information. The source code for our proprietary software is generally protected as trade secrets and as unpublished copyright works. We have applied for the registration of “Satyam” as trademarks in India and United States. We generally apply for trademarks and service marks to identify our various service and product offerings. Although we believe that our services and products do not infringe the intellectual property rights of others, we cannot assure you that such a claim will not be asserted against us in the future.

         Our IT services business is not affected by seasonality.

         Regulation of our business by the Indian government affects our business in several ways. We benefit from certain tax incentives promulgated by the Government of India, including a ten-year tax holiday from Indian corporate income taxes for the operation of most of our Indian facilities and a partial taxable income deduction for profits derived from exported IT services under Indian tax laws. As a result of these incentives, our operations have been subject to relatively insignificant Indian tax liabilities. We have also benefited from the liberalization and deregulation of the Indian economy by the successive Indian governments since 1991. Further, there are restrictive parts of Indian law that effect our business, including the fact that we are generally required to obtain approval from the Reserve Bank of India and/or the Ministry of Finance of the Government of India to acquire companies organized outside India, and we are generally required, subject to some exceptions, to obtain approval from relevant government authorities in India in order to raise capital outside India. Finally, the conversion of our equity shares into ADSs is governed by guidelines issued by the Reserve Bank of India.

         Please see “Item 10. Additional Information”, as well as “Item 3. Key Information — Risk Factors” for additional information on the effects of governmental regulation of our business.

BPO Services

         On June 05, 2002, we formed Nipuna Services Limited or Nipuna, a wholly-owned subsidiary in Secunderabad, Andhra Pradesh, India to provide various services connected with business process outsourcing. As of March 31, 2004, we had invested $4.0 million in Nipuna.

         Nipuna completed its first full year of operations with 10 active customers. At present, Nipuna is offering support in the areas of production back office, health care insurance, IT help desk, finance and accounts, customer contact and data management. Nipuna had 503 employees as of March 31, 2004. Nipuna’s Hyderabad facility is capable of hosting 550 employees, and an additional facility in Bangalore capable of hosting 350 employees will be operational in fiscal 2005. Nipuna reported revenue of US$2.4 million in fiscal 2004.

         In October 2003, Nipuna issued 45,669,999 0.05% convertible redeemable cumulative preference shares of par value Rs 10 ($0.22) per share to each of Olympus Capital and Intel Capital at an issue price of $0.22 per share, in exchange for an aggregate consideration of $10 million. A similar amount will be invested in the second phase, making a total investment of US$20 million. These preference shares are to be mandatory converted / redeemed into equity shares on or before June 2007 based on certain provisions in the agreement relating to revenues and profits earned up to March 31, 2006. If not converted or early converted at the option of the investors based on certain triggering events, these convertible preference shares are redeemable on maturity in June 2007 at a redemption premium, which could range in between 7.5% to 13.5% per annum.

         The investors are entitled to receive dividends from the preference shares at the rate of 0.05% per cent per annum. The dividend on the preference shares for the period ended March 31, 2004 is payable.

         We have guaranteed payment of all sums payable by Nipuna to the investors on redemption of the preference shares. Further, we are required to subscribe to Convertible Debentures amounting to US$20 million based on certain provisions in the agreement. These convertible debentures shall bear an interest rate equal to

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the prime lending rate of the State Bank of India prevailing at the time of issuance and are convertible upon the election of Nipuna into Ordinary Shares at any time.

         Satyam Computer Services, Nipuna and the two investors have also entered into a Warrant Agreement whereby Nipuna agrees to issue to the investors warrants in consideration of and based upon the referral revenues received by Nipuna or its subsidiaries at any time during the period commencing from the date of initial closing and ending in June 2007 from business referred to Nipuna or its subsidiaries by an Investor or its Affiliates. The investors have rights to purchase from Nipuna Ordinary Shares which, upon issuance, would constitute 7.5% of the then outstanding equity share capital of the Company on a fully diluted basis during the exercise period at the price per share then in effect.

