20-F

Amount of Long Term Loans as at March 31,

Rupee term loans*

Rs.13.3 million

Rs.19.2 million

Rs.25.1 million

Foreign currency loans

Euros 218.9 million and U.S.$12.2 million

Euros 358 million and U.S.$12.7 million

Euros 400.0 million

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F


o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended March 31, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from to

Commission File Number: 1-15182

DR. REDDY’S LABORATORIES LIMITED

(Exact name of Registrant as specified in its charter)


Not Applicable		ANDHRA PRADESH, INDIA
(Translation of Registrant’s name		(Jurisdiction of incorporation or
into English)		organization)

7-1-27, Ameerpet
Hyderabad, Andhra Pradesh 500 016, India
+91-40-23731946
(Address of principal executive offices)

Saumen Chakraborty, Chief Financial Officer, +91-40-2373 1946, saumenc@drreddys.com
7-1-27, Ameerpet, Hyderabad, Andhra Pradesh, India
(Name, telephone, e-mail and/or facsimile number and address of company contact person)

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


Title of Each Class		Name of Each Exchange on which Registered
American depositary shares, each representing one equity share		New York Stock Exchange

Equity Shares*		New York Stock Exchange


*		Not for trading, but only in connection with the registration of American depositary shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act. None.

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

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

168,172,746 Equity Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No þ

Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:


U.S. GAAP þ	International Financial Reporting Standards as issued o	Other o
	by the International Accounting Standards Board

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes o No þ

Currency of Presentation and Certain Defined Terms

In this annual report on Form 20-F, references to “$” or “U.S.$” or “dollars” or “U.S. dollars” are to the legal currency of the United States and references to “Rs.” or “rupees” or “Indian rupees” are to the legal currency of India. Our financial statements are presented in Indian rupees and translated into U.S. dollars and are prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”). References to “Indian GAAP” are to Indian Generally Accepted Accounting Principles. References to a particular “fiscal” year are to our fiscal year ended March 31 of such year. References to our “ADSs” are to our American Depositary Shares.

References to “U.S.” or “United States” are to the United States of America, its territories and its possessions. References to “India” are to the Republic of India. References to “EU” are to the European Union. All references to “we,” “us”, “our”, “DRL”, “Dr. Reddy’s” or the “Company” shall mean Dr. Reddy’s Laboratories Limited and its subsidiaries. “Dr. Reddy’s” is a registered trademark of Dr. Reddy’s Laboratories Limited in India. Other trademarks or trade names used in this annual report on Form 20-F are trademarks registered in the name of Dr. Reddy’s Laboratories Limited or are pending before the respective trademark registries.

Except as otherwise stated in this report, all translations from Indian rupees to U.S. dollars are based on the noon buying rate in the City of New York on March 31, 2008 for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York, which was Rs.40.02 per U.S.$1.00. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate. As of July 11, 2008, that rate was Rs.42.8 per U.S.$1.00.

Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.

Information contained in our website, www.drreddys.com, is not part of this Annual Report and no portion of such information is incorporated herein.

Forward-looking and Cautionary Statement

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

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

3.A. Selected financial data

The selected consolidated financial data should be read in conjunction with the consolidated financial statements, the related notes and operating and financial review and prospects, which are included elsewhere in this annual report. The selected consolidated statements of income data for the five years ended March 31, 2008 and balance sheet data as of March 31, 2004, 2005, 2006, 2007 and 2008 in Indian rupees have been prepared and presented in accordance with U.S. GAAP and have been derived from our audited consolidated financial statements, the unaudited convenience translation and related notes except for cash dividend per share. The selected consolidated financial data presented below for fiscal year 2006 reflects the acquisition of Industrias Quimicas Falcon de Mexico effective December 30, 2005 and beta Holding GmbH effective March 3, 2006 and therefore the results for fiscal year 2006 are not comparable to the results of other fiscal years. The selected consolidated financial data presented below for fiscal years 2007 and 2008 reflects the acquisition of Industrias Quimicas Falcon de Mexico and beta Holding GmbH for the full year and therefore is not comparable with results for prior fiscal years.


	Fiscal Year Ended March 31,
Income Statement Data	2004			2005			2006			2007			2008
	(Rs. in millions, U.S.$ in millions, except share and per share data)
																Convenience
																translation into
																U.S.$
Product sales	Rs.	20,081.2		Rs.	19,126.2		Rs.	24,077.2		Rs.	64,185.4		Rs.	49,230.6		U.S.$	1,230.1
License fees		—			345.7			47.5			27.5			34.8			0.9
Services income		22.3			47.5			142.3			882.2			740.2			18.5

Total revenues		20,103.5			19,519.4			24,267.0			65,095.1			50,005.6			1,249.5
Cost of revenues		9,337.3			9,385.9			12,417.4			34,219.5			24,597.6			614.6

Gross profit		10,766.2			10,133.5			11,849.6			30,875.6			25,408.0			634.9
Operating expenses:
Selling, general and administrative expenses		6,542.5			6,774.6			8,028.9			14,051.1			15,175.2			379.2
Research and development expenses, net		1,991.6			2,803.3			2,153.0			2,462.7			3,532.9			88.3
Amortization expenses		382.9			349.9			419.9			1,570.9			1,614.8			40.4
Write-down of intangible assets		—			—			—			1,770.2			2,488.5			62.2
Impairment of Goodwill		—			—			—			—			90.4			2.3
Foreign exchange (gain)/loss, net		(282.5	)		488.8			126.3			(136.8	)		(744.9	)		(18.6	)
Other operating (income)/expenses, net		83.2			6.0			(327.7	)		(174.0	)		(106.6	)		(2.7	)

Total operating expenses		8,717.7			10,422.6			10,400.4			19,544.1			22,050.3			551.0

Operating income/(loss)		2,048.5			(289.1	)		1,449.2			11,331.5			3,357.7			83.9
Equity in (loss)/gain of affiliates		(44.4	)		(58.1	)		(88.2	)		(62.7	)		1.8			0.0
Other (expense)/income, net		535.9			454.2			526.3			(768.5	)		78.6			2.0

Income before income taxes and minority interest		2,540.0			107.0			1,887.3			10,500.3			3,438.1			85.9

Income taxes (expense)/benefit		(69.2	)		94.3			(258.3	)		(1,176.9	)		1,229.4			30.7
Minority interest		3.4			9.9			(0.1	)		3.4			10.5			0.3
Net income	Rs.	2,474.2		Rs.	211.2		Rs.	1,628.9		Rs.	9,326.8		Rs.	4,678.0		U.S.$	116.9

Earnings per equity share:
Basic	Rs.	16.17		Rs.	1.38		Rs.	10.64		Rs.	58.82		Rs.	27.83		U.S.$	0.69
Diluted	Rs.	16.16		Rs.	1.38		Rs.	10.62		Rs.	58.56		Rs.	27.73		U.S.$	0.69
Weighted average number of equity shares used in computing earnings per equity share:*
Basic**		153,027,528			153,037,898			153,093,316			158,552,422			168,075,840			168,075,840
Diluted**		153,099,196			153,119,602			153,403,846			159,256,476			168,690,774			168,690,774
Cash dividend per share (excluding dividend tax)	Rs.	2.50		Rs.	2.50		Rs.	2.50		Rs.	2.50		Rs.	3.75		U.S.$	0.09


*		Each ADR represents one equity share.

**		On August 30, 2006, we approved a one-for-one stock split effected in the form of a stock dividend for each equity share and ADS issued and outstanding as of August 29, 2006. The number of equity shares and per share information presented in the above selected consolidated financial data reflect the effect of this one-for-one stock split effected in the form of a stock dividend for all periods presented.


	Fiscal Year Ended March 31,
	2004			2005			2006			2007			2008
	(Rs. in millions, U.S.$ in millions)
																Convenience
																translation into
																U.S.$
Cash Flow Data:
Net cash provided by/(used in):
Operating activities	Rs.	3,999.2		Rs.	2,291.6		Rs.	1,696.5		Rs.	11,960.6		Rs.	6,122.6		U.S.$	153.0
Investing activities		(6,506.1	)		632.9			(34,577.8	)		436.4			(9,599.9	)		(239.9	)
Financing activities		(376.1	)		1,931.3			27,210.9			1,753.7			(6,827.6	)		(170.6	)
Effect of exchange rate changes on cash		(14.2	)		55.8			95.1			118.2			(278.2	)		(7.0	)
Expenditure on property, plant and equipment		(2,415.6	)		(1,749.2	)		(1,873.3	)		(4,477.1	)		(6,348.1	)		(158.6	)


	As of March 31,
	2004		2005		2006		2007		2008
	(Rs. in millions, U.S.$ in millions)
											Convenience
											translation into
											U.S.$
Balance Sheet Data:
Cash and cash equivalents	Rs.	4,376.2	Rs.	9,287.9	Rs.	3,712.6	Rs.	17,981.4	Rs.	7,398.3	U.S.$	184.9
Working capital*		11,103.3		10,770.9		1,345.1		18,933.0		15,227.9		380.5
Total assets		26,619.3		29,288.4		68,768.1		85,919.1		85,445.1		2,135.1
Total long-term debt, excluding current portion		31.0		25.1		20,937.1		17,871.0		12,864.2		321.4
Total stockholders’ equity		21,039.4		20,953.2		22,271.7		41,578.2		47,066.6		1,176.1


*		- Working capital equals current assets less current liabilities.

Exchange Rates

The following table sets forth, for the fiscal years indicated, information concerning the number of Indian rupees for which one U.S. dollar could be exchanged based on the average of the noon buying rate in the City of New York on the last business day of each month during the period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York. The column titled “Average” in the table below is the average of the daily noon buying rate on the last business day of each month during the year.


Fiscal Year Ended
March 31,		Period End		Average		High		Low
	2004		43.40		45.96		47.46		43.40
	2005		43.62		44.86		46.45		43.27
	2006		44.48		44.17		46.26		43.05
	2007		43.10		45.06		46.83		42.78
	2008		40.02		40.13		43.05		38.48

The following table sets forth the high and low exchange rates for the previous six months and is based on the average of the noon buying rate in the City of New York on the last business day of each month during the period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York:


Month	High		Low
October 2007		39.72		38.48
November 2007		39.68		39.11
December 2007		39.55		39.29
January 2008		39.55		39.13
February 2008		40.11		39.12
March 2008		40.46		39.76

On July 11, 2008 the noon buying rate in the city of New York was Rs.42.8 per U.S. dollar.

3.B. Capitalization and indebtedness

Not applicable.

3.C. Reasons for the offer and use of proceeds

Not applicable.

3.D. Risk factors

You should carefully consider all of the information set forth in this Form 20-F and the following risk factors that we face and that are faced by our industry. The risks below are not the only ones we face. Additional risks not currently known to us or that we presently deem immaterial may also affect our business operations. Our business, financial condition or results of operations could be materially or adversely affected by any of these risks. This Form 20-F also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere. See “Forward-Looking Statements.”

RISKS RELATING TO OUR COMPANY AND OUR BUSINESS

Failure of our research and development efforts may restrict introduction of new products, which is critical to our business.

Our future results of operations depend, to a significant degree, upon our ability to successfully commercialize additional products in our active pharmaceutical ingredients and intermediates, generics, formulations and drug discovery businesses, as well as our most recent business focus, specialty pharmaceuticals. We must develop, test and manufacture generic products as well as prove that our generic products are the bio-equivalent of their branded counterparts. All of our products must meet and continue to comply with regulatory and safety standards and receive regulatory approvals; we may be forced to withdraw a product from the market if health or safety concerns arise with respect to such product. The development and commercialization process, particularly with respect to innovative products, is both time consuming and costly and involves a high degree of business risk. Our products currently under development, if and when fully developed and tested, may not perform as we expect, necessary regulatory approvals may not be obtained in a timely manner, if at all, and we may not be able to successfully and profitably produce and market such products.

To develop our products pipeline, we commit substantial efforts, funds and other resources to research and development, both through our own dedicated resources and our collaborations with third parties. Our ongoing investments in new product launches and research and development for future products could result in higher costs without a proportionate increase in revenues. Our overall profitability depends on our ability to continue developing commercially successful products.

Our dependence on research and development makes it highly important that we recruit and retain high quality researchers and development specialists. Should we fail in our efforts, this could adversely affect our ability to continue developing commercially successful products and, thus, our overall profitability.

If we cannot respond adequately to the increased competition we expect to face in the future, we will lose market share and our profits will go down.

Our products face intense competition from products commercialized or under development by competitors in all our business segments based in India and overseas. Many of our competitors have greater financial resources and marketing capabilities than we do. Some of our competitors, especially multinational pharmaceutical companies, have greater experience than we do in clinical testing and human clinical trials of pharmaceutical products and in obtaining regulatory approvals. Our competitors may succeed in developing technologies and products that are more effective, more popular or cheaper than any we may develop or license. These developments could render our technologies and products obsolete or uncompetitive, which would harm our business and financial results. We believe some of our competitors have broader product ranges, stronger sales forces and better segment positioning than us, which enables them to compete effectively.

To the extent that we succeed in being the first to market a generic version of a significant product, and particularly if we obtain the 180-day period of market exclusivity provided under the Hatch-Waxman Act of 1984, as amended, our sales and profit can be substantially increased in the period following the introduction of such product and prior to a competitor’s introduction of the equivalent product or the launch of an authorized generic. Selling prices of generic drugs typically decline, sometimes dramatically, as additional companies receive approvals for a given product and competition intensifies. Our ability to sustain our sales and profitability of any product over time is dependent on both the number of new competitors for such product and the timing of their approvals.

Our generics business is also facing increasing competition from brand-name manufacturers who do not face any significant regulatory approvals or barriers to entry into the generics market. These brand-name companies sell generic versions of their products to the market directly or by acquiring or forming strategic alliances with our competitor generic pharmaceutical companies or by granting them rights to sell “authorized generics.” Moreover, brand-name companies continually seek new ways to delay the introduction of generic products and decrease the impact of generic competition, such as filing new patents on drugs whose original patent protection is about to expire, developing patented controlled-release products, changing product claims and product labeling, or developing and marketing as over-the-counter products those branded products which are about to face generic competition.

If we cannot maintain our position in the Indian pharmaceutical industry in the future, we may not be able to attract co-development, outsourcing or licensing partners and may lose market share.

In order to attract multinational corporations into co-development and licensing arrangements, it is necessary for us to maintain the position of a leading pharmaceutical company in India. Multinational corporations have been increasing their outsourcing of both active pharmaceutical ingredients and generic formulations to highly regarded companies that can produce high quality products at low cost that conform to standards set in developed markets. If we cannot maintain our current position in the market, we may not be able to attract outsourcing or licensing partners and may lose market share.

If we fail to comply fully with government regulations applicable to our research and development activities or regarding the manufacture of our products, it may delay or prevent us from developing or manufacturing our products.

Our research and development activities are heavily regulated. If we fail to comply fully with applicable regulations, then there could be a delay in the submission or approval of potential new products for marketing approval. In addition, the submission of an application to a regulatory authority does not guarantee that a license to market the product will be granted. Each authority may impose its own requirements and/or delay or refuse to grant approval, even when a product has already been approved in another country. In the United States, as well as many of the international markets into which we sell our products, the approval process for a new product is complex, lengthy and expensive. The time taken to obtain approval varies by country but generally takes from six months to several years from the date of application. This registration process increases the cost to us of developing new products and increases the risk that we will not be able to successfully sell such new products.

Also, governmental authorities, including the U.S. Food and Drug Administration (“U.S. FDA”), heavily regulate the manufacture of our products. If we or our third party suppliers fail to comply fully with such regulations, then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. Failure to comply fully with such regulations could also lead to a delay in the approval of new products.

Reforms in the health care industry and the uncertainty associated with pharmaceutical pricing, reimbursement and related matters could adversely affect the marketing, pricing and demand for our products.

Increasing expenditures for health care has been the subject of considerable public attention in almost every jurisdiction where we conduct business. Both private and governmental entities are seeking ways to reduce or contain health care costs. In many countries in which we currently operate, including India, pharmaceutical prices are subject to regulation. The existence of price controls can limit the revenues we earn from our products. In the United States, numerous proposals that would affect changes in the United States health care system have been introduced or proposed in Congress and in some state legislatures, including the enactment in December 2003 of expanded Medicare coverage for drugs, which became effective in January 2006. In Germany, an important market for us, the government has introduced several healthcare reforms in order to control healthcare spending and promote the prescribing of generic drugs. As a result, the prices of generic pharmaceutical products in Germany have declined, impacting our revenues, and may further decline in the future. Similar developments may take place in our other key markets. We cannot predict the nature of the measures that may be adopted or their impact on the marketing, pricing and demand for our products.