Software Products

         Through our wholly owned subsidiary in the United States, VisionCompass Inc., or VCI, we developed VisionCompass, a software product for use as a management tool to assess and help improve business performance. Following our decision to discontinue the operations of VisionCompass so as to focus on our core business of IT services, VCI was formally dissolved on March 24, 2004.

ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

         The following discussion of the financial condition and results of operations of our company should be read in conjunction with the financial statements and the related notes included elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. For additional information regarding these risks and uncertainties, please see "Item 3.-Risk Factors.”

Restatement of Previously Reported Amounts

         Satyam has restated beginning shareholder’s equity as of March 31, 2001 and shareholder’s equity and net income as of and for the years ended March 31, 2003 and 2002, to reflect the impact on deferred tax liabilities and income taxes of Satyam’s equity in the losses of Sify. Such impact was not previously recognized. Satyam recognized a deferred tax liability of US$ 36.92 million as at March 31, 2001 for the outside basis difference between the book carrying value and tax basis of its investment in Sify. This outside basis difference was generated from the increase in the book carrying value of Satyam’s investment in Sify resulting from Sify’s issuance of its shares to third parties. In subsequent periods, Satyam recognized its equity in the losses of Sify as a reduction in the book carrying value of its investment and as a charge to the income statement. However, Satyam did not recognize the tax benefit resulting from the decrease in the outside basis difference deferred tax liability.

         The effects of these adjustments are as follows:

         The significant effects of this restatement are disclosed in Note 22 to the accompanying financial statements and in Item 3 — Selected Financial Data.

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Overview

         We are the fourth largest provider of IT services in India, based on the amount of export revenues generated during our fiscal year ended March 31, 2004. We offer a comprehensive range of services, including software development, system maintenance, packaged software integration, engineering design services, and business process outsourcing, or BPO. We use our global infrastructure to deliver value-added services to our customers to address IT needs in specific industries and to facilitate e-Business initiatives. Our total revenues increased by 23.3% to $566.4 million in fiscal 2004 from $459.2 million in fiscal 2003 and 10.8% to $459.2 million in fiscal 2003 from $414.5 million in fiscal 2002. Our reportable operating segments are divided into IT services, BPO and software products.

         On June 5, 2002, we formed a wholly-owned subsidiary, Nipuna Services Limited, or Nipuna, to provide various services connected with business process outsourcing.

         We own 100% of the outstanding stock of VisionCompass Inc., or VCI, which had developed and marketed our software product, VisionCompass. However, keeping in view the business and economic conditions, the relative size and managerial time, we decided to discontinue the operations of VisionCompass so as to focus on our core business of IT services. VCI was formally dissolved on March 24, 2004. We have applied for one patent in the United States related to VisionCompass which we intend to pursue despite closure of VCI operations as this product remains in use by customers. VisionCompass shall be continued to be marketed by Satyam.

Consolidation of Subsidiaries

         As of March 31, 2004, we had invested $28.0 million in VCI and $16.3 million in five of our other subsidiaries. Since its inception in January 1999 VCI incurred significant operating losses and negative cash flows. As of March 31, 2004 the cumulative net losses incurred were $27.5 million by VCI and $17.6 million by our other five subsidiaries. The results of VCI and our other subsidiaries are reflected in our consolidated audited financial statements under U.S. GAAP.

         On March 28, 2003, we acquired Northrop Grumman’s 24% interest in Satyam Manufacturing Technologies Inc., or SMTI and SMTI became our 100% owned subsidiary. We issued Northrop Grumman a non interest bearing unsecured promissory note with a principal amount of $3.5 million payable in four quarterly installments from April 01, 2003 to January 01, 2004 in payment of the purchase price. The amount was fully paid during fiscal 2004.

         Our investments in business entities in which we do not have control, but have the ability to exercise significant influence over operating and financial policies (generally 20-50 percent ownership), are referred to as associated companies and are accounted for by the equity method.

         The following table gives details regarding our percentage holding, carrying value and share of earnings / (losses) of our associated companies for the years ended March 31, 2004 and 2003.

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         We continue to be the single largest shareholder of Sify, which provides Internet services in India, even though our ownership interest in Sify was reduced from 37.2% as at March 31, 2003 to 32.0% as at March 31, 2004.

         The holding in Sify reduced from 37.2% as at March 31, 2003 to 35.0% as at July 31, 2003 due to Sify’s private placements to Softbank Asia Infrastructure Fund, or SAIF, and VentureTech Solutions Private Ltd, or VentureTech, in December 2002, May 2003 and July 2003. Subsequent to December 9, 2002, we have accounted for our interest in Sify under the equity method of accounting, as we no longer hold a controlling interest in Sify. We are under no future obligation to provide additional funds to Sify and would be unwilling to do so.

         On June 23, 2003, Sify’s shareholders approved sponsoring the sale of its 4,600,200 unlisted Indian equity shares through a secondary issue of Sify’s American Depository Shares, or ADS. In September 2003, we sold 1,000,000 Indian equity shares out of our total holding of 12,182,600 Indian equity shares in Sify at a sale price of $4.40 (Rs.198.90) per share as determined by Sify based on the recommendation of the lead manager to the sponsored ADS program. The difference between the carrying value of the investment in Sify as of September 30, 2003 and the sale proceeds amounting to US$2.6 millon has been accounted for as a gain during the year ended March 31, 2004 in the statement of operations. As are result of this transaction, our ownership interest in Sify was reduced from 35.0% to its current level of 32.0%.

         On October 28, 2000, we entered into an agreement with Venture Industries to form an equally held joint venture company Satyam Venture Engineering Services Private Limited or Satyam Venture. We hold 50% of Satyam Venture and have invested $0.8 million for our share in the joint venture. Satyam Venture is engaged in providing engineering solutions, software development and customization services specifically for the automotive industry worldwide.

         On December 29, 2000, we entered into an agreement with Computer Associates International, Inc. to form an equally held joint venture company, CA Satyam ASP Private Limited or CA Satyam. We hold 50% of CA Satyam. As per the agreement, both we and Computer Associates have invested $1.5 million each in the joint venture. CA Satyam is engaged in providing a portfolio of information and knowledge management solutions that are intended to enhance employee productivity and organizational agility.

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         On June 30, 2002, we completed the transfer of 50% of the shares of Satyam GE Software Services Private Limited, or Satyam GE, to GE Pacific (Mauritius) Limited, or GEPL for a consideration of approximately $4.0 million. Our interest in Satyam GE was accounted for using the equity method until June 30, 2002. During fiscal 2003, we recorded a gain of $830 thousand in the statement of operations for Satyam GE, the excess of consideration received for the share sale over the carrying value as of June 30, 2002.

Deferred Stock-based Compensation

         We have 3 associate stock option plans: our Associated Stock Option Plan, or ASOP, established in May 1998; our Associated Stock Option Plan B, or ASOP B, established in May 1999; and our Associated Stock Option Plan ADS, or ASOP ADS, established in May 1999.

ASOP

         The aspects of the ASOP differ significantly from typical U.S. stock option plans. We established a controlled associate welfare trust called the Satyam Associate Trust, to administer the ASOP, and issued warrants to purchase 13.0 million equity shares of Satyam Computer Services. To give our associates the benefit of our stock split in September 1999, the Trust exercised its warrants to acquire our shares before the split using the proceeds from bank loans. The Trust periodically grants eligible associates warrants to purchase equity shares held by or reserved for issuance by the Trust. The warrants may vest immediately or may vest over a period ranging from two to three years, depending on the associate’s length of service and performance. Upon vesting, employees have 30 days in which to exercise their warrants. Each warrant issued by the Trust currently entitles the associate holding the warrant to purchase 10 equity shares of our company at a price of Rs.450 ($10.4), plus an interest component associated with the loan the Trust assumed, for the conversion of the warrants it held. The interest component is computed based on a fixed vesting period and a fixed interest rate. This exercise price has been substantially below the market price of our shares at the time the warrants have been granted by the Trust. Neither we nor the Trust may increase the exercise price of the warrants.