In addition, governments throughout the world heavily regulate the marketing of our products. Most countries also place restrictions on the manner and scope of permissible marketing to physicians, pharmacies and other health care professionals. The effect of such regulations may be to limit the amount of revenue that we may be able to derive from a particular product. Moreover, if we fail to comply fully with such regulations, then civil or criminal actions could be brought against us.

If a regulatory agency amends or withdraws existing approvals to market our products, this may cause our revenues to decline.

Regulatory agencies may at any time reassess the safety and efficacy of our products based on new scientific knowledge or other factors. Such reassessments could result in the amendment or withdrawal of existing approvals to market our products, which in turn could result in a loss of revenue, and could serve as an inducement to bring lawsuits against us.

If we are sued by consumers for defects in our products, it could harm our reputation and thus our profits.

Our business inherently exposes us to potential product liability. From time to time, the pharmaceutical industry has experienced difficulty in obtaining desired amounts of product liability insurance coverage. Although we have obtained product liability coverage with respect to products that we manufacture, if any product liability claim sustained against us were to be not covered by insurance or were to exceed the policy limits, it could harm our business and financial condition. This risk is likely to increase as we develop our own new-patented products in addition to making generic versions of drugs that have been in the market for some time.

In addition, product liability coverage for pharmaceutical companies is becoming more expensive. As a result, we may not be able to obtain the type and amount of coverage we desire at an acceptable price. Furthermore, the severity and timing of future claims are unpredictable. Our customers may also bring lawsuits against us for alleged product defects. The existence, or even threat of a major product liability claim could also damage our reputation and affect consumers’ views of our other products, thereby negatively affecting our business, financial condition and results of operations.

If we are unable to patent new products and processes or to protect our intellectual property rights or proprietary information, or if we infringe on the patents of others, our business may be materially and adversely impacted.

Our overall profitability depends, among other things, on our ability to continuously and timely introduce new generic as well as innovative products. Our success will depend, in part, on our ability in the future to obtain patents, protect trade secrets, intellectual property rights and other proprietary information and operate without infringing on the proprietary rights of others. Our competitors may have filed patent applications, or hold issued patents, relating to products or processes that compete with those we are developing, or their patents may impair our ability to successfully develop and commercialize new products.

Our success with our innovative products depends, in part, on our ability to protect our current and future innovative products and to defend our intellectual property rights. If we fail to adequately protect our intellectual property, competitors may manufacture and market products similar to ours. We have been issued patents covering our innovative products and processes and have filed, and expect to continue to file, patent applications seeking to protect our newly developed technologies and products in various countries, including the United States. Any existing or future patents issued to or licensed by us may not provide us with any competitive advantages for our products or may even be challenged, invalidated or circumvented by competitors. In addition, such patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products.

We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation that we seek to protect, in part by confidentiality agreements with licensees, suppliers, employees and consultants. It is possible that these agreements will be breached and we will not have adequate remedies for any such breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Furthermore, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors or we may not be able to maintain the confidentiality of information relating to such products.

Changes in the regulatory environment may prevent us from utilizing the exclusivity periods that are important to the success of our generic products.

The policy of the U.S. FDA regarding the award of 180 days of market exclusivity to generic manufacturers who challenge patents relating to specific products continues to be the subject of extensive litigation in the United States. During this 180-day market exclusivity period, nobody other than the generic manufacturer who won exclusivity relating to the specific product can market that product. The U.S. FDA’s current interpretation of the Hatch-Waxman Act of 1984 is to award 180 days of exclusivity to the first generic manufacturer who files a Paragraph IV certification under the Hatch-Waxman Act challenging the patent of the branded product, regardless of whether that generic manufacturer was sued for patent infringement.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Prescription Drug Act”) amended the Hatch-Waxman Act and provides that the 180-day market exclusivity period is triggered by the commercial marketing of the product, as opposed to the old rule under which the exclusivity period was triggered by a final, non-appealable court decision. However, the Medicare Prescription Drug Act also contains forfeiture provisions, which, if met, will deprive the first Paragraph IV filer of exclusivity. As a result, under certain circumstances, we may not be able to exploit our 180-day exclusivity period since it may be forfeited prior to our being able to market the product.

In addition, legal and administrative disputes with respect to triggering dates and shared exclusivities may also prevent us from fully utilizing the exclusivity periods.

If we are unable to defend ourselves in patent challenges, we could be subject to injunctions preventing us from selling our products, resulting in a decrease in revenues, or we could be subject to substantial liabilities that would lower our profits.

There has been substantial patent related litigation in the pharmaceutical industry concerning the manufacture, use and sale of various products. In the normal course of business, we are regularly subject to lawsuits and the ultimate outcome of litigation could adversely affect our results of operations, financial condition and cash flow. Regardless of regulatory approval, lawsuits are periodically commenced against us with respect to alleged patent infringements by us, such suits often being triggered by our filing of an application for governmental approval, such as a new drug application. The expense of any such litigation and the resulting disruption to our business, whether or not we are successful, could harm our business. The uncertainties inherent in patent litigation make it difficult for us to predict the outcome of any such litigation.

If we are unsuccessful in defending ourselves against these suits, we could be subject to injunctions preventing us from selling our products, resulting in a decrease in revenues, or to damages, which may be substantial. An injunction or substantial damages resulting from these suits could adversely affect our consolidated financial position, results of operations or liquidity.

If we elect to sell a generic product prior to the final resolution of outstanding patent litigation, we could be subject to liabilities for damages.

At times we seek approval to market generic products before the expiration of patents for those products, based upon our belief that such patents are invalid, unenforceable, or would not be infringed by our products. As a result, we are involved in patent litigation, the outcome of which could materially adversely affect our business. Based upon a complex analysis of a variety of legal and commercial factors, we may elect to market a generic product even though litigation is still pending. This could be before any court decision is rendered or while an appeal of a lower court decision is pending. To the extent we elect to proceed in this manner, if the final court decision is adverse to us, we could be required to cease the sale of the infringing products and face substantial liability for patent infringement. These damages may be significant as they may be measured by a royalty on our sales or by the profits lost by the patent owner and not by the profits we earned. Because of the discount pricing typically involved with generic pharmaceutical products, patented brand products generally realize a significantly higher profit margin than generic pharmaceutical products. In the case of a willful infringer, the definition of which is unclear, these damages may even be trebled. In April 2006, we launched, and continue to sell, generic versions of Allegra^® (fexofenadine) despite the fact that litigation with the company that holds the patents for and sells this branded product is still pending. This is the only product that we have launched prior to the resolution of outstanding patent litigation.

If we do not maintain and increase our arrangements for overseas distribution of our products, our revenues and net income could decrease.

As of March 31, 2008, we market our products in approximately 90 countries. Our products are marketed in most of these countries through our subsidiaries as well as joint ventures. Since we do not have the resources to market and distribute our products ourselves in all our export markets, we also market and distribute our products through third parties by way of marketing and agency arrangements. These arrangements may be terminated by either party providing the other with notice of termination or when the contract regarding the arrangement expires. We may not be able to successfully negotiate these third party arrangements or find suitable joint venture partners in the future. Any of these arrangements may not be available on commercially reasonable terms. Additionally, our marketing partners may make important marketing and other commercialization decisions with respect to products we develop without our input. As a result, many of the variables that may affect our revenues and net income are not exclusively within our control when we enter into arrangements like these.

If we fail to comply with environmental laws and regulations or face environmental litigation, our costs may increase or our revenues may decrease.

We may incur substantial costs complying with requirements of environmental laws and regulations. In addition, we may discover currently unknown environmental problems or conditions. In all countries in which we have production facilities, we are subject to significant environmental laws and regulations which govern the discharge, emission, storage, handling and disposal of a variety of substances that may be used in or result from our operations. If any of our plants or the operations of such plants are shut down, we may continue to incur costs in complying with regulations, appealing any decision to close our facilities, maintaining production at our existing facilities and continuing to pay labor and other costs which may continue even if the facility is closed. As a result, our overall operating expenses may increase and our profits may decrease.

Our equity shares and our ADSs may be subject to market price volatility, and the market price of our equity shares and ADSs may decline disproportionately in response to adverse developments that are unrelated to our operating performance.

Market prices for the securities of Indian pharmaceutical companies, including our own, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as the following can have an adverse effect on the market price of our ADSs and equity shares:

	•		general market conditions,

	•		speculative trading in our shares and ADSs,

	•		changes in the weight given to our shares in the Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE) indices, and

	•		developments relating to our peer companies in the pharmaceutical industry.

If the world economy is affected due to terrorism, wars or epidemics, it may adversely affect our business and results of operations.

Several areas of the world, including India, have experienced terrorist acts and retaliatory operations recently. For example, Mumbai was the target of serial railway bombings in July 2006. Hyderabad, the city in which we are headquartered was also subjected to terrorist acts in May and August 2007. In May 2008, the city of Jaipur in the state of Rajasthan was subjected to a series of co-ordinated bombings. If the economy of our major markets is affected by such acts, our business and results of operations may be adversely affected as a consequence.

In recent years, Asia has experienced outbreaks of avian influenza and Severe Acute Respiratory Syndrome, or SARS. If the economy of our major markets is affected by such outbreaks or other epidemics, our business and results of operations may be adversely affected as a consequence.

If we have difficulty in identifying acquisition candidates or consummating acquisitions, our competitiveness and our growth prospects may be harmed.

In order to enhance our business, we frequently seek to acquire or make strategic investments in complementary businesses or products, or to enter into strategic partnerships or alliances with third parties. It is possible that we may not identify suitable acquisition, strategic investment or strategic partnership candidates, or if we do identify suitable candidates, we may not complete those transactions on terms commercially acceptable to us or at all. We compete with others to acquire companies, and we believe that this competition has intensified and may result in decreased availability or increased prices for suitable acquisition candidates. Even after we identify acquisition candidates and/or announce that we plan to acquire a company, we may ultimately fail to consummate the acquisition. For example, we may be unable to obtain necessary acquisition financing on terms satisfactory to us or may be unable to obtain necessary regulatory approvals, including the approval of antitrust regulatory bodies. The inability to identify suitable acquisition targets or investments or the inability to complete such transactions and the management and financial resources required to pursue such transactions may affect our competitiveness and our growth prospects.

If we acquire other companies, our business may be harmed by difficulties in integration and employee retention, unidentified liabilities of the acquired companies, or obligations incurred in connection with acquisition financings.

All acquisitions involve known and unknown risks that could adversely affect our future revenues and operating results. For example:

	•		We may fail to successfully integrate our acquisitions in accordance with our business strategy.

	•		Integration of acquisitions may divert management’s attention away from our primary product offerings, resulting in the loss of key customers and/or personnel, and may expose us to unanticipated liabilities.

	•		We may not be able to retain the skilled employees and experienced management that may be necessary to operate the businesses we acquire. If we cannot retain such personnel, we may not be able to locate or hire new skilled employees and experienced management to replace them.

	•		We may purchase a company that has contingent liabilities that include, among others, known or unknown patent or product liability claims.

	•		Our acquisition strategy may require us to obtain additional debt or equity financing, resulting in additional leverage, or increased debt obligations as compared to equity, and dilution of ownership.

	•		We may purchase companies located in jurisdictions where we do not have operations and as a result we may not be able to anticipate local regulations and the impact such regulations have on our business.

In addition, if we make one or more significant acquisitions in which the consideration includes equity shares or other securities, equity interests in us held by holders of the equity shares may be significantly diluted. If we make one or more significant acquisitions in which the consideration includes cash, we may be required to use a substantial portion of our available cash or incur a significant amount of debt or otherwise arrange additional funds to complete the acquisition, which may result in a dilution of earnings per equity share.

Our principal shareholders control us and, if they take actions that are not in your best interests, the value of your investment in our ADSs may be harmed.

Our full time directors together with members of their immediate families, in the aggregate, beneficially own 25.14% of our issued shares as at March 31, 2008. As a result, these people, acting in concert, are likely to have the ability to exercise significant control over most matters requiring approval by our shareholders, including the election and removal of directors and significant corporate transactions. This control by these directors and their family members could delay, defer or prevent a change in control of us, impede a merger, consolidation, takeover or other business combination involving us, or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, even if that was in our best interest. As a result, the value of your ADSs may be adversely affected or you might be deprived of a potential opportunity to sell your ADSs at a premium.

If we improperly handle any of the dangerous materials used in our business and accidents result, we could face significant liabilities that would lower our profits.

We handle dangerous materials including explosive, toxic and combustible materials like sodium azide, acrolein and acetyl chloride. If improperly handled or subjected to the wrong conditions, these materials could hurt our employees and other persons, cause damage to our properties and harm the environment. This, in turn, could subject us to significant litigation, which could lower our profits in the event we were found liable.

If there is delay and/or failure in supplies of materials, services and finished goods from third parties, it may adversely affect our business and results of operations.

In some of our businesses, we rely on third parties for the timely supply of active pharmaceutical ingredients (“API”), specified raw materials, equipment, formulation or packaging services and maintenance services. For instance, we rely on third party manufacturers for our substantial supply of finished dosages sold in Germany. Although, we actively manage these third party relationships to ensure continuity of supplies and services on time and to our required specifications, events beyond our control could result in the complete or partial failure of supplies and services or in supplies and services not being delivered on time. Any such failure could adversely affect our results of business and results of operations.

In the event that we experience a shortage in our supply of raw materials, we might be unable to fulfill all of the API needs of our generics and formulations segments, which could result in a loss of production capacity for these segments. In addition, this could result in a conflict between the API needs of our generics and formulations segments and the needs of customers of our active pharmaceutical ingredients and intermediates segment, some of whom are also our competitors in the formulations segment. In either case, we could potentially lose business from adversely affected customers and we could be subjected to lawsuits.

If as we expand into new international markets we fail to adequately understand and comply with the local laws and customs, these operations may incur losses or otherwise adversely affect our business and results of operations.

Currently, we operate our business through subsidiaries and equity investees in other countries. In those countries where we have limited experience in operating subsidiaries, and in reviewing equity investees we are subject to additional risks related to complying with a wide variety of national and local laws, including restrictions on the import and export of certain intermediates, drugs, technologies and multiple and possibly overlapping tax structures. In addition, we may face competition in other countries from companies that may have more experience with operations in such countries or with international operations generally. We may also face difficulties integrating new facilities in different countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture. If we do not effectively manage our operations in these subsidiaries and review equity investees effectively, we may lose money in these countries and it may adversely affect our business and results of operations.

Fluctuations in exchange rates and interest rate movements may adversely affect our business and results of operations.

Our principal subsidiaries are located in the United States, United Kingdom, Germany and Russia and each has significant local operations. A significant portion of our revenues are in other currencies, especially the U.S. dollar, euro, rouble and pound sterling, while a significant portion of our costs are in Indian rupees. As a result, if the value of the Indian rupee appreciates relative to these other currencies, our revenues measured in rupees may decrease.

We have entered into borrowing arrangements in connection with our acquisition of betapharm. In the future, we may enter into additional borrowing arrangements in connection with acquisitions or for general working capital purposes. In the event interest rates increase, our costs of borrowing will increase and our results of operations may be adversely affected.

Our success depends on our ability to retain and attract key qualified personnel and, if we are not able to retain them or recruit additional qualified personnel, we may be unable to successfully develop our business

We are highly dependent on the principal members of our management and scientific staff, the loss of whose services might significantly delay or prevent the achievement of our business or scientific objectives. In India, it is not our practice to enter into employment agreements with our executive officers and key employees that are as extensive as are generally used in the United States, and each of those executive officers and key employees may terminate their employment upon notice and without cause or good reason. Currently we are not aware that any executive officer or key employee is planning to leave or retire. Competition among pharmaceutical companies for qualified employees is intense, and the ability to retain and attract qualified individuals is critical to our success. There can be no assurance that we will be able to retain and attract such individuals currently or in the future on acceptable terms, or at all, and the failure to do so would have a material adverse effect on our business, financial condition and results of operations. In addition, we do not maintain “key person” life insurance on any officer, employee or consultant.

We operate in a highly competitive and rapidly consolidating industry.

We operate in a highly competitive and rapidly consolidating industry. Our competitors, which include major multinational corporations, are consolidating, and the strength of the combined companies could affect our competitive position in all of our business areas. Furthermore, if one of our competitors or their customers acquire any of our customers or suppliers, we may lose business from the customer or lose a supplier of a critical raw material.

RISKS RELATING TO INVESTMENTS IN INDIAN COMPANIES

We are an Indian company and a substantial part of our operations are conducted, and most of our assets are located, in India. In addition, approximately 20.9% of our total revenues for fiscal 2008 were derived from sales in India. As a result, the following additional risk factors apply.

A slowdown in economic growth in India may adversely affect our business and results of operations.