         We account for the ASOP as a fixed plan in accordance with Accounting Principles Board Opinion No. 25. Under U.S. GAAP, the difference between the exercise price and the market price on the date the warrants are granted to associates is required to be treated as a non-cash compensation charge and amortized over the vesting period of the equity shares underlying the warrants. Under U.S. GAAP, in fiscal 2004, 2003 and 2002, we recognized deferred stock-based compensation of $776 thousand, $1.7 million and $1.2 million, and $1.6 million, $3 million and $10.5 million was amortized and charged to earnings, respectively. As of March 31, 2004, warrants (net of forfeited and cancelled) to purchase 11,370,520 equity shares have been granted to associates pursuant to ASOP, and warrants to purchase 11,312,320 equity shares have been exercised. As of March 31, 2004, the Trust held warrants to purchase 1,629,480 equity shares that had not yet been granted to associates pursuant to the ASOP but are expected to be granted in the future. Under current accounting rules, we expect to recognize amortization of deferred stock-based compensation expense in respect of our ASOP in the approximate amounts of $6.1 million in fiscal 2005 and $0.6 million in fiscal 2006 based on the price of our equity shares on March 31, 2004 and in connection with both granted and ungranted warrants on such date. Depending on the market value of our equity shares on the dates future grants are made, amortization of deferred stock-based compensation expense with respect to ungranted warrants may cause the expected amounts to change.

ASOP B

         The ASOP B is substantially similar to the ASOP and is administered by a committee of our board of directors. The Securities and Exchange Board of India, or SEBI, guidelines state the exercise price as “the average of the two weeks high and low price of the share preceding the date of grant of option on the stock exchange on which the shares of the company are listed”. However as per our special resolution in the last AGM, we opted for higher of the following, a) the closing price of the shares on the date of the meeting of the Compensation Committee convened to grant the stock options, on the stock exchange where highest volumes are traded; or b) the average of the two weeks high and low price of the share preceding the date of grant of option on the stock exchange on which the shares of the company are listed.. Under U.S. GAAP, in fiscal 2004, fiscal 2003 and fiscal 2002, we recognized deferred stock-based compensation of $(14) thousand, $(11)

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thousand and $6 thousand and $27 thousand, $58 thousand and $68 thousand was amortized and charged to earnings, respectively. As of March 31, 2004, options (net of forfeited and cancelled) to purchase 18,932,219 equity shares have been granted to associates under this plan and warrants to purchase 1,421,738 equity shares have been exercised. We expect to recognize amortization of deferred stock-based compensation expense in respect of these granted options in the approximate amounts of $1.2 thousand in fiscal 2005 and $nil in fiscal 2006. Under current accounting rules, we expect that the exercise prices of options granted in the future under the ASOP B will generally be not less than the fair market value of the underlying shares and therefore we do not expect to incur significant compensation expense. We also account for the ASOP B as a fixed option plan.

ASOP ADS

         Under ASOP ADS, we periodically issue grants to eligible associates to purchase ADSs. As of March 31, 2004, warrants (net of forfeited and cancelled) for 1,326,418 ADSs representing 2,652,836 equity shares have been granted to associates under the ASOP ADS, and warrants to purchase 144,986 ADSs representing 289,972 equity shares have been exercised. The warrants issued under ASOP ADS could be at a price per option which is not less than 90% of the value of one ADS as reported on NYSE (fair market value) on the date of grant converted into Indian Rupees at the rate of exchange prevalent on the day of grant. We account for the ASOP ADS as a fixed option plan. We expect that the exercise prices of options granted in the future under the plan will not be less than the fair market value of the underlying ADSs and therefore we do not expect to incur compensation expense with respect to those future grants under current accounting rules.