Our performance and the quality and growth of our business are necessarily dependent on the health of the overall Indian economy. The Indian economy has grown significantly over the past few years. Any future slowdown in the Indian economy could harm us, our customers and other contractual counterparties. In addition, the Indian economy is in a state of transition. The share of the services sector of the economy is rising while that of the industrial, manufacturing and agricultural sector is declining. It is difficult to gauge the impact of these fundamental economic changes on our business.

A significant change in the Indian Government or in its economic liberalization and deregulation policies may adversely affect the Indian economy, the health of which our business depends upon.

The Indian Government has traditionally exercised and continues to exercise a dominant influence over many aspects of the economy. The present Government is a multi-party coalition and therefore there is no assurance that it will be able to generate sufficient cross-party support to implement economic policies or that the existing economic policies will continue. Any significant change in the Government’s economic policies could have a significant effect on private-sector entities, including us, and on market conditions and prices of Indian securities, including our shares and our ADSs. India’s trade relationships with other countries can also influence Indian economic conditions, which in turn can affect our business.

If communal disturbances or riots erupt in India, or if regional hostilities increase, this would adversely affect the Indian economy, which our business depends upon.

India has experienced communal disturbances, terrorist attacks and riots during recent years. If such disturbances continue or are exacerbated, our operational, sales and marketing activities may be adversely affected. Additionally, India has from time to time experienced hostilities with neighboring countries. The hostilities have continued sporadically. The hostilities between India and Pakistan are particularly threatening, because both India and Pakistan are nuclear powers. Hostilities and tensions may occur in the

future and on a wider scale. These hostilities and tensions could lead to political or economic instability in India and harm our business operations, our future financial performance and the price of our shares and our ADSs.

If wage costs or inflation rise in India, it may adversely affect our competitive advantages over higher cost countries and our profits may decline.

Wage costs in India have historically been significantly lower than wage costs in developed countries and have been one of our competitive strengths. However, wage increases in India may increase our costs, reduce our profit margins and adversely affect our business and results of operations.

Due to various macro-economic factors, the inflation level in the recent period has increased in India. According to the economic report released by the Department of Economic Affairs, Ministry of Finance in India, the annual inflation rate in India, as measured by the benchmark wholesale price index, Base 1993-94=100 was 11.05% for the week ended June 7, 2008, which is one of the highest in the recent years. This trend may continue and the rate of inflation may further rise. We may not be able to pass these costs on to our customers by increasing the price we charge for our products. If this occurs, our profits may decline.

In the event that a natural disaster should occur in India, including drought, floods and earthquakes, it could adversely affect our production operations and cause our revenues to decline.

Our main facilities are situated around Hyderabad, India. This region has experienced earthquakes, floods and droughts in the past and has experienced droughts in recent years. In the event of a drought so serious that the drinking water in the region is limited, the government could cut the supply of water to all industries, including our facilities. This would adversely affect our production operations and reduce our revenues. Even if we take precautions to provide back-up support in the event of such a natural disaster, the disaster may nonetheless affect our facilities, harming production and ultimately our business.

Stringent labor laws may adversely affect our ability to have flexible human resource policies; labor union problems could negatively affect our production capacity and overall profitability.

Labor laws in India are more stringent than in other parts of the world. These laws may restrict our ability to have human resource policies that would allow us to react swiftly to the needs of our business. Approximately 10% of our employees belong to a number of different labor unions. If we experience problems with our labor unions, our production capacity and overall profitability could be negatively affected.

Indian law imposes certain restrictions that limit a holder’s ability to transfer the equity shares obtained upon conversion of ADSs and repatriate the proceeds of such transfer, which may cause our ADSs to trade at a premium or discount to the market price of our equity shares.

Under certain circumstances, the Reserve Bank of India must approve the sale of equity shares underlying ADSs by a non-resident of India to a resident of India. The Reserve Bank of India has given general permission to effect sales of existing shares or convertible debentures of an Indian company by a resident to a non-resident, subject to certain conditions, including the price at which the shares may be sold. Additionally, except under certain limited circumstances, if an investor seeks to convert the rupee proceeds from a sale of equity shares in India into foreign currency and then repatriate that foreign currency from India, he or she will have to obtain an additional approval from the Reserve Bank of India for each such transaction. Required approval from the Reserve Bank of India or any other government agency may not be obtained on terms favorable to a non-resident investor or at all.

There are limits and conditions to the deposit of shares into the ADS facility.

Indian legal restrictions may limit the supply of our ADSs. The only way to add to the supply of our ADSs will be through a primary issuance because the depositary is not permitted to accept deposits of our outstanding shares and issue ADSs representing those shares. However, an investor in our ADSs who surrenders an ADS and withdraws our shares will be permitted to redeposit those shares in the depositary facility in exchange for our ADSs. In addition, an investor who has purchased our shares in the Indian market will be able to deposit them in the ADS program, but only in a number that does not exceed the number of underlying shares that have been withdrawn from and not re-deposited into the depositary facility. Moreover, there are restrictions on foreign institutional ownership of our shares as opposed to our ADSs.

There may be less company information available in Indian securities markets than securities markets in developed countries.

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

Indian stock exchange closures, broker defaults, settlement delays, and Indian Government regulations on stock market operations could affect the market price and liquidity of our equity shares.

The Indian securities markets are smaller than the securities markets in the United States and Europe and have experienced volatility from time to time. The regulation and monitoring of the Indian securities market and the activities of investors, brokers and other participants differ, in some cases significantly, from those in the United States and some European countries. Indian stock exchanges have at times experienced problems, including temporary exchange closures, broker defaults and settlement delays and if similar problems were to recur, they could affect the market price and liquidity of the securities of Indian companies, including our shares. Furthermore, any change in Indian Government regulations of stock markets could affect the market price and liquidity of our shares.

Financial instability in other countries, particularly emerging market countries in Asia, could affect our business and the price and liquidity of our shares and our ADSs.

The Indian markets and the Indian economy are influenced by economic and market conditions in other countries, particularly emerging market countries in Asia. Although economic conditions are different in each country, investors’ reactions to developments in one country can have adverse effects on the securities of companies in other countries, including India. Any worldwide financial instability or any loss of investor confidence in the financial systems of Asian or other emerging markets could increase volatility in Indian financial markets or adversely affect the Indian economy in general. Either of these results could harm our business, our future financial performance and the price of our shares and ADSs.

If you are not able to exercise preemptive rights available to other shareholders, your investment in our securities may be diluted.

A company incorporated in India must offer its holders of shares preemptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages prior to the issuance of any shares, unless these rights have been waived by at least 75.0% of the company’s shareholders present and voting at a shareholders’ general meeting. U.S. investors in our ADSs may be unable to exercise preemptive rights for the shares underlying our ADSs unless a registration statement under the Securities Act of 1933 is effective with respect to the rights or an exemption from the registration requirements of the Securities Act is available. Our decision to file a registration statement will depend on the costs and potential liabilities associated with a registration statement as well as the perceived benefits of enabling U.S. investors in our ADSs to exercise their preemptive rights and any other factors we consider appropriate at the time. We might choose not to file a registration statement under these circumstances. If we issue any of these securities in the future, such securities may be issued to the depositary, which may sell them in the securities markets in India for the benefit of the investors in our ADSs. We cannot assure you as to the value, if any, the depositary would receive upon the sale of these securities. To the extent that you are unable to exercise preemptive rights, your proportional interests in us would be reduced.

If there is a change in tax regulations, it may increase our tax liabilities and thus adversely affect our financial results.

Currently, we enjoy various tax benefits and exemptions under Indian tax laws. Any changes in these laws, or their application in matters such as tax exemption on exportation income and transfer pricing, may increase our tax liability and thus adversely affect our financial results.

ITEM 4. INFORMATION ON THE COMPANY

4.A. History and development of the company

Dr. Reddy’s Laboratories Limited was incorporated in India under the Companies Act, 1956, by its promoter and our current Chairman, Dr. K. Anji Reddy as a Private Limited Company on February 24, 1984. We were converted to a Public Limited Company on December 6, 1985 and listed on the Indian Stock Exchanges in August 1986 and on the New York Stock Exchange on April 11, 2001. We are registered with the Registrar of Companies, Andhra Pradesh, Hyderabad, India as Company No. 4507 (Company Identification No. U85195AP1984PTC004507). Our registered office is situated at 7-1-27, Ameerpet, Hyderabad — 500 016, Andhra Pradesh, India and the telephone number of our registered office is +91-40-23731946. The name and address of our registered agent in the United States is Dr. Reddy’s Laboratories, Inc. 200 Somerset Corporate Boulevard (Bldg II), Bridgewater, New Jersey 08807.

Key business developments:

In April 2007, we launched Reditux™, our brand of rituximab, a monoclonal antibody (MAb) used in the treatment of Non-Hodgkin’s Lymphoma. We launched our social initiative called “Sparsh”, an assistance program for cancer patients undergoing treatment, at the same time. Qualified patients identified by doctors in connection with the program are provided Reditux™ free of cost. Reditux™ is the second product from our Biologics portfolio.

In April 2007, we terminated all of our over-the-counter (“OTC”) agreements with Leiner Health Products, LLC (“Leiner”). This action was taken after receipt of notice that, on March 16, 2007, Leiner had been served with a list of Inspection Observations on a Form 483 from the U.S. FDA inspectors and, in response thereto, on March 20, 2007, suspended all of its packaging, production and distribution of OTC products manufactured, packaged or tested at its facilities in the United States. Under the terminated agreements, we had supplied Leiner with finished dosages tablets and API to produce OTC products, and also granted Leiner access to certain OTC products under development. Subsequently, on March 10, 2008, Leiner filed for Chapter 11 bankruptcy proceedings. During fiscal 2008, we launched our own private label OTC business.

In August 2007, we, together with Rheoscience, the Denmark based innovator pharmaceutical company, announced that the first patient had received Balaglitazone (DRF 2593), which is an insulin sensitizer that acts as a partial PPAR (peroxisome proliferator-activated receptor) gamma agonist in a Phase III trial study. The study is the first in a series of planned Phase III trials to investigate the safety and efficacy of Balaglitazone as an oral anti-diabetic drug. In the trial, Balaglitazone will be tested in a six month double-blind, randomized, placebo-controlled multicenter trial, whereby type 2 diabetes patients will be given daily doses of either 10 or 20 mg of Balaglitazone versus the active comparator Actos^® (45 mg/day) as a supplement to stable insulin treatment. Balaglitazone is being developed under a co-development agreement between us and Rheoscience.

In November 2007, we signed an exclusive 10 year agreement with SYGNIS Pharma AG (“SYGNIS”) for the supply of the active pharmaceutical ingredient AX200, a biological molecule in development by SYGNIS for the treatment of strokes and other neurodegenerative disorders. The agreement secures the supply of AX200 far beyond the clinical development phase and provides a solid basis for our anticipated marketing of the compound. SYGNIS successfully completed a Phase IIa clinical trial of AX200 in September 2007 that demonstrated safety and efficacy in patients who have suffered an acute stroke. In the second half of 2008, SYGNIS plans to start a Phase IIb efficacy trial in patients who have suffered an acute stroke. Strokes affect over 5 million patients worldwide every year and are the third leading cause of death worldwide, presenting a major socio-economic burden.

In November 2007, we, along with Argenta Discovery Limited (“Argenta”), a U.K. based respiratory drug discovery and development company, announced a major milestone in our development program targeting a novel disease-modifying approach to treat the underlying cause of certain chronic respiratory diseases including chronic obstructive pulmonary disease (“COPD”) and severe asthma. Within 18 months of initiating the collaboration, the team has already selected the first candidate drug to proceed into pre-clinical development. Under the terms of the licensing agreement announced in February 2006, we are collaborating with Argenta both in the identification of clinical candidates by analyzing an undisclosed but proven anti-inflammatory drug target and in the development of these candidates for Phase II clinical trials proof-of-concept.

In January 2008, we entered into a settlement agreement with Novartis Pharma AG (“Novartis”) which resulted in Novartis stipulating to the dismissal of the lawsuits in the United States relating to the Abbreviated New Drug Applications (the “ANDA”) filed by us for a generic version of rivastigmine tartrate capsules, which are indicated for the treatment of mild-to-moderate dementia relating to Alzheimer’s disease and are sold under the trade name Exelon^® by Novartis. Under the terms of the agreement, we will not

launch our generic rivastigmine tartrate capsules until a specified time before the expiry of the Orange Book patents claiming rivastigmine tartrate. In October 2007, we received the final approval from the U.S. FDA on our ANDA for rivastigmine tartrate capsules. According to IMS Health Inc.’s (“IMS”) June 2007 Moving Annual Total Report, the annual sales of this product in the United States were U.S.$199 million.

In February 2008, we entered into an agreement with SkyePharma PLC (“SkyePharma”) to undertake a feasibility study of a product utilizing two of SkyePharma’s proprietary drug delivery systems, for which SkyePharma received an upfront payment from us. We will pay for the costs of this study. If the feasibility study is successful, full development activities will begin later in fiscal 2009.

In March 2008, we signed a drug discovery collaboration agreement with 7TM Pharma for selected drug targets in the area of metabolic disorders. Under the terms of the agreement, we will collaborate with 7TM Pharma to identify clinical candidates for pre-selected drug targets. The parties will jointly develop these candidates from the pre-clinical stage up to Phase IIa clinical trials (proof-of-concept). Upon successful completion of a Phase IIa clinical trial, the Company and 7TM Pharma may either develop and commercialize the candidate jointly or license the candidate for further development and commercialization to a larger pharmaceutical company.

In order to build a robust generics and API pipeline, in fiscal 2008, we filed 19 ANDAs in the United States, including 10 Paragraph IV filings. Additionally, in fiscal 2008, the U.S. FDA granted us 13 final ANDA approvals and seven tentative ANDA approvals. With respect to APIs, we filed 54 Drug Master Files (“DMF”) in fiscal 2008 worldwide, 23 of which were filed in the United States, nine in Canada, 13 in Europe and nine in other countries. With these filings, we have a total of 127 U.S. DMFs filed as of March 31, 2008. Including the United States filings, as of March 31, 2008, we have made a total of 281 DMF filings worldwide: with 49 filings in Canada, 64 filings in Europe and 41 filings in other countries.

In our branded formulations division, during fiscal 2008, we filed a total of 307 dossiers for product registrations in various countries.

During fiscal 2008, we received 202 product approvals in various countries, including 18 approvals in Romania, 13 approvals in South Africa, 13 approvals in Venezuela, 11 approvals in Ukraine, seven approvals in Kazakhstan, seven approvals in Middle Eastern countries and five approvals in Brazil. As of March 31, 2008, we had 21 certificates of suitability granted by European authorities. For most of these, we are already supplying either commercial quantities or development quantities of API to various generic formulators.

During fiscal 2008, we invested Rs.6,348.0 million on capital expenditures for manufacturing, research and development facilities and other assets, which is our highest level of investment in a single financial year to date. These investments will create the capacity to support our strategic growth agenda.

During fiscal 2006, fiscal 2007 and fiscal 2008, no third party made any public takeover offers in respect of our shares and we did not make any public offers to take over any other company.

4.B. Business overview

We are an emerging global pharmaceutical company with proven research capabilities. We produce active pharmaceutical ingredients and intermediates and finished dosage forms and biologics products and market them globally, with a focus on India, the United States, Europe and Russia. We are vertically integrated and use our active pharmaceutical ingredients and intermediates in our own finished dosage products. We conduct basic research in the areas of cancer, diabetes, metabolic disorders, cardiovascular disease, inflammation and bacterial infection.

Our total revenues for fiscal 2008 were Rs.50,005.6 million (U.S.$1,249.5 million). We derived 20.9% of these revenues from sales in India, 22.7% from the United States and Canada (“North America”), 11.1% from Russia and other countries of the former Soviet Union, 31.7% from Europe and 13.6% from other countries. Our net income for fiscal 2008 was Rs.4,678.0 million (U.S.$116.9 million).

OUR STRATEGY

As a global pharmaceutical company, our core purpose is to help people lead healthier lives by maximizing their access to affordable generic medicines and new and improved pharmaceuticals that address unmet medical needs. Our strategy through which we intend to achieve this goal is as follows:

•		Our core businesses of active pharmaceutical ingredients and intermediates and branded formulations are well established with a track record of consistent growth and profitability. We will continue to make appropriate investments to strengthen our capabilities and infrastructure and in turn address future growth opportunities. We are focused on expanding our product portfolio, enhancing our cost competitiveness, improving our position in existing markets and expanding into selected new markets in an effort to continue this growth and profitability.