         On March 31, 2004, the Financial Accounting Standards Board (FASB or the “Board”) issued an exposure draft (the “ED”) entitled Share-Based Payment. If the ED is adopted by the Board, the final standard will eliminate the guidance of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and amend FASB Statement No. 123, Accounting for Stock Based Compensation (“FAS 123”) and FASB Statement No. 95, Statement of Cash Flows (“FAS 95”). The ED requires that all public companies report share-based compensation expense at the grant date fair value of the related share-based awards. If this requirement goes into effect, it will represent a significant change in practice of accounting for deferred stock based compensation for the company.

Revenues

         Our revenues are generated from professional services fees and product development provided through three segments, IT services, BPO and software products. Management evaluates performance based on stand-alone revenues and net income for these segments.

         Up to March 31, 2003, Satyam provided segmental disclosures based on three business groups: IT services, internet services and software products. Pursuant to the above change in the operating segments, figures for our internet services segment for fiscal 2003 and fiscal 2002 have been included in IT service segment.

         Currently our executive management evaluates Satyam’s operating segments based on the following three-business groups:

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         The following table sets forth the total revenues for our three business segments for the years ended March 31, 2004, 2003, and 2002 (in millions, except percentages):

         Our total revenues increased by 23.6% to $567.9 million in fiscal 2004 from $459.4 million in fiscal 2003 and 10.8% to $459.4 million in fiscal 2003 from $414.8 million in fiscal 2002. Our top two customers accounted for 24.2% of our revenues in fiscal 2004 down from 24.9% of our revenues in fiscal 2003. Additionally, our top 5 customers accounted for 36.4% of our revenues in fiscal 2004 as compared to 38.4% in fiscal 2003. Our worldwide technical headcount increased to 13,450 as of March 31, 2004 compared to 9,086 as of March 31, 2003, while the number of our technical associates offshore increased by 3,294 and technical associates onsite increased by 1,070 during this period.

         Our IT services revenues (excluding inter-segment revenues) represented 99.8%, 99.8% and 99.9% of our total revenues in fiscal 2004, 2003 and 2002 respectively. These revenues increased by 23.3% to $565.0 million in fiscal 2004 from $458.3 million in fiscal 2003 and 10.7% to $458.3 million in fiscal 2003 from $413.9 million in fiscal 2002. This growth of $106.7 million in revenue during fiscal 2004 was primarily the result of an increase in business from existing customers and the generation of new business from new customers. We added 108 and 100 customers during the year including 20 and 23 from the Fortune 500 list during the fiscal 2004 and 2003 respectively.

         Nipuna, which commenced its operations in June 2002, generated revenues of $2.4 million in fiscal 2004 of which $1.1 million was from inter-segment revenues. Nipuna had 503 employees as on March 31, 2004.

         Revenues from software products to date have been immaterial.

Expenses

         Cost of revenues. Cost of revenues increased by 24.8% to $343.6 million in fiscal 2004 from $275.2 million in fiscal 2003. Cost of revenues represented 60.7% of revenues in fiscal 2004 and 59.9% in fiscal 2003. Inter-segment cost of revenues were $1.4 million in fiscal 2004 as compared to $nil in fiscal 2003 and have not been allocated to the individual components that make up cost of revenues.

         The increase in cost of revenues by $68.4 million to $343.6 million in fiscal 2004 from $275.2 million in fiscal 2003 was attributable primarily to increases in associate compensation and benefits expenses and traveling expenses. Associate compensation and benefit expenses increased 36.2% to $256.0 million or 45.2% of revenue in fiscal 2004 from $187.9 million in fiscal 2003. The increase in the associate compensation and benefits is due to: (1) increase in the total number of technical associates by 4,364 to 13,450 in fiscal 2004 from 9,086 in fiscal 2003; (2) increase in number of onsite technical associates by 1,070 to 3,456 in fiscal 2004 from 2,386 in fiscal 2003 for which we pay a higher compensation; and (3) On account of salary increments (approximately 17%) given to associates during the year.. Traveling expenses increased 22.9% to $31.7 or 5.6% of revenue in fiscal 2004 from $25.8 million in fiscal 2003. These increases were partly compensated by a

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decrease in deferred stock-based compensation, communication expenses and depreciation expense. Deferred stock-based compensation expense decreased by 46.5% to $0.9 million or 0.2% of revenues in fiscal 2004 from $1.6 million or 0.3% of revenues in fiscal 2003. Communication expense decreased by 60.0% to $5.1 million or 0.9% of revenues in fiscal 2004 from $12.9 million or 2.8% of revenues in fiscal 2003 on account of communication expenses of SIFY being included in fiscal 2003. Subsequent to December 09, 2002, our ownership interest in Sify was accounted using the equity method due to our reduced owner ship interest. Depreciation expense decreased by 8.8% to $20.1 million or 3.5% of revenues in fiscal 2004 from $22.1 million or 4.8% of revenues in fiscal 2003.

         Gross profit. Our gross profit was $222.8 million for fiscal 2004, representing an increase of 21.1% over gross profit of $184.0 million for fiscal 2003.As a percentage of total revenues, gross profit decreased to 39.3% for fiscal 2004 from 40.1% for fiscal 2003.This decrease was attributable to the factors as explained in the cost of revenues above.

         Selling, general and administrative expense. Selling, general and administrative expenses decreased 13.1% to $101.6 million in fiscal 2004 from $116.9 million in fiscal 2003. Selling, general and administrative expenses represented 17.9% of revenues in fiscal 2004 as compared to 25.5% of revenues in fiscal 2003. This decrease was a result primarily of decreases in traveling expenses, deferred stock-based compensation expense, depreciation expense and other expenses. These decreases were partially offset by increase in associate compensation and benefits, communication expenses and professional charges. Traveling expenses decreased 14.3% to $8.7 million or 1.5% of revenues in fiscal 2004 from $10.1 million or 2.2% of revenues in fiscal 2003. Depreciation expense decreased 70.5% to $4.1 million or 0.7% of revenues in fiscal 2004 from $13.8 million or 3.0% of revenues in fiscal 2003. The decrease is primarily due to depreciation of $9.7 million of Sify included in fiscal 2003. Subsequent to December 09, 2002, our ownership interest in Sify was accounted using the equity method due to our reduced owner ship interest.

         Operating income (loss). Our operating income was $121.1 million for fiscal 2004, representing an increase of 44.9% over the operating income of $83.6 million for fiscal 2003. As a percentage of revenues, operating income increased to 21.4% for fiscal 2004, from an operating income of 18.2% for fiscal 2003. This increase was due to (i) decrease in selling, general and administrative expense from 25.5% of revenue in fiscal 2003 to 17.9% of revenues in fiscal 2004 and (ii) impairment of other non-marketable investments of 0.7% of revenues during fiscal 2003. This increase was partially offset by increase in cost of revenue from 59.9% of revenues in fiscal 2003 to 60.7% of revenues in fiscal 2004 and due to reversal of put option charge in fiscal 2003 which was 4.3% of revenue in fiscal 2003.

         Interest income. Interest income increased to $20.3 million in fiscal 2004 from $7.2 million in fiscal 2003. This increase in interest was due to (i) increase in bank deposits from $268.5 million at the end of fiscal 2003 to $338.5 million at the end of fiscal 2004 and (ii) transfer of deposits placed in overseas banks to Indian banks yielding higher interest.

         Net income. Our net income was $111.9 million for fiscal 2004, representing an increase of 35.9% over net income of $82.3 million for fiscal 2003. As a percentage of total revenues, net income increased to 19.7% for fiscal 2004 from 18% for fiscal 2003. This was primarily due to increase in operating income and increase in interest income. Operating income increased from $83.6 million or 18.2% of revenue in fiscal 2003 to $121.1 million or 21.4% of revenue in fiscal 2004. Interest income increased from $7.2 million or 1.6% of revenue in fiscal 2003 to $20.3 million or 3.6% of revenue in fiscal 2004. These increases were offset by decrease in minority interest in losses of subsidiaries and increase in income tax expense. Minority interest in losses of subsidiaries decreased from $11.1 million or 2.4% of revenue in fiscal 2003 to $nil in fiscal 2004. Income tax expense increased from $9.7 million or 2.1% of revenue in fiscal 2003 to $22.5 million or 4.0% of revenue in fiscal 2004. This increase in income tax expense was primarily due to increase in tax of $8.9 million on income from United States.