•		In our global generics business, we continue to build a product pipeline that will help drive medium-term growth in North America and Europe. Our strategic markets include United States and Germany, which are two of the largest generic markets in the world and where we intend to build an industry-leading market presence. In addition, we continue to focus on additional markets such as Canada in North America, and the United Kingdom, Spain, Italy, France and Portugal in Europe. We intend to leverage our existing global platforms of product development, manufacturing, and supply chain management to address the growing needs of our customers in each of these markets.

•		We are positioning our custom pharmaceutical services business as a partner of choice for the strategic outsourcing needs of our customers. We market process development and manufacturing services to customers primarily consisting of innovator pharmaceutical and biotechnology companies. The focus is to leverage our skills in process development, analytical development, formulation development and cGMP manufacturing to serve the customer needs.

•		In addition, we are focusing our investments on innovation-driven businesses. The drug discovery business has a goal of building a robust and unique New Chemical Entity (“NCE”) pipeline. The specialty pharmaceuticals business is positioning to launch an internal sales and marketing operation for in-licensed and co-developed dermatology products while continuing to advance internal product development. The biologics business continues to launch products in the key markets of India, Russia, and Latin America, while developing a product pipeline and infrastructure to address the global biologics opportunity. These businesses, while being investment intensive and having long lead times, have the potential to provide significant growth as well as sustained revenues and consistent profitability over the long-term due to commercial differentiation and patent protection.

•		To supplement our internal growth initiatives for each of these businesses, we are actively pursuing external business development opportunities, including acquisitions and alliances.

OUR PRINCIPAL AREAS OF OPERATIONS

The following table shows our revenues and percentage of total revenues of our formulations, active pharmaceutical ingredients and intermediates, generics, custom pharmaceutical services and drug discovery segments for fiscal 2006, 2007 and 2008, respectively:


	Fiscal Year Ended March 31,
Segment	2006				2007				2008
	(Rs. in millions, U.S.$ in millions)
Formulations	Rs.	10,587.6	43.6	%	Rs.	13,086.6	20.1	%	Rs.	15,241.1	30.5	%	U.S.$	380.8
Active pharmaceutical ingredients and intermediates		8,267.5	34.1			11,883.0	18.3			11,804.8	23.6			295.0
Generics		4,055.8	16.7			33,224.2	51.0			17,781.5	35.6			444.3
Drug discovery		—	—			136.8	0.2			39.2	0.1			1.0
Custom pharmaceutical services		1,326.8	5.5			6,599.8	10.1			4,817.6	9.6			120.4
Others		29.3	0.1			164.7	0.3			321.4	0.6			8.0

Total revenues	Rs.	24,267.0	100.0	%	Rs.	65,095.1	100.0	%	Rs.	50,005.6	100.0	%	U.S.$	1,249.5

Formulations Segment

Formulations, also referred to as branded finished dosages, are finished pharmaceutical products ready for consumption by the patient. Branded means we package the formulations for sale under our brand name. We sell branded formulations in India, Russia and other emerging markets. Formulations accounted for 30.5% of our revenues in fiscal 2008. Effective April 1, 2007, our critical care and biotechnology segment was merged into our formulations segment. Accordingly, disclosures relating to the previous period have been restated to conform to current period presentation.

Markets

We export our branded formulations to over 40 countries worldwide. Our major markets in this segment are India, Russia and other countries of the former Soviet Union, Central Eastern Europe, Southeast Asian countries and Latin America. We have also expanded our presence in emerging markets, such as Romania, Albania, South Africa, Venezuela and the Middle East region. We have progressively increased the number of countries in which we market our formulations by registering our products in various markets around the world. During fiscal 2008, we filed 307 new product dossiers in various countries around the world. Our formulations portfolio includes brands covering several therapeutic segments.

The following table sets forth formulations revenues by geographic area for fiscal 2006, 2007 and 2008, respectively:


Fiscal Year Ended March 31,
	2006					2007					2008
	Revenues in		% of			Revenues in		%
Country	millions		Total⁽¹⁾			millions		Total⁽¹⁾			Revenues in millions			% Total⁽¹⁾
India	Rs.	5,968.1		56.4	%	Rs.	6,964.5		53.2	%	Rs.	8,059.6	U.S.$201.4		52.9	%
Russia		2,676.8		25.3	%		3,587.3		27.4	%		4,064.4	101.6		26.7	%
Ukraine		447.0		4.2	%		604.3		4.6	%		767.0	19.1		5.0	%
Romania		192.2		1.8	%		337.1		2.6	%		465.4	11.6		3.1	%
Kazakhstan		240.5		2.3	%		319.4		2.4	%		368.3	9.2		2.4	%
Belarus		178.4		1.7	%		205.1		1.6	%		258.8	6.5		1.7	%
Venezuela		59.1		0.6	%		152.9		1.2	%		256.3	6.4		1.7	%
South Africa		142.0		1.3	%		178.8		1.4	%		179.6	4.5		1.2	%
Myanmar		84.7		0.8	%		105.1		0.8	%		100.5	2.5		0.7	%
Vietnam		105.3		1.0	%		67.6		0.5	%		81.8	2.0		0.5	%
Others		493.5		4.6	%		564.5		4.3	%		639.4	16.0		4.1	%

Total	Rs.	10,587.6		100.0	%	Rs.	13,086.6		100.0	%	Rs.	15,241.1	U.S.$380.8		100.0	%


(1)		Refers to our revenues from formulations sales in the applicable country expressed as a percentage of our total revenues from formulations sales throughout the world.

India. Our revenues from sales of formulations in India were 52.9% of our total formulations sales in fiscal 2008. In India, our formulations business focuses mainly on the therapeutic categories of cardiovascular, diabetes management, gastro-intestinal and pain management. As of March 31, 2008, we had a total of 151 brands. Our top ten brands together accounted for 46.2% of our formulations revenues in India in fiscal 2008. According to Operations Research Group International Medical Statistics (“ORG IMS”) in its March Moving Annual Total (“MAT”) report for the 12-month period ending March 2008, our secondary sales of formulations in India grew 13.4% in fiscal 2008 as compared to the industry average growth of 14.8%. According to ORG IMS, as of March 2008, we had 43 brands that were ranked either first or second in terms of sales in India in their respective product categories. According to the Center for Marketing and Advertising Research Consultancy (“CMARC”) report for the period November 2007 to February 2008, which measures doctors’ prescriptions, we were ranked seventh in terms of the number of prescriptions generated in India.

New product launches during fiscal 2008 accounted for 3.9% of our revenues from sales of formulations in India. Key product launches included Reditux, our brand of rituximab; Etura, our brand of etodolac; Gemone, our brand of gemifloxacin; Pemgem, our brand of pemetrexed; Mintop 10, our brand of minoxidil and Supanac, our brand of diclofenac potassium.

The following table provides a summary of our sales in India in our therapeutic categories for fiscal 2006, 2007 and 2008, respectively:


Fiscal Year Ended March 31,
	2006							2007							2008
Therapeutic	No. of		Revenues		%			No of		Revenues		%			No of					%
Category⁽¹⁾	Products		in millions		Total⁽²⁾			Products		in millions		Total⁽²⁾			Products		Revenues in Millions			Total⁽²⁾
Gastrointestinal		45	Rs.	1,274.3		21.4	%		49	Rs.	1,527.8		21.9	%		47	Rs.	1,811.7	U.S.$ 45.3		22.5	%
Cardiovascular		36		1,108.5		18.6	%		46		1,234.4		17.7	%		50		1,467.5	36.7		18.2	%
Pain management		19		872.0		14.6	%		21		1,050.6		15.1	%		24		1,069.9	26.7		13.3	%
Oncology		28		442.7		7.4	%		32		549.1		7.9	%		37		747.0	18.7		9.3	%
Anti-Infective		18		347.3		5.8	%		26		462.5		6.6	%		26		543.5	13.6		6.7	%
Vitamins/ Minerals/ Nutrients		18		424.1		7.1	%		21		430.2		6.2	%		20		450.5	11.3		5.6	%
Diabetes management		18		315.2		5.3	%		18		359.1		5.2	%		22		446.5	11.2		5.5	%
Respiratory		15		233.8		3.9	%		17		285.1		4.1	%		17		336.8	8.4		4.2	%
Dermatology		18		265.1		4.4	%		17		283.2		4.1	%		18		313.2	7.8		3.9	%
Dental		21		216.1		3.6	%		23		235.5		3.4	%		21		278.2	7.0		3.5	%
Others		38		469.0		7.9	%		44		547.0		7.8	%		42		594.8	14.9		7.3	%

Total		274	Rs.	5,968.1		100.0	%		314	Rs.	6,964.5		100.0	%		324	Rs.	8,059.6	U.S.$201.4		100.0	%


(1)		The categorization into therapeutic segments is based on current marketing practice and focuses on therapies.

(2)		Refers to the therapeutic category’s revenues from sales in India expressed as a percentage of our total revenues from sales in all of our therapeutic categories in India.

The following tables summarize the position of our top 10 brands in the Indian market for fiscal 2006, 2007 and 2008, respectively:



			Rank of our product		Market Share of our
	Therapeutic	Therapeutic Sub-	within Product		Brand within Product		Brand
Brand **	Category	Category⁽¹⁾	Category⁽¹⁾		Category ⁽²⁾		Growth⁽³⁾
Omez	Gastro-intestinal	Anti-ulcerant		1		50.7		9.6
Nise	Pain management	Non-steroidal anti-inflammatory		1		47.2		(2.6	)
Stamlo	Cardiovascular	Anti-hypertensive		1		23.1		13.6
Stamlo beta	Cardiovascular	Anti-hypertensive		2		15.2		7.9
Razo	Gastro-intestinal	Anti-ulcerant		1		12.1		27.7
Atocor	Cardiovascular	Lipid lowering agent		4		7.6		27.4
Enam	Cardiovascular	Anti-hypertensive		2		25.2		5.9
Mintop	Dermatology	Alopecia		1		57.2		26.8
Reclimet	Diabetes management	Sulphonylurea anti-diabetic		2		13.1		6.4


(1)		Therapeutic sub-categories are the specific groups within each therapeutic category and product categories are the compound groups within each therapeutic sub-category. Source: Derived from Operations Research Group March 2008.

(2)		Refers to our brand’s revenues from sales in India expressed as a percentage of total revenues from sales in respective product categories in India. Source: Derived from ORG IMS in its Moving Annual Total report for the 12 month period ending March 2008.

(3)		Revenue growth determined based on retail sales over the corresponding 12-month period for the previous year. Source: Derived from ORG IMS in its Moving Annual Total report for the 12 month period ending March 2008.

**		Market data is not available for our Reditux (No. 8) brand in the Oncology therapeutic category and therefore it is not included above.


Fiscal Year Ended March 31,
	2006					2007					2008
	Revenues in					Revenues in
BRAND	millions		% Total⁽¹⁾			millions		% Total⁽¹⁾			Revenues in millions			% Total⁽¹⁾
Omez	Rs.	690.7		11.6	%	Rs.	829.7		11.9	%	Rs.	965.9	U.S.$ 24.1		12.0	%
Nise		736.0		12.3	%		873.1		12.5	%		879.5	22.0		10.9	%
Stamlo		339.7		5.7	%		370.0		5.3	%		405.9	10.1		5.0	%
Stamlo beta		262.8		4.4	%		267.5		3.8	%		305.0	7.6		3.8	%
Razo		127.3		2.1	%		211.2		3.0	%		291.4	7.3		3.6	%
Atocor		167.2		2.8	%		188.9		2.7	%		243.9	6.1		3.0	%
Enam		172.7		2.9	%		174.2		2.5	%		179.6	4.5		2.2	%
Reditux		0.0		0.0	%		0.0		0.0	%		153.9	3.8		1.9	%
Mintop		109.2		1.8	%		118.8		1.7	%		149.5	3.7		1.9	%
Reclimet		123.7		2.1	%		138.0		2.0	%		149.0	3.7		1.8	%
Others		3,238.8		54.3	%		3,793.1		54.6	%		4,336.0	108.3		53.9	%
Total	Rs.	5,968.1		100.0	%	Rs.	6,964.5		100.0	%	Rs.	8,059.6	U.S.$201.4		100.0	%


(1)		Refers to the brand’s revenues from sales in India expressed as a percentage of our total revenues from sales in all of our therapeutic categories in India.

Russia. Russia is our largest international market in our formulations business and our sales of formulations in this market accounted for 26.7% of our revenues in the formulations segment in fiscal 2008. Pharmexpert, a market research firm, ranked us 14th in sales in Russia with a market share of 1.24% as of March 2008 in its moving annual total report for first quarter 2008 (the “Pharmexpert MAT Q1 2008 Report”). Pharmexpert also reported that market growth during fiscal 2008 was 17.5%. All of the companies ranked ahead of us by Pharmexpert were either multinational corporations or of European origin. Accordingly, we were the top ranked Indian pharmaceutical company in Russia.

The following table provides a summary of our revenues in Russia by therapeutic category for fiscal 2006, 2007 and 2008, respectively:


Fiscal Year Ended March 31,
	2006							2007							2008
Therapeutic	No of		Revenues		%			No of		Revenues		%			No of						%
Area	Products		in millions		Total⁽¹⁾			Products		in millions		Total⁽¹⁾			Products		Revenues in millions				Total⁽¹⁾
Pain management		9	Rs.	899.1		33.6	%		8	Rs.	1,327.1		37.0	%		8		Rs. 1,647.6	U.S.$	41.2		40.5	%
Gastrointestinal		3		590.0		22.0	%		3		843.2		23.5	%		3		882.5		22.1		21.7	%
Anti-infective		6		530.7		19.8	%		6		603.2		16.8	%		7		645.8		16.1		15.9	%
Cardiovascular		4		280.2		10.5	%		6		266.5		7.4	%		8		262.2		6.6		6.5	%
Respiratory		3		86.4		3.2	%		1		166.4		4.6	%		1		199.0		5.0		4.9	%
Dermatology		4		138.1		5.2	%		5		192.6		5.4	%		5		191.0		4.8		4.7	%
Others		5		152.3		5.7	%		13		188.3		5.3	%		16		236.3		5.9		5.8	%

Total		34	Rs.	2676.8		100.0	%		42	Rs.	3,587.3		100.0	%		48		R.s.4,064.4	U.S.$	101.6		100.0	%


(1)		Refers to the therapeutic category’s revenues from sales in Russia expressed as a percentage of our total revenues from sales in all of our therapeutic categories in Russia.

The following table provides a summary of our top 10 Brands in the Russian market for fiscal 2006, 2007 and 2008, respectively:


Fiscal Year Ended March 31,
	2006					2007					2008
	Revenues in					Revenues in
Brand	millions		% Total⁽¹⁾			millions		% Total⁽¹⁾			Revenues in millions				% Total⁽¹⁾
Omez	Rs.	585.1		21.9	%	Rs.	821.2		22.9	%	Rs.	848.6	U.S.$	21.2		20.9	%
Nise		367.8		13.7	%		666.4		18.6	%		798.6		20.0		19.6	%
Ketorol		496.4		18.5	%		634.1		17.7	%		796.6		19.9		19.6	%
Ciprolet		471.6		17.6	%		544.8		15.2	%		549.5		13.7		13.5	%
Enam		280.2		10.5	%		266.2		7.4	%		255.1		6.4		6.3	%
Cetrine		86.4		3.2	%		166.4		4.6	%		199.0		5.0		4.9	%
Exifine		114.3		4.3	%		140.8		3.9	%		139.7		3.5		3.4	%
Mitotax		90.2		3.4	%		86.8		2.4	%		104.5		2.6		2.6	%
Bion		0.0		0.0	%		29.8		0.8	%		62.3		1.6		1.5	%
Mycoflucan		23.9		0.9	%		51.8		1.4	%		51.3		1.3		1.3	%
Others		160.9		6.0	%		179.0		5.1	%		259.2		6.5		6.4	%

Total	Rs.	2,676.8		100.0	%	Rs.	3,587.3		100.0	%	Rs.	4,064.4	U.S.$	101.6		100.0	%


(1)		Refers to the brand’s revenues from sales in Russia expressed as a percentage of our total revenues from all formulation sales in Russia.

Our top four brands, Omez, Nise, Ketorol and Ciprolet, accounted for 73.6% of our formulations revenues in Russia in fiscal 2008. Omez, (anti-ulcerant product), Nise and Ketorol (pain management product) and Ciprolet (anti-infective product) are ranked as the 48th, 55th, 64th and 97th best selling formulation brands respectively, in the Russian market as of March 2008 by Pharmexpert in its MAT Q1 2008 Report.

Our strategy in Russia is to focus on the therapeutic areas of gastro-intestinal, pain management, anti-infectives and cardiovascular. Our focus is on building brand leaders in these therapeutic segments. Omez, Ciprolet, Nise and Ketorol continued to be brand leaders in their respective categories, as reported by the Pharmexpert MAT Q1 2008 Report.

Growth during the year was driven by sales and marketing initiatives to target specialists through field sale forces focused on these specialists, increased participation in hospital business and an OTC initiative for certain brands.

During fiscal 2008, we further expanded our Russian sales force. The hospital division has 26 hospital specialists and 9 key account managers, and is focused on expanding our present network of relationships with hospitals and institutes. The OTC division has 43 medical representatives, and is focused on establishing a network of relationships with OTC distributors in preparation for future OTC product launches.

Other Markets: We have operations in former Soviet Union countries other than Russia, including Ukraine, Kazakhstan, Belarus and Uzbekistan. We also have operations in other emerging markets, such as Venezuela, Vietnam, South Africa, Romania and Myanmar. Our export of formulations to these countries accounted for 16.7% of the revenues in our formulations segment in fiscal 2008.

In South Africa, we market through our partially owned subsidiary, Dr. Reddy’s Laboratories (Proprietary) Limited (DRSA). As of March 31, 2008, we held a 60% equity interest in DRSA. We currently market 9 products through DRSA in South Africa and have 5 registered products scheduled to be launched in fiscal 2009. Apart from these, we have 24 products pending registration. During fiscal 2008, we launched fexofenadine tablets and finasteride tablets in South Africa.

In China, we market through our equity investee, Kunshan Rotam Reddy Pharmaceuticals Co. Limited (“KRRP” or “Reddy Kunshan”). As of March 31, 2008, we held a 51.33% equity interest in KRRP. We currently market twelve formulation products through KRRP in China and have two products under registration. We have applied for registration of thirteen products from our China representative office for which applications are pending approval.

Sales, marketing and distribution network

India. We generate demand for our products by promoting them to doctors who prescribe them, and meeting with pharmacists to ensure that the pharmacists stock our brands. Our focus on brand building is thus primarily driven through efforts to build relationships with the medical community. While we do not sell directly to doctors or pharmacists, our approximately 1,950 sales representatives and front line managers frequently visit doctors and pharmacists throughout the country to promote our products. In addition, we sponsor medical conferences in different parts of the country and conduct seminars for doctors. During fiscal 2008, we increased our total sales personnel in India by approximately 250.

We sell our formulations primarily through clearing and forwarding agents to approximately 2,050 stockists who decide which brands to buy based on demand. The stockists pay for our products in an agreed credit period and in turn sell these products to retailers. Our clearing and forwarding agents are responsible for transporting our products to the stockists and ensuring that the stockists maintain adequate supplies of our products. We pay our clearing and forwarding agents on a commission basis. We have insurance policies that cover our products during shipment and storage at clearing and forwarding locations.

Russia. In Russia, we sell our formulations to some of the principal national distributors directly as well as through our wholly-owned subsidiary located in Russia, OOO Dr. Reddy’s Laboratories, Russia. Our sales and marketing efforts are driven by a team of 255 marketing representatives, 23 regional managers, 4 zone managers and 18 key account managers to promote our products to doctors in 48 cities in Russia. During fiscal 2008, we increased our sales personnel in Russia by approximately 70.

In the Russian market, credit is generally extended only to customers after they have established a satisfactory history of payment with us. The credit ratings of these customers are based on turnover, payment record and the number of the customers’ branches or pharmacies and are reviewed on a periodic basis. During fiscal 2008, the credit period for our distributors Protek and SIA was

increased from 60 days to 90 days and 45 days to 75 days respectively. There were no material changes in the credit terms for other distributors.

Other Markets. Our other key focus markets are South Africa, Brazil, China, Kazakhstan, Uzbekistan, Ukraine, Belarus, Vietnam, Romania, Venezuela and Myanmar, where we have our own sales personnel to promote our products. In South Africa, we sell our products to wholesale distributors, dispensing doctors and retail pharmacies. In China, where we market through KRRP, as of March 31, 2008, we have 95 marketing representatives covering hospitals. In several of these markets, we market and distribute through local distributors. We also have representative offices in several of these countries.

Manufacturing and Raw Materials

We have four facilities for the manufacture of formulation products, all of which are situated in India, as of March 31, 2008. We manufacture most of our finished products at these facilities and also use third-party manufacturing facilities as we determine necessary. We also purchase some products from approved third parties based on the necessity and requirement of our markets. For each of our products, we endeavor to identify alternate suppliers of our products and the processes applicable to our products. The main difference between active pharmaceutical ingredients as compared to formulations and generics is the form in which they are produced and the way they are packaged. Active pharmaceutical ingredients are manufactured and distributed in bulk. In formulations and generics, these bulk ingredients are converted into finished dosages by adding other ingredients, called excipients, and packaged into individual doses that are ready for consumption by the patient. In fiscal 2008, our active pharmaceutical ingredients and intermediates business provided 70.4% of the active pharmaceutical ingredients and intermediates requirements of our formulations business, with the balance coming from various other suppliers.

Our manufacture of formulations is subject to strict quality and contamination controls throughout the manufacturing process. Each production line consists of a series of rooms through which the product passes at different stages of its conversion to a finished dosage. In our facilities, we manufacture formulations in various dosage forms including tablets, capsules, injections and liquids. These dosage forms are then packaged and quarantined to be tested for quality and contamination. One of our facilities also has the approval of the U.K. Medicines and Health Care Products Regulatory Agency (“MHRA”) apart from other country specific approvals. The Ministries of Health of Brazil, Ukraine, Romania, Gulf Co-operation Council group, Indonesia, Nigeria, Kirgystan and World Health Organization have visited during the year and approved our facilities.

We manufacture our key brands for our domestic market at our facility in Baddi to take advantage of certain fiscal benefits, which include exemption from income tax and excise duty for a specified period, offered by the Government of India to encourage industrial growth in the state of Himachal Pradesh.

Competition

We compete with different companies in different countries, depending upon therapeutic and product categories, and within each category upon dosage strengths and drug delivery. On the basis of sales, we are the tenth largest pharmaceutical seller in India, with a market share of 2.33% according to the ORG IMS March Moving Annual Total report for the 12-month period ending March 2008. Of the top ten participants in the Indian formulations market, three are multinational corporations and the rest are Indian corporations.

We believe growth opportunities in India continue to exist. The Indian pharmaceutical business environment underwent considerable changes in fiscal 2008. Some of the most significant changes in the industry are as follows:

•

The Industry recorded growth of 14.8% after moderate performance for the past couple of years.

•

Growth driven by successful new product launches in chronic therapeutic areas (TA), increased spending on health care due to rising disposable income, increased penetration of health insurance, changing disease profile and penetration into semi-urban and rural areas.

•

Change in market dynamics, including emergence of organized retail chains, boom in hospital sector, target of tier II markets i.e., semi urban and rural areas, by most companies.

•

Multi-national corporations launched more of their patented products.

•

Promotion of special purpose vehicle and innovative funding models to address higher investment demands in research and development.

•

Contract research and manufacturing services gained more prominence.

•

Active promotion of health tourism, and

•

Emergence of bio-similars to cater to needy population in Oncology therapeutic area.

Our formulation segment’s principal competitors in the Indian market are Cipla Limited, Glaxo SmithKline Pharmaceuticals Limited, Ranbaxy Laboratories Limited, Nicholas Piramal India Limited, Sun Pharmaceuticals Industries Limite, Zydus-Cadila and Lupin.

Our formulation segment’s principal competitors in the Russian market include Berlin Chemi AG, Gedeon Richter Limited, Krka, Pliva, Lek, Ranbaxy, Nycomed and Egis Pharmaceuticals Limited.

In our export markets, we compete with local companies, multinational corporations and companies from other emerging markets. In Russia and in most of our export markets, we believe our products occupy a niche position between the less expensive local products and the more expensive products of the multinational corporations.

Government regulations

All pharmaceutical companies that manufacture and market products in India are subject to various national and state laws and regulations, which principally include the Drugs and Cosmetics Act, 1940, the Drugs (Prices Control) Order, 1995 (DPCO), various environmental laws, labor laws and other government statutes and regulations. These regulations govern the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of pharmaceutical products.

In India, manufacturing licenses for drugs and pharmaceuticals are generally issued by state drug authorities. Under the Drugs and Cosmetics Act, 1940, the state drug administrations are empowered to issue manufacturing licenses for drugs if they are approved for marketing in India by the Drug Controller General of India (“DCGI”). Prior to granting licenses for any new drugs or combinations of new drugs, DCGI clearance has to be obtained in accordance with the Drugs and Cosmetics Act, 1940.

Pursuant to the amendments in May 2005 to the Schedule Y of the Drugs and Cosmetics Act, 1940, manufacturers of finished dosages are required to submit additional technical data to the DCGI in order to obtain a no-objection certificate for conducting clinical trials as well as to manufacture new drugs for marketing.

All pharmaceutical manufacturers that sell products in any country are subject to regulations issued by the ministry of health (“MoH”) of the respective country. These regulations govern, or influence the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of products.

Our facilities and products are periodically inspected by various regulatory authorities such as the U.K. MHRA, the South African Medicines Control Council, the Brazilian National Agency of Sanitary Surveillance (also known as “ANVISA”), the Romanian National Medicines Agency, and the World Health Organization, all of which have extensive enforcement powers over the activities of pharmaceutical manufacturers operating within their jurisdiction.

MoH approval of an application is required before a generic equivalent of an existing or referenced brand drug can be marketed. When processing a generics application, the MoH waives the requirement of conducting complete clinical studies, although it normally requires bioavailability and/or bioequivalence studies. “Bioavailability” indicates the rate and extent of absorption and levels of concentration of a drug product in the blood stream needed to produce a therapeutic effect. “Bioequivalence” compares the bioavailability of one drug product with another, and when established, indicates that the rate of absorption and levels of concentration of the active drug substance in the body are the equivalent for the generic drug and the previously approved drug. A generic application may be submitted for a drug on the basis that it is the equivalent of a previously approved drug. Before approving a generic product, the MoH also requires that our procedures and operations conform to Current Good Manufacturing Practice (“cGMP”) regulations, relating to good manufacturing practices as defined by various countries. We must follow the cGMP regulations at all times during the manufacture of our products. We continue to spend significant time, money and effort in the areas of production and quality testing to help ensure full compliance with cGMP regulations.

The timing of final MoH approval of a generic application depends on various factors, including patent expiration dates, sufficiency of data and regulatory approvals.

Under the present drug policy of the Government of India, certain drugs have been specified under the DPCO as subject to price control. The Government of India established the National Pharmaceutical Pricing Authority (“NPPA”) to control pharmaceutical prices. Under the DPCO, the NPPA has the authority to fix the maximum selling price for specified products. At present, more than 70 drugs and their formulations are categorized as specified products under the DPCO. A limited number of our formulation products fall in this category. Adverse changes in the DPCO list or in the span of price control can affect pricing, and hence, our Indian revenues.

On March 22, 2005, the Government of India passed the Patents (Amendment) Bill 2005 (the “Amendment”), introducing a product patent regime for food, chemicals and pharmaceuticals in India. The Amendment specifically provides that new medicines (patentability of which is not specifically excluded) for which a patent has been applied for in India on or after January 1, 1995 and for which a patent is granted cannot be manufactured or sold in India by other than the patent holder and its assignees and licensees. This will result in a reduction of the new product introductions in India, as well as other countries where similar legislation has been introduced, for all Indian pharmaceutical companies engaged in the development and marketing of generic finished dosages and APIs. Processes for the manufacture of APIs and formulations were patentable in India even prior to the Amendment, so no additional impact is anticipated from patenting of such processes.

The biotechnology sector in India is governed by the guidelines and rules formulated by the Department of Biotechnology (“DBT”), under the Indian Government’s Ministry of Science and Technology. The guidelines cover the entire requirements of various other related ministries/statutory departments of the Government of India.

A business which intends to manufacture and market biotechnology products is required to form an Institutional Bio Safety Committee (“IBSC”) consisting of internal experts on related fields as well as a nominee of the DBT and Central Pollution Control Board (“CPCB”). The IBSC reviews, verifies and approves the product application before submitting it to the Review Committee of Genetic Manipulation (“RCGM”) under the Indian Government’s Ministry of Science and Technology. The RCGM verifies and approves all the data included in the application including the protocol and final reports on animal toxicity and human clinical trials.

Once clearance is obtained from the RCGM, the business is required to obtain clearance from the Genetic Engineering Approval Committee (“GEAC”) under the Ministry of Environment and Forest, Government of India. The GEAC forwards its recommendation to the DBT and DCGI. Upon receipt of a “No Objection Certificate” from the Drugs Controller General of India (“DCGI”), the business is required to obtain a manufacturing license from the State Drugs Authority and, thereafter, can commence commercial marketing.

We are making required investments for scaling up our manufacturing infrastructure and enhancing our development capabilities to leverage the global opportunity available in biogenerics.

Active Pharmaceutical Ingredients and Intermediates Segment

Our active pharmaceutical ingredients and intermediates business contributed 23.6% of our total revenues for fiscal 2008. Active pharmaceutical ingredients are the principal ingredients for finished dosages and are also known as bulk actives or bulk drugs. Active pharmaceutical ingredients become formulations when the dosage is prepared for human consumption in the form of a tablet, capsule or liquid using additional inactive ingredients. Intermediates are the compounds from which active pharmaceutical ingredients are prepared. We produce and market more than 100 different active pharmaceutical ingredients and intermediates in several markets. We export active pharmaceutical ingredients to emerging as well as developed markets covering 78 countries. Our principal markets in this business segment include North America and Europe, which together contributed 40.8% of this segment’s revenues. Our active pharmaceutical ingredients and intermediates business is operated independently from our formulations and generics businesses and, in addition to supplying API to our formulations and generics businesses, we sell APIs to third parties for use in creating generic products, subject to any patent rights of other third parties. Our active pharmaceutical ingredients business also manufactures and supplies all of the API required in our custom pharmaceutical services business. The research and development group within the active pharmaceutical ingredients and intermediates segment contributes to our business by creating intellectual property (principally with respect to novel and non-infringing manufacturing processes and intermediates), providing research intended to reduce the cost of production of our products and developing approximately 15-20 new products every year.

The following table sets forth active pharmaceutical ingredients and intermediates revenues by geographic area for fiscal 2006, 2007 and 2008, respectively:


	Fiscal Year Ended March 31,
	2006					2007					2008
	Revenues		% Total(1)			Revenues		% Total(1)			Revenues				% Total(1)
	(in millions)					(in millions)					(in millions)
	Rs.					Rs.					Rs.		U.S.$
Emerging markets
India		2,300.4		27.8	%		2,077.4		17.5	%		2,351.7		58.8		19.9	%
Bangladesh		265.7		3.2	%		155.0		1.3	%		183.6		4.6		1.6	%
Other countries		2,584.4		31.3	%		5,397.8		45.4	%		4,174.2		104.3		35.4	%

Total emerging markets		5,150.5		62.3	%		7,630.2		64.2	%		6,709.5		167.7		56.8	%

Developed markets
North America		1,655.0		20.0	%		2,029.7		17.1	%		2,288.6		57.2		19.4	%
Europe		1,420.9		17.2	%		2,116.8		17.8	%		2,520.7		63.0		21.4	%
Japan		41.1		0.5	%		106.3		0.9	%		286.0		7.1		2.4	%
Total developed markets		3,117.0		37.7	%		4,252.8		35.8	%		5,095.3		127.3		43.2	%

Total		8,267.5		100.0	%		11,883.0		100.0	%		11,804.8		295.0		100.0	%


(1)		Refers to our revenues from API sales in the applicable country expressed as a percentage of our total revenues from API sales throughout the world.

The following table sets forth the sales of our key active pharmaceutical ingredients and intermediates for fiscal 2006, 2007 and 2008, respectively:


			Fiscal Year Ended March 31,
			2006					2007					2008
Product	Category	Sub-Category	Revenues		% Total(1)			Revenues		% Total(1)			Revenues		U.S.$		% Total(1)
			(in millions)
Finasteride	Prostatic inhibition	Benign prostatic hyperplasia		98.3		1.2	%		580.8		4.9	%		952.3		23.7		8.1	%
Ramipril	Cardiovascular	Anti-hypertensive		642.5		7.8	%		760.7		6.4	%		933.2		23.3		7.9	%
Ciprofloxacin Hcl	Anti-infective	Anti-bacterial		778.5		9.5	%		739.6		6.3	%		818.3		20.4		6.9	%
Olanzapine	Neurophychiatry	Schizophernia		82.5		1.0	%		156.6		1.3	%		721.3		18.0		6.1	%
Clopidogrel	Cardiovascular	Anti-platelet agent		139.9		1.7	%		384.2		3.2	%		681.5		17.0		5.8	%
Naproxen	Pain management	Anti-inflammatory		375.0		4.6	%		408.0		3.4	%		636.7		15.9		5.4	%
Sertraline hydrochloride	Cardiovascular	Anti-hypertensive		494.1		6.0	%		2,461.5		20.8	%		600.9		15.0		5.1	%
Ranitidine HCl	Gastro-intestinal	Anti-ulcerant		552.8		6.7	%		523.5		4.4	%		553.3		13.8		4.7	%
Terbinafine HCl	Anti-infective	Anti-fungal		537.2		6.5	%		483.9		4.1	%		457.4		11.4		3.9	%

Amlodipine besylate	Cardiovascular	Anti-hypertensive		40.9		0.5	%		83.0		0.7	%		403.8		10.1		3.4	%
Nizatidine	Gastro-intestinal	Anti-ulcerant		160.9		2.0	%		223.6		1.9	%		381.0		9.5		3.2	%
Montelukast	Respiratory	Anti-allergic		241.1		2.9	%		285.2		2.4	%		319.1		8.0		2.7	%
Losartan potassium	Cardiovascular	Anti-hypertensive		172.7		2.1	%		234.4		2.0	%		315.8		7.9		2.7	%
Ibuprofen	Pain management	Analgesic		502.3		6.1	%		328.9		2.8	%		304.8		7.6		2.6	%
Naproxen sodium	Pain management	Anti-inflammatory		380.4		4.6	%		521.2		4.4	%		268.1		6.7		2.3	%


(1)		Refers to our revenues from key API sales expressed as a percentage of our total API revenues.

Sales, Marketing and Distribution

Emerging Markets. India is an important emerging market, contributing 19.9% to the segment’s revenues in fiscal 2008. In India, we market our active pharmaceutical ingredients to Indian and multinational companies who are also our competitors in our formulations segment.

In India, our top six products are ciprofloxacin, ranitidine, clopidogrel, ramipril, losartan potassium and fexofenadine. The market in India is highly competitive with severe pricing pressure and competition from cheaper Chinese imports in several products.

In India, our sales team works closely with our sales agents to market our products. We market our products through these sales agents, commonly referred to as “indenting agents,” with a focus on regional sales and marketing. The sales are made directly from the factory and to a limited extent through clearing and forwarding agents. Distribution through clearing and forwarding agents is done to give better service to the customer.

Our sales to other emerging markets were Rs.4,357.8 million for fiscal 2008. Our other key emerging markets include Israel, Turkey, South Korea, Mexico, Brazil, Bangladesh, Hong Kong, Argentina, Jordan, China, Saudi Arabia, Poland, Indonesia, Egypt, Pakistan, Japan, Thailand, Peru and Chile. While we work through our agents in these markets, our zonal marketing managers also interact directly with our key customers in order to service their requirements. Our strategy is to build relationships with top customers in each of these markets and partner with them in product launches by providing timely technical and analytical support.

Developed Markets. Our principal markets are North America and Europe. In the United States and Europe, over the next five years, a large number of products are expected to lose patent protection, providing growth opportunities for our active pharmaceutical ingredients and intermediates business. We have been marketing APIs in the United States for over a decade. We market through our subsidiaries in the United States and Europe. These subsidiaries are engaged in all aspects of marketing activity and support our customers’ pursuit of regulatory approval for their products focusing on building long-term relationships with the customers.

We filed 54 Drug Master Files (“DMF”) in fiscal 2008: 23 were filed in the United States, nine in Canada, 13 in Europe and nine in other countries. With these filings, we have filed a total of 127 U.S. DMFs through March 31, 2008. Including the U.S. filings, as of March 31, 2008 we have filed a total of 281DMFs worldwide: 49 filings in Canada, 64 filings in Europe and 41 filings in other countries. For most of these, we are either already supplying commercial quantities or development quantities of API to various generic formulators.

Manufacturing and Raw Materials

We have seven facilities for the manufacture of our APIs. Six of these facilities have been inspected by the U.S. FDA and follow cGMP. All of these facilities are situated in the state of Andhra Pradesh, India. Six of these facilities have ISO 9001 certification, which is valid until December 5, 2009, at which time we will be reinspected. With over 650 reactors of different sizes offering 2.3 million litres of reaction volume annually, we have the flexibility to produce quantities that range from a few kilograms to several metric tons. The manufacturing process consumes a wide variety of raw materials that we obtain from sources that comply with the requirements of regulatory authorities in the markets to which we supply our products. We procure raw materials on the basis of our requirement planning cycles. We utilize a broad base of suppliers in order to minimize risk arising from dependence on a single supplier. Our formulations and generics businesses source approximately 70.4% and 70.9%, respectively, of their API purchases from our active pharmaceutical ingredients and intermediates segment. We also outsource the manufacturing of some of our APIs to third-party manufacturers. The active pharmaceutical ingredients and intermediates segment also sources several APIs from third party suppliers for the emerging markets to optimally utilize the in-house manufacturing capacities for the developed markets, which are more profitable relative to the emerging markets. During fiscal 2008, 5.0% of our total revenues resulted from sale of APIs procured from third-party suppliers. We maintain stringent quality controls when procuring materials from third-party suppliers.

Competition

The global API market can broadly be divided into regulated and less regulated markets. The less regulated markets offer low entry barriers in terms of regulatory requirements and intellectual property rights. The regulated markets, like the United States and Europe, have high entry barriers in terms of intellectual property rights and regulatory requirements, including facility approvals. As a result, there is a premium for quality and regulatory compliance along with relatively greater stability for both volumes and prices.

During fiscal 2008, the competitive environment for the API industry underwent significant changes. These changes included increasing consolidation in the global generics industry and vertical integration of some key generic pharmaceutical companies.

As an API supplier, we compete with a number of manufacturers within and outside India, which vary in size. Our main competitors in this segment are Hetero Drugs Limited, Divi’s Laboratories Limited, Shasun Chemicals and Drugs Limited, Aurobindo Pharma Limited, Ranbaxy Laboratories Limited, Cipla Limited, Matrix Laboratories Limited, Sun Pharmaceutical Industries Limited and MSN Laboratories Limited, all based in India. In addition, we experience competition from European and Chinese manufacturers, as well as from Teva Pharmaceuticals Industries Limited, based in Israel.

Government regulations

All pharmaceutical companies that manufacture and market products in India are subject to various national and state laws and regulations, which principally include the Drugs and Cosmetics Act, 1940, the Drugs (Prices Control) Order, 1995, various environmental laws, labor laws and other government statutes and regulations. These regulations govern the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of pharmaceutical products.

In India, manufacturing licenses for drugs and pharmaceuticals are generally issued by state drug authorities. Under the Drugs and Cosmetics Act, 1940, the state drug administrations are empowered to issue manufacturing licenses for drugs if they are approved for marketing in India by the DCGI. Prior to granting licenses for any new drugs or combinations of new drugs, the DCGI clearance has to be obtained in accordance with the Drugs and Cosmetics Act, 1940.

Our active pharmaceutical ingredients and intermediates segment is subject to a number of government regulations with respect to pricing and patents as discussed above under our formulations segment.

We submit a DMF for active pharmaceutical ingredients to be commercialized in the United States. Any drug product for which an Abbreviated New Drug Application (“ANDA”) is being filed must have a DMF in place with respect to a particular supplier supplying the underlying active pharmaceutical ingredient. The manufacturing facilities are inspected by the U.S. FDA to assess cGMP compliance. The manufacturing facilities and production procedures utilized at the manufacturing facilities must meet U.S. FDA standards before products may be exported to the United States. Six of our manufacturing facilities have been inspected by the U.S. FDA and found “Acceptable.” For European markets, we submit a European DMF and, where applicable, obtain a certificate of suitability from the European Directorate for the Quality of Medicines.

Generics Segment

Generic drugs are the chemical and therapeutic equivalents of reference brand drugs, typically sold under their generic chemical names at prices below those of their brand drug equivalents. Generic drugs are finished pharmaceutical products ready for consumption by the patient. Our generic products are marketed principally in North America and Europe. These drugs are required to meet governmental standards that are similar to those applicable to their brand-name equivalents and must receive regulatory approval prior to their sale in any given country.

Our generics operations started in the second half of fiscal 2001. This segment accounted for 35.6% of our total revenues for fiscal 2008, contributing Rs.17,781.5 million. In fiscal 2008, revenues in this segment were Rs.9,714.9 million from sales in Europe, Rs.8,024.3 million from sales in North America and Rs.42.3 million from sales in the rest of the world.

The following table sets forth the sales of our principal generics finished dosages for fiscal 2006, 2007 and 2008, respectively.


			Fiscal Year Ended March 31,
			2006					2007					2008
	Therapeutic	Therapeutic	Revenues		%			Revenues		%			Revenues		Revenues		%
Region / Product	Category	Sub-Category	(Rs. millions)		Total(1)(2)			(Rs. millions)		Total(1)			(Rs. millions)		(U.S.$ millions)		Total(1)
North America
Fluoxetine capsules	Central nervous system	Anti-psychotic	Rs.	373.8		9.2	%	Rs.	249.8		0.8	%	Rs.	363.3	U.S.$	9.1		2.0	%
Ibuprofen tablets	Pain management	Analgesic		235.1		5.8			86.1		0.3			22.0		0.6		0.1
Ranitidine tablets	Gastro-intestinal	Anti-ulcerant		225.9		5.6			206.0		0.6			206.3		5.2		1.2
Famotidine tablets	Gastro-intestinal	Anti-ulcerant		156.1		3.8			172.1		0.5			99.9		2.5		0.6
Citalopram tablets	Central nervous system	Anti-psychotic		143.4		3.5			289.9		0.9			365.6		9.1		2.1
Ciproflaxacin tablets	Anti-infective	Anti-bacterial		135.3		3.3			259.5		0.8			242.1		6.0		1.4
Tizanidine tablets	Spasticity	Muscle relaxant		62.8		1.5			108.7		0.3			89.5		2.2		0.5
Ranitidine capsules	Alimentary tract	Stomach ulcer		27.9		0.7			36.1		0.1			21.8		0.5		0.1
Simvastatin AG	Cardiovascular	Cholesterol regulator		—		—			13,899.4		41.8			253.7		6.3		3.5
Ondansetron	Gastro-intestinal	Antiemetic antinausient solids		—		—			2,890.1		8.7			480.1		12.0		2.7
Fexofinadine	Respiratory	Antihistamine systemic		—		—			2,429.3		7.3			2,181.9		54.5		12.3
Finasteride AG	Urology	Benign prostate hyperlesian		—		—			1,913.6		5.8			1,720.9		43.0		9.7
Pravastatin	Cardiovascular	Statins		—		—			158.2		0.5			174.8		4.4		1.0
Simvastatin	Cardiovascular	Cholesterol regulator		—		—			164.3		0.5			729.9		18.2		4.1
Carvedilol	Cardiovascular	Cholesterol regulator		—		—			—		—			111.7		2.8		0.6
Finasteride	Urology	Benign prostate hyperlesian		—		—			—		—			91.8		2.3		0.5
Omeprazole	Gastro-intestinal	Anti-ulcerant		—		—			—		—			90.2		2.3		0.5

Total				1,360.3		33.5			22,863.1		68.8			7,245.4		181.0		43.4


Europe
Simvastatin	Cardiovascular	Cholestrol regulator		119.0		2.9			1,370.6		4.1			1,265.4		31.6		7.1.3
Omeprazole	Gastro- Intestinal	Anti-ulcerant		786.3		19.4			976.6		2.9			899.8		22.5		5.1.1
Alendronate	Women’s health	Bone calcium regulator		21.5		0.5			676.2		2.0			465.3		11.6		2.6.7
Amlodipine	Cardiovascular	Anti-hypertensive		371.5		9.2			525.1		1.6			531.7		13.3		3.0.0
Oxycodon	Central Nervous System	Narcotic Analgesic												362.8		9.1		2.0.1

Total			Rs.	1,298.3		32.0	%	Rs.	3,548.5		10.7	%	Rs.	3,525.0	U.S.$	88.1		19.8.1


(1)		Refers to our revenues from generics sales in the applicable region expressed as a percentage of our total revenues from generics sales throughout the world.

Generic drugs may be manufactured and marketed only if relevant patents on their brand name equivalents and any additional government-mandated market exclusivity periods have expired, been challenged and invalidated, or otherwise validly circumvented.

Generic pharmaceutical sales have increased significantly in recent years, due in part to an increased awareness and acceptance among consumers, physicians and pharmacists that generic drugs are the equivalent of brand-name drugs. Among the factors contributing to this increased awareness are the passage of legislation permitting or encouraging substitution and the publication by regulatory authorities of lists of equivalent drugs, which provide physicians and pharmacists with generic drug alternatives. In addition, various government agencies and many private managed care or insurance programs encourage the substitution of generic drugs for brand-name pharmaceuticals as a cost-savings measure in the purchase of, or reimbursement for, prescription drugs. We believe that these factors, together with the large volume of branded products losing patent protection over the coming years, should lead to continued expansion of the generic pharmaceuticals market as a whole. We intend to capitalize on the opportunities resulting from this expansion of the market by leveraging our product development capabilities, manufacturing capacities inspected by various international regulatory agencies and access to our own APIs, which offer significant supply chain efficiencies.

Through the coordinated efforts of our teams in the United States, Europe and India, we constantly seek to expand our pipeline of generic products. In fiscal 2008, we filed 19 ANDAs including 10 Paragraph IV filings with the U.S. FDA. In fiscal 2008, the U.S. FDA granted 13 final ANDA approvals and seven tentative approvals. In addition, in fiscal 2008, we filed nine Marketing Authorization Applications (“MAAs”) in Europe. During the fiscal 2008, we received seven product approvals in the United Kingdom, one in Italy and one in Spain. In addition, we obtained 54 marketing authorizations in Germany for products in varying dosage strengths.

During fiscal 2005, we entered into an agreement with I-VEN Pharma Capital Limited (“I-VEN”) for the joint development and commercialization of generic drug products for the U.S. markets. The agreement gives I-VEN the right to fund up to fifty percent of the project costs (development, registration and legal costs) related to these products and the related U.S. Abbreviated New Drug Applications (“ANDA”). Under this agreement, we received Rs.985.4 million in March 2005 which were applied, in part to our research and development costs for the fiscal years 2005, 2006 and 2007. During fiscal 2007, we signed an amendment to the agreement with I-VEN to reflect a change in the product portfolio and the royalty rate.

Sales, Marketing and Distribution Network

North America. Dr. Reddy’s Laboratories, Inc., our wholly-owned subsidiary in the United States, is engaged in the marketing of our generic products in North America. In early 2003, we commenced sales of generic products under our own label. We have our own sales and marketing team to market these generic products. During fiscal 2008, we launched carvedilol tablets, meprobamate tablets, omeprazole, finasteride, ceterizine OTC, ranitidine OTC, zolpidem tablets, terbinafine and ciprofloxacin ER tablets. Key account representatives for generic products call on purchasing agents for chain drug stores, drug wholesalers, health maintenance organizations and pharmacy buying groups.

In January 2006, we entered into an agreement with Merck & Co., Inc. allowing us to distribute and sell generic versions of finasteride and simvastatin (sold by Merck under the brand names Proscar^® and Zocor^®), upon the expiration of Merck’s patents covered by these products, provided that some other company obtains 180-day exclusivity after the expiration of the patents for either product. Subsequently, the patents for both of these products expired and other companies obtained 180-day exclusivity. Accordingly, we launched sales of these products on June 19, 2006 and June 23, 2006, respectively. After expiration of the period of exclusivity, we continue to distribute and sell these products, and in fiscal 2008 we earned revenue of Rs 1,974.6 million from sales of these products.

On March 13, 2006, we acquired trademark rights to three off-patent products, along with all the physical inventories of the products, from PDL Biopharma, Inc (“PDL”) for a total consideration of Rs.122.7 million. PDL was a company focused on the development and commercialization of novel therapies for treatment of inflammation and autoimmune diseases, acute cardiac conditions and cancer. As a result of the acquisition, we acquired an opportunity to sell these products using their existing brand names through our generics sales and marketing network. In the twelve months ended March 31, 2008, we earned revenue of Rs.151 million from sales of these products.

In 2001, we entered into a profit sharing marketing alliance with Par Pharmaceuticals, Inc. to market certain prescription generic formulations, none of which are over-the-counter products. As of March 31, 2008, we marketed six generic products through Par Pharmaceuticals, Inc.

We formerly marketed generic versions of famotidine (Pepcid^®) tablets, ranitidine (Zantac^®) tablets and naproxen sodium (Aleve^®) tablets/caplets, through Leiner Health Products, LLC (“Leiner”). In 2002, we entered into a 15-year exclusive agreement with Leiner to market these and additional OTC products in the United States pursuant to which we launched our first new OTC product under this agreement, ibuprofen/pseudoephedrine, during fiscal 2007. However, we terminated our OTC product agreements with Leiner on April 18, 2007. This action was taken by us after receiving notice that, on March 16, 2007, Leiner had been served with a list of inspection observations on a Form 483 from the U.S. FDA and, in response thereto, on March 20, 2007, had suspended all of its packaging, production and distribution of over-the-counter products manufactured, packaged or tested at its facilities in the United States. Under terms of the agreement, we had provided Leiner with supplies of API to produce OTC products as well as finished dosage tablets with the rights to market certain of our OTC products under development. In fiscal 2008, we launched our own OTC products division and successfully introduced ranitidine 150mg OTC in September 2007 and cetirizine 10mg OTC in January 2008.

During fiscal 2008, we have also initiated the supply to U.S. governmental agencies of veteran affairs and department of defense. As a result of this, we have become an authorized supplier to the U.S. government. The first product to be supplied is finasteride 5 mg.

In Canada, in fiscal 2002, we entered into a profit sharing arrangement with Cobalt Pharmaceuticals Inc. and Pharmascience Inc. to market certain of our generic products.

United Kingdom. Dr. Reddy’s Laboratories (U.K.) Limited, which we acquired in fiscal 2003, is engaged in the marketing of our generic products in the United Kingdom and other European Union countries. We currently market approximately 26 generic products representing over 87 dosage strengths. New product launches in fiscal 2008 included the generic versions of finasteride and risperidone. We also seek to expand our presence to the other European countries either directly or through strategic alliances.

Germany. In March 2006, we acquired 100% of beta Holding GmbH (“betapharm”) from 3i Group plc, a European private equity house. This acquisition allowed us to enter the German generics market. During fiscal 2008, the German pharmaceutical market underwent a significant change. The new healthcare reform (the Statutory Health Insurance — Competition Strengthening Act or Wettbewerbsstärkungsgesetz (“GKV – WSG”) (an act to strengthen the competition in public health insurance) which was effective as of April 1, 2007, has significantly increased the power of insurance companies and statutory health insurance funds (“SHI funds”) to influence dispensing of medicines. Pursuant to the new law, pharmaceutical products covered by rebate contracts with insurance companies have to be prescribed by physicians and dispensed by pharmacies. This has increased the power of insurance funds. As a result, several SHIs have entered into rebate contracts with pharmaceutical companies, which has caused pressure on margins. Allgemeinen Ortsrankenkassen (“AOK”) one of the largest SHI funds with 18.2 million members and a further 7 million dependents ,covering around 40% of the market, sought tender from pharmaceutical companies. However due to legal issues the tender has been cancelled. Regardless of the legal dispute, AOK has been able to sign the binding contracts for approximately 23 products with several companies for next two years.

betapharm has been a pioneer in partnering with SHI funds since 2005 and has a large number of contracts with major SHI funds. Traditionally these contracts had the elements of basic rebate and incremental rebates on additional prescriptions generated through these SHI funds. Since the new healthcare reforms, the SHI funds have been aggressive in negotiating rebates for their contracts. Consequently in the recent months they have negotiated higher discounts.

Through our national German sales force, we sell a broad and diversified range of generic pharmaceutical products, under the “beta” brand. The sales force targets primary care physicians and pharmacists and the key account management team targets insurance companies, various doctors and pharmacist associations. These efforts are supported by a direct marketing team and an active public relations program. Value-added services provided by the beta institut gemeinnützige GmbH, also known as the beta Institute for Sociomedical Research, are fully integrated into the sales and marketing effort and provide a unique differentiation point for our sales calls. The beta Institute for Sociomedical Research is a non-profit organization engaged in research and development in order to seek means of improving the healthcare process in ways which promote the psychological welfare of patients.

Our sales force promotes products to physicians and pharmacies by emphasizing product-specific factors, contracts with insurance companies, promoting our reputation and other promotional and customer relationship activities.

With the abovementioned discount contracts being effective, the long term changes in the structural framework conditions are ongoing. betapharm is in the process of a comprehensive restructuring of sales force. Negotiations have been recently concluded with Works Council of betapharm for implementation of social plan, which is aimed at reduction and re-organization of sale force to evolve a sustainable sales force structure to adapt to the current market situation.

Manufacturing and Raw Materials

As with formulations, generics are packaged in individual doses for consumption by the patient. In fiscal 2008, our generics segment procured 70.9% of its API requirements from our active pharmaceutical ingredients and intermediates segment.

For a majority of the products we sell in the United States and the United Kingdom, we manufacture our finished products at our plant in Bachupally, Andhra Pradesh, India. The facility in Andhra Pradesh, India is designed for the manufacture of tablets and hard gelatin capsules. We are also dependent on third parties for the supply of the inactive pharmaceutical ingredients used in our products.

For our manufacturing operations in India, we source most of the raw material requirements with respect to the active pharmaceutical ingredients internally from our active pharmaceutical ingredients and intermediates segment. We are required to identify the suppliers of all the raw materials for our products in the drug applications that we file with the U.S. FDA. If raw materials for a particular product become unavailable from an approved supplier specified in a drug application, we would be required to qualify a substitute supplier with the U.S. FDA, which would likely interrupt manufacturing of the affected product. To the extent practicable, we attempt to identify more than one supplier in each drug application. However, some raw materials are available only from a single source and, in some of our drug applications, only one supplier of raw materials has been identified, even in instances where multiple sources exist. In addition, we obtain a significant portion of our inactive pharmaceutical ingredients from foreign suppliers. Arrangements with international raw material suppliers are subject to, among other things, U.S. FDA regulations, various import duties and other government clearances.

Our facility in the United Kingdom is located at Beverley. This facility is designed for the packaging and warehousing of pharmaceutical products in a variety of dosage forms, including tablets, capsules, liquids and creams. The facility holds all relevant licenses and authorizations required to conduct all necessary activities, including the supply of materials for use in clinical studies. In addition, the quality systems for ensuring product quality planning and control are ISO 9000 accredited. We closed our other U.K. facility, which had been located at Battersea, in fiscal 2007. We transferred the manufacturing of most of the products manufactured at the Battersea facility to our facilities in India.

We have completed the expansion of our facility at Bachupally, Andhra Pradesh to manufacture tablets and capsules. We are in the process of expanding the manufacture and packing of pellet formulations. We have also established a facility to manufacture oral solid and injectable forms of cyto-toxic and hormonal formulations at a Special Economic Zone located in Visakhapatnam, India. After the commercialization of these products, the facility will cater to the requirements of our key markets for the concerned products.

In Germany, manufacturing of betapharm’s products is now partly through our facilities in Bachupally India and also outsourced to third party manufacturers. As of March 31, 2008, we have shifted manufacturing of nine key product groups to India. In fiscal 2009, we intend to continue such shifting of manufacturing of betapharm products to our facilities in India. The logistics services for storage and distribution in Germany is outsourced to a third party service provider.

Competition

Revenues and gross profit derived from the sales of generic pharmaceutical products are affected by certain regulatory and competitive factors. As patents and regulatory exclusivity for brand name products expire, the first off-patent manufacturer to receive regulatory approval for generic equivalents of such products is generally able to achieve significant market penetration. As competing off-patent manufacturers receive regulatory approvals on similar products, market share, revenues and gross profit typically decline, in some cases significantly. Accordingly, the level of market share, revenues and gross profit attributable to a particular generic product is normally related to the number of competitors in that product’s market and the timing of that product’s regulatory approval and launch, in relation to competing approvals and launches. Consequently, we must continue to develop and introduce new products in a timely and cost-effective manner to maintain our revenues and gross margins. In addition, the other competitive factors critical to this business include price, product quality, prompt delivery, customer service and reputation. Many of our competitors seek to participate in sales of generic products by, among other things, collaborating with other generic pharmaceutical companies or by marketing their own generic equivalent to their branded products. Our major competitors in the U.S. market include Ranbaxy Laboratories Limited, Teva Pharmaceutical Industries Limited, Barr Laboratories Inc., Mylan Laboratories Inc., Andrx Corporation, Watson Laboratories Inc., and Sandoz, a division of Novartis Pharma A.G.

Brand-name manufacturers have devised numerous strategies to delay competition from lower cost generic versions of their

products. One of these strategies is to change the dosage form or dosing regimen of the brand product prior to generic introduction, which may reduce the demand for the original dosage form as sought by a generic ANDA dossier applicant or create regulatory delays, sometimes significant, while the generic applicant, to the extent possible, amends its ANDA dossier to match the changes in the brand product. In many of these instances, the changes to the brand product may be protected by patent or data exclusivities, further delaying generic introduction. Another strategy is the launch by the innovator or its licensee of an “authorized generic” during the 180-day generic exclusivity period, resulting in two generic products competing for the market rather than just the product that obtained the generic exclusivity. This may result in reduced revenues for the generic company which has been awarded the generic exclusivity period. In January 2006, we entered into an agreement with Merck & Co., Inc., allowing us to distribute and sell generic versions of finasteride and simvastatin (sold by Merck under the brand names Proscar^® and Zocor^®), upon the expiration of Merck’s patents covered by these products, provided that some other company obtains 180-day exclusivity after the expiration of the patents for either product. Subsequently, the patents for both of these products expired and other companies obtained 180-day exclusivity. Accordingly, we launched sales of these products on June 19, 2006 and June 23, 2006, respectively.

In Germany, the companies with the largest generics market shares are losing their generics market shares to companies having rebate contracts with SHI funds. The top five generics companies (including their subsidiaries) in Germany hold an aggregate market share of approximately 52.3%, according to Insight Health’s NPI-Gx (Sales March 2008) report. Our key competitors within the German generics market include Sandoz (including its Hexal, Sandoz and 1A Pharma subsidiaries), a division of Novartis Pharma A.G., Ratiopharm GmbH and Stada Arzneimittel AG (including its Stada and Aliud subsidiaries).

With the discount contracts with SHI funds becoming effective, long term structural changes are ongoing in the German market. Some companies have decided to cut their sales force to reduce fixed costs; others still believe that sales representatives remain a useful differentiating factor in this fiercely competitive environment.

Government regulations

U.S. Regulatory Environment

All pharmaceutical manufacturers that sell products in the United States are subject to extensive regulation by the U.S. federal government, principally pursuant to the Federal Food, Drug and Cosmetic Act, the Hatch-Waxman Act, the Generic Drug Enforcement Act and other federal government statutes and regulations. These regulations govern or influence the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of products.

Our facilities and products are periodically inspected by the U.S. FDA, which has extensive enforcement powers over the activities of pharmaceutical manufacturers. Non-compliance with applicable requirements can result in fines, criminal penalties, civil injunction against shipment of products, recall and seizure of products, total or partial suspension of production, sale or import of products, refusal of the U.S. government to enter into supply contracts or to approve new drug applications and criminal prosecution. The U.S. FDA also has the authority to deny or revoke approvals of drug active ingredients and dosage forms and the power to halt the operations of non-complying manufacturers. Any failure by us to comply with applicable U.S. FDA policies and regulations could have a material adverse effect on the operations in our generics business.

U.S. FDA approval of an ANDA is required before a generic equivalent of an existing or referenced brand drug can be marketed. The ANDA process is abbreviated because when processing an ANDA, the U.S. FDA waives the requirement of conducting complete clinical studies, although it normally requires bio-availability and/or bio-equivalence studies. An ANDA may be submitted for a drug on the basis that it is the equivalent of a previously approved drug or, in the case of a new dosage form, is suitable for use for the indications specified.

An ANDA applicant in the United States is required to review the patents of the innovator listed in the U.S. FDA publication entitled Approved Drug Products with Therapeutic Equivalence Evaluations, popularly known as the “Orange Book,” and make an appropriate certification. There are several different types of certifications that can be made. A Paragraph IV filing is made when the ANDA applicant believes its product or the use of its product does not infringe on the innovator’s patents listed in the Orange Book or where the applicant believes that such patents are not valid or enforceable. The first generic company to file a Paragraph IV filing may be eligible to receive a six-month marketing exclusivity period from the date a court rules the patent is invalid or not infringed. A Paragraph III filing is made when the ANDA applicant does not intend to market its generic product until the patent expiration. A Paragraph II filing is made where the patent has already expired. A Paragraph I filing is made when the innovator has not submitted the required patent information for listing in the Orange Book. Another type of certification is made where a patent claims a method of

use, and the ANDA applicant’s proposed label does not claim that method of use. When an innovator has listed more than one patent in the Orange Book, the ANDA applicant must file separate certifications as to each patent. Generally, Paragraph IV and Paragraph III filings are made before the product goes off patent, and Paragraph II and Paragraph I filings are made after the patent has expired.

Before approving a product, the FDA also requires that our procedures and operations conform to Current Good Manufacturing Practice (“cGMP”) regulations, relating to good manufacturing practices as defined in the U.S. Code of Federal Regulations. We must follow cGMP regulations at all times during the manufacture of our products. We continue to spend significant time, money and effort in the areas of production and quality testing to help ensure full compliance with cGMP regulations.

The timing of final U.S. FDA approval of an ANDA depends on a variety of factors, including whether the applicant challenges any listed patents for the drug and whether the brand-name manufacturer is entitled to one or more statutory exclusivity periods, during which the U.S. FDA may be prohibited from accepting applications for, or approving, generic products. In certain circumstances, a regulatory exclusivity period can extend beyond the life of a patent, and thus block ANDAs from being approved on the patent expiration date. For example, in certain circumstances the U.S. FDA may now extend the exclusivity of a product by six months past the date of patent expiration if the manufacturer undertakes studies on the effect of their product in children, a so-called pediatric extension.

In June 2003, the U.S. FDA announced reforms in its generic drug review program with the goal of providing patients with greater and more predictable access to effective, low cost generic alternatives to brand name drugs.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act of 2003”) has modified certain provisions of the Hatch-Waxman Act. In particular, significant changes have been made to provisions governing 180-day exclusivity and forfeiture thereof. The new statutory provisions governing 180-day exclusivity may or may not apply to an ANDA, depending on whether the first Paragraph IV certification submitted by any applicant for the drug was submitted prior to the enactment of the Medicare Amendments on December 8, 2003.

Where the first Paragraph IV certification was submitted on or after December 8, 2003, the new statutory provisions apply. Under these provisions, 180-day exclusivity is awarded to each ANDA applicant submitting a Paragraph IV certification for the same drug with regard to any patent on the first day that any ANDA applicant submits a Paragraph IV certification for the same drug. The 180-day exclusivity period begins on the date of first commercial marketing of the drug by any of the first applicants. However, a first applicant may forfeit its exclusivity in a variety of ways, including, but not limited to (a) failure to obtain tentative approval within 30 months after the application is filed or (b) failure to market its drug by the later of two dates calculated as follows: (x) 75 days after approval or 30 months after submission of the ANDA, whichever comes first, or (y) 75 days after each patent for which the first applicant is qualified for 180-day exclusivity is either (1) the subject of a final court decision holding that the patent is invalid, not infringed, or unenforceable or (2) withdrawn from listing with the U.S. FDA (court decisions qualify if either the first applicant or any applicant with a tentative approval is a party; a final court decision is a decision by a court of appeals or a decision by a district court that is not appealed). The foregoing is an abbreviated summary of certain provisions of the Medicare Act, and accordingly it should be consulted for a complete understanding of both the provisions described above and other important provisions related to 180-day exclusivity and forfeiture thereof.

Where the first Paragraph IV certification was submitted prior to enactment of the Medicare Act, the statutory provisions governing 180-day exclusivity prior to the Medicare Act still apply. The U.S. FDA interprets these statutory provisions to award 180-day exclusivity to each ANDA applicant submitting a Paragraph IV certification for the same drug on the same day with regard to the same patent on the first day that any ANDA applicant submits a Paragraph IV certification for the same drug with regard to the same patent. The 180-day exclusivity period begins on the date of first commercial marketing of the drug by any of the first applicants or on the date of a final court decision holding that the patent is invalid, not infringed, or unenforceable, whichever comes first. A final court decision is a decision by a court of appeals or a decision by a district court that is not appealed.

European Union Regulatory Environment

The activities of pharmaceutical companies within the European Union are governed by Directive 2001/83EC as amended. This Directive outlines the legislative framework, including the legal basis of approval, specific licensing procedures, and quality standards including manufacture, patient information and pharmaco-vigilance activities.

Our U.K. facilities are licensed and periodically inspected by the U.K. MHRA Inspectorate, which has extensive enforcement powers over the activities of pharmaceutical manufacturers. Non-compliance can result in product recall and closure. In addition, the

U.K. MHRA Inspectorate has approved and periodically inspected our manufacturing facility based in Andhra Pradesh, India for the manufacture of generic tablets and capsules for supply to Europe.

All pharmaceutical companies that manufacture and market products in Germany are subject to the rules and regulations defined by the German drug regulator, the Bundesinstitut für Arzneimittel und Medizinprodukte (“BfArM”) and the Federal Drug Authorities. All the licensed facilities of pharmaceutical companies in Germany are periodically inspected by the Federal Drug Authorities, which has extensive enforcement powers over the activities of pharmaceutical companies. Non-compliance can result in closure of the facility.

Prior approval of a Marketing Authorization is required to supply products within the European Union. Such Marketing Authorizations may be restricted to one member state then recognized in other member states or can cover the whole of the European Union, depending upon the form of registration elected. In Germany, Marketing Authorizations have to be submitted for approval to the BfArM.

Generic or abridged applications omit full non-clinical and clinical data but contain limited non-clinical and clinical data, depending upon the legal basis of the application or to address a specific issue. The majority of our generic applications are made on the basis of essential similarity although other criteria may be applied. In the case of an essentially similar application, the applicant is required to demonstrate that its generic product contains the same active pharmaceutical ingredients in the same dosage form for the same indication as the innovator product. Specific data is included in the application to demonstrate that the proposed generic product is essentially similar to the innovator product with respect to quality, safe usage and continued efficacy. The applicant is also required to demonstrate bioequivalence with the reference product. Once all these criteria are met then a Marketing Authorization may be considered for grant.

Unlike in the United States, there is no regulatory mechanism within the European Union to challenge any patent protection. Nor is any period of market exclusivity conferred upon the first generic approval. In situations where the period of exclusivity given to the branded product expires before their patent expires, the launch of our product would then be delayed until patent expiration.

In Germany, the government is currently focused on reducing health care spending. During fiscal 2007, the German government passed the Economic Optimization of Pharmaceutical Care Act (“Arzneimittelversorgungs-Wirtschaftlichkeisgestz” or “AVWG”) which became effective as of May 1, 2006, which is designed to contain increased pharmaceutical costs. The AVWG’s provisions include, among other things: prohibitions on the provision of free goods to health professionals (including wholesalers, pharmacists, medical institutions, physicians etc.); limitations on the payment of rebates to wholesalers and pharmacists; prohibitions on price increases for medicinal products prior to March 31, 2008; implementation of additional mandatory rebates of 10% if pharmaceutical prices are not 30% below the reference prices as published by the Federal Associations of Healthcare Insurance funds; and empowering the statutory health insurance funds to waive copayments by patients. Due to the AVWG, insurance companies operating in Germany have the power to influence prices, and they have done so by releasing several products from co-payment.

Further, the government passed a new healthcare reform, the Statutory Health Insurance - Competition Strengthening Act or Wettbewerbsstärkungsgesetz (“WSG”), which became effective as of April 1, 2007. Highlights of this new act are:

	•		private insurance funds cannot refuse to provide health insurance to anyone who is without private health insurance coverage or who wants to switch from the public system; for these patients, private insurance funds need to offer basic rates in the future;

	•		insurance funds are encouraged to enter into contracts with doctors, pharmacies and the pharmaceutical industry designed to lower the costs for the supply of patients with medicinal products (e.g., rebate agreements with the pharmaceutical industry and pharmacists) and integrating different fields of care to lower medical treatment costs.;

	•		insurance funds can cause drugs that are covered by rebate contracts with the pharmaceutical industry to be exempt from co-payments by patients;

	•		in filling prescriptions, pharmacists are required to give preference to drugs subject to rebates, unless the physician has explicitly excluded replacement of the prescribed drug;

	•		rebated medicinal products might, depending on individual agreements with physicians, be exempted from individual prescribing limits of the physicians (in Germany, physicians are given prescribing limits by insurance funds based on their

			number of patients, and if those limits are exceeded, the physicians can be penalized);

	•		patients included in integrated care routes (see above) shall preferably receive rebated medicinal products; and

	•		in making decisions pertaining to the prescription of drugs or filling of prescriptions, drugs will be evaluated not only from a benefit perspective but also from a cost perspective.

Canada and South Africa Regulatory Environment

In Canada and South Africa, we are required to file product dossiers with the particular country’s regulatory authority for permission to market the generic formulation. The regulatory authorities may inspect our manufacturing facility before approval of the dossier.

Drug Discovery Segment

Drug discovery is a key segment of our business. In this segment, we are actively pursuing discovery and development of new molecules, sometimes referred to as “New Chemical Entities” or “NCEs.” Our research programs focus on the following therapeutic areas:

	•		Metabolic disorders

	•		Cardiovascular disorders

	•		Bacterial infections

	•		Inflammation

	•		Cancer

Our research laboratories are based in Hyderabad, India and Atlanta, Georgia, U.S. As of March 31, 2008, we employed a total of 198 scientists, including approximately 40 scientists who held Ph.D. degrees. We pursue an integrated research strategy with our laboratories in the United States focusing on discovery of new molecular targets and designing of screening assays to screen for promising lead molecules followed by selection and optimization of lead molecules and further clinical development of those optimized leads at our laboratories in India. By establishing a research facility in the United States, we have better access to research scientists in the United States, enhancing our screening abilities for new molecular targets and access to high technology platforms.

While we continue to seek licensing and development arrangements with third parties to further develop our pipeline products, we also conduct clinical development of some of the candidate drugs ourselves where it is economically and technically feasible. Our long-term strategy for drug discovery is to increasingly undertake clinical testing ourselves, as we believe that this will enable us to derive higher value for our compounds. Our goal is to balance internal development of our own product candidates with in-licensing of promising compounds that complement our strengths. We also pursue licensing and joint development of some of our lead compounds with companies looking to implement their own product portfolio.

In September 2005, we entered into a co-development and commercialization agreement with Denmark based Rheoscience A/S for the joint development and commercialization of Balaglitazone (DRF 2593), a partial PPAR-gamma agonist, for the treatment of type 2 diabetes. Under the terms of the agreement, Rheoscience will fund all the costs associated with the Phase III clinical trials of DRF 2593 and we will pay Rheoscience a pre-determined amount towards its share of the development costs. Rheoscience has exclusive marketing rights in the European Union and China, and we have exclusive marketing rights in the rest of the world. Rheoscience is obligated to obtain all necessary regulatory approvals on our behalf in the United States. Upon receiving final approval from the U.S. FDA, we are obligated to make a pre-determined milestone payment to Rheoscience. The agreement is valid for a period of ten years from the date of commercialization. Under the terms of the agreement, if either party chooses to commercialize the product without the other, then the other party will be entitled to a milestone-based royalty on sales. However, if the parties choose to commercialize the product through a third party, then each of the parties is entitled to share a pre-determined percentage of the net proceeds of commercialization received. We also retain the right to supply clinical development and commercial quantities of the requisite active pharmaceutical ingredients on arms-length basis to the party that commercializes DRF 2593. DRF 2593 commenced Phase III clinical trials in August 2007, with such clinical trials scheduled to continue until middle of fiscal 2011.

In September 2005, we announced the formation of an integrated drug development company, Perlecan Pharma Private Limited (“Perlecan Pharma”), as a joint venture with Citigroup Venture Capital International Growth Partnership Mauritius Limited (“CVC”) and ICICI Venture Funds Management Company (“ICICI Venture”). The terms of the joint venture were amended in March 2006. Under the terms of the joint venture agreement, CVC and ICICI Venture each contributed Rs.1,018 million and we contributed Rs.170 million towards Perlecan’s initial equity capital. Furthermore, the agreement grants us the first right to conduct product development and clinical trials on behalf of Perlecan Pharma on an arm’s length basis, subject to the final decision by the board of directors of Perlecan Pharma. During fiscal 2007, we entered into a Research Services Agreement with Perlecan Pharma pursuant to which we provide Perlecan Pharma with clinical development support and services.

Perlecan Pharma has certain development rights with respect to additional NCE assets that we discover and we have certain commercialization rights with respect to products that Perlecan Pharma develops. In addition, as part of this arrangement, we transferred all rights and title, including the development and commercialization rights, of four NCE assets to Perlecan Pharma. As a result, we own approximately 14.31% of the equity of Perlecan Pharma and we have the right to designate three out of seven directors on the board of Perlecan Pharma. In addition, Perlecan Pharma has issued warrants to us to purchase 45,000,000 equity shares of Perlecan Pharma, the exercise of which is contingent upon the success of certain research and development milestones. If the warrants are fully exercised, then we will own approximately 62.5% of the equity shares of Perlecan Pharma. During fiscal 2007, Perlecan Pharma discontinued the development of DRL 11605. Perlecan Pharma is exploring out-licensing opportunities for DRF 10945 instead of developing it within Perlecan Pharma. Development of the remaining two molecules, RUS 3108 and DRL 16536, has been discontinued within Perlecan Pharma and back-up molecules are being researched.

In September 2006, we entered into an agreement with ClinTec International for the joint development of an anti-cancer compound, DRF 1042, belonging to the topoisomerase inhibitors class of compounds for use as potential treatment of various types of cancer. We have completed Phase I clinical trials for DRF 1042 in India. Under the terms of the agreement, we and ClinTec International will co-develop DRF 1042, undertaking Phase II and Phase III clinical trials, with the aim of securing U.S. FDA and EMEA approvals. ClinTec International is granted the commercialization rights for most of Europe, including major European markets, and we retain the commercialization rights for the rest of the world, including the United States. Upon commercialization of the product, we will receive a royalty on sales by ClinTec International in its designated territories and ClinTec International will receive a royalty on sales by us in the United States. In the event either party out-licenses the drug product, the proceeds from such an arrangement will be shared by both the parties in a pre-determined ratio (excluding the proceeds from out-licenses of the drug product to our territories outside the United States). We will also retain the exclusive, worldwide rights to supply commercial quantities of the drug product. During fiscal 2008, preclinical studies were carried out to confirm that the molecule was ready to begin Phase II clinical trial studies for solid tumors.

As part of our research program, we pursue collaborations with leading institutions and laboratories all over the world. We enter into these collaborations to utilize the expertise and facilities these institutions and laboratories provide. We have collaborated with the National Cancer Institute in Maryland, which is a part of the United States National Institutes of Health. In February 2006, we entered into an agreement with Argenta Discovery Limited (“Argenta”) for the joint development and commercialization of a novel approach to the treatment of Chronic Obstructive Pulmonary Disease (“COPD”). Under the terms of the agreement, the parties agreed to collaborate to identify clinical candidates from a certain class of our compounds for use as potential treatments for COPD. Both parties agreed to jointly develop the selected candidates from the pre-clinical stage up to Phase IIa (proof-of-concept). Upon successful completion of a Phase IIa trial, the parties may either license-out the candidate for further development and commercialization to a larger pharmaceutical company or continue the further co-development and commercialization themselves. We and Argenta have agreed to fund the joint collaboration up to proof-of-concept and share the development expenses equally and profits at a predetermined ratio. DRF 2546 was identified as candidate that could be developed for COPD, and Good Laboratory Practices toxicity studies are ongoing for this molecule.

In March 2008, we entered into an agreement with 7TM Pharma for drug discovery collaboration on selected drug targets. We will collaborate with 7TM Pharma to identify clinical candidates for pre-selected targets and will jointly develop these candidates from the pre-clinical stage up to Phase IIa (proof-of-concept). Upon successful completion of a Phase IIa trial, the parties may either license out the candidate for further development and commercialization to a larger pharmaceutical company or continue the further co-development and commercialization themselves. Denmark based 7TM Pharma is a biotech company focusing on discovery and development of new drugs targeting 7TM receptors. 7TM Pharma’s primary therapeutic area is metabolic diseases, including obesity, Type 2 diabetes and cardiovascular diseases.

Our investments into research and development of NCEs have been consistently focused towards developing promising therapeutics. In fiscal 2006, 2007 and 2008, we spent Rs.814.5 million, Rs.774.6 million and Rs.901.1, respectively, towards drug discovery activities. In fiscal 2006, 2007 and 2008, we received Rs.0, Rs.136.8 million and Rs.39.2 million in revenues, respectively, from our drug discovery segment activities.

The compounds currently under development in our pipeline include:


Compound	Therapeutic Area	Status	Development partner	Remarks
DRF 2593	Metabolic disorders	Phase III	Rheoscience	In Phase III clinical testing for type 2 diabetes

DRF 1042	Oncology	Phase I	ClinTec	Scheduled to enter Phase II clinical testing for solid tumors

COPD	Respiratory disorders	Pre-clinical Development	Argenta	Targeted for Chronic Obstructive Pulmonary Disease

Patents. The status of our patents filed and issued as of March 31, 2008 is summarized below:


Category	USPTO(1)		USPTO(1)		PCT(2)		India		India
	(Filed)		(Granted)		(Filed)		(Filed)		(Granted)
Anti-diabetic		74		44		60		116		38
Anti-cancer		17		8		14		45		14
Anti-bacterial		7		5		8		21		3
Anti-inflammation/Cardiovascular		34		12		18		15		1
Anti-ulcerant		1		1		—		1
Miscellaneous		4		1		3		23		8
TOTAL		137		71		103		221		64


(1)		“USPTO” means the United States Patent and Trademark Office.

(2)		“PCT” means the Patent Cooperation Treaty, an international treaty that facilitates foreign patent filings for residents of member countries when obtaining patents in other member countries.

Stages of Testing Development. The stages of testing required before a pharmaceutical product can be marketed in the United States are generally as follows:


Stage of Development		Description

Preclinical		Animal studies and laboratory tests to evaluate safety and efficacy, demonstrate activity of a product candidate and identify its chemical and physical properties.
Phase I		Clinical studies to test safety and pharmacokinetic profile of a drug in humans.
Phase II		Clinical studies conducted with groups of patients to determine preliminary efficacy, dosage and expanded evidence of safety.
Phase III		Larger scale clinical studies conducted in patients to provide sufficient data for statistical proof of efficacy and safety.

For ethical, scientific and legal reasons, animal studies are required in the discovery and safety evaluation of new medicines. Preclinical tests assess the potential safety and efficacy of a product candidate in animal models. The results of these studies must be submitted to the U.S. FDA as part of an Investigational New Drug (“IND”) application before human testing may proceed.

U.S. law further requires that studies conducted to support approval for product marketing be “adequate and well controlled.” In general, this means that either a placebo or a product already approved for the treatment of the disease or condition under study must

be used as a reference control. Studies must also be conducted in compliance with good clinical practice requirements, and adverse event and other reporting requirements must be followed.

The clinical trial process can take five to ten years or more to complete, and there can be no assurance that the data collected will be in compliance with good clinical practice regulations, will demonstrate that the product is safe or effective, or, in the case of a biologic product, pure and potent, or will provide sufficient data to support U.S. FDA approval of the product. The U.S. FDA may place clinical trials on hold at any point in this process if, among other reasons, it concludes that clinical subjects are being exposed to an unacceptable health risk. Trials may also be terminated by institutional review boards, who must review and approve all research involving human subjects. Side effects or adverse events that are reported during clinical trials can delay, impede, or prevent marketing authorization.

Competition

The pharmaceutical and biotechnology industries are highly competitive. We face intense competition from organizations such as large pharmaceutical companies, biotechnology companies and academic and research organizations. The major pharmaceutical organizations competing with us have greater capital resources, larger overall research and development staff and facilities and considerably more experience in drug development. Biotechnology companies competing with us may have these advantages as well. In addition to competition for collaborators and investors, these companies and institutions also compete with us in recruiting and retaining highly qualified scientific and management personnel.

Government regulations

Virtually all pharmaceutical and biologics products that we or our collaborative partners develop will require regulatory approval by governmental agencies prior to commercialization. The nature and extent to which these regulations apply varies depending on the nature of the products and also vary from country to country. In particular, human pharmaceutical products are subject to rigorous pre-clinical and clinical testing and other approval procedures by the relevant regulatory agency. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country.

In India, under the Drugs and Cosmetics Act, 1940, the regulation of the manufacture, sale and distribution of drugs is primarily the concern of the state authorities while the Central Drug Control Administration is responsible for approval of new drugs, clinical trials in the country, laying down the standards for drugs, control over the quality of imported drugs, coordination of the activities of state drug control organizations and providing expert advice with a view of bringing about the uniformity in the enforcement of the Drugs and Cosmetics Act, 1940.

For marketing a drug in the United States, we or our partners will be subject to regulatory requirements governing human clinical trials, marketing approval and post-marketing activities for pharmaceutical products and biologics. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record-keeping and marketing of these products. The process of obtaining these approvals and the subsequent compliance with applicable statutes and regulations is time consuming and requires substantial