         In fiscal 2004 and fiscal 2003, 84.5% and 81.2%, respectively, of our total revenues were generated in U.S. dollars. A significant amount of our expenses were incurred in Indian Rupees and the balance was primarily incurred in U.S. dollars, European currencies and Japanese yen. Our functional currency and the functional currency for our subsidiaries located in India is the Indian rupee; however, the Japanese yen, U.S. dollars,

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Sterling pounds and Singapore dollars are the functional currencies of our foreign subsidiaries located in Japan, the U.S., the U.K. and Singapore, respectively. The translation of such foreign currencies into U.S. dollars (our reporting currency) is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using monthly simple average exchange rates prevailing during the reporting periods. Adjustments resulting from the translation of functional currency financial statements to reporting currency are accumulated and reported as other comprehensive income, a separate component of shareholders’ equity.

         Our functional currency is the Indian Rupee, although we transact a major portion of our business in US dollars and accordingly face foreign currency exposure through our sales in the United States. Accordingly, we are exposed to substantial risk on account of adverse currency movements in global foreign exchange markets. The exchange rate between the rupee and the dollar has changed substantially in recent years and may fluctuate substantially in the future.

         We manage risk on account of foreign currency fluctuations through treasury operations. Our risk management strategy is to identify risks we are exposed to, evaluate and measure those risks, decide on managing those risks, regular monitoring and reporting to management. The objective of our risk management policy is to minimize risk arising from adverse currency movements by managing the uncertainty and volatility of foreign exchange fluctuations by hedging the risk to achieve greater predictability and stability. Our risk management policies are approved by senior management and include implementing hedging strategies for foreign currency exposures, specification of transaction limits; specifying authority and responsibility of the personnel involved in executing, monitoring and controlling such transactions.

         We purchase forward foreign exchange contracts to mitigate the risk of changes in foreign exchange rates on cash flows denominated in certain foreign currencies. We enter into forward foreign exchange contracts where the counter party is generally a bank. We consider the risks of non-performance by the counter party as non-material. These foreign forward exchange contracts mature between one and nine months. These contracts do not qualify for hedge accounting under SFAS 133, as amended. Any derivative that is either not a designated hedge, or is so designated but is ineffective per SFAS 133, is marked to market and recognized in earnings.

         The following table gives details in respect of Satyam’s outstanding foreign exchange forward contracts:

         We expect that a majority of our revenues will continue to be generated in U.S. dollars for the foreseeable future and that a significant portion of our expenses, including personnel costs as well as capital and operating expenditures, will continue to be denominated in Indian rupees. Consequently, our results of operations will be affected to the extent the rupee appreciates/depreciates against the U.S. dollar. The average exchange rate of rupee to US dollar for fiscal 2004 was 45.95 against 48.42 for fiscal 2003. At the end of fiscal 2004, rupee appreciated to 43.40 against 47.53 at the end of fiscal 2003. As a result, loss on foreign exchange transactions was $ 8.9 million in fiscal 2004 as compared to a loss of $4.8 million in fiscal 2003.

         As of May 31, 2004, we had outstanding foreign exchange contracts worth $108.8 million with maturity dates over next ten months to cover the risks of dollar to Rupee fluctuations.

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Results of Operations

         The following tables set forth selected operating data as value of revenues by segment (including inter-segment revenues) for the periods indicated:

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The following tables set forth selected operating data as a percentage of revenues by segment (including inter-segment revenues) for the periods indicated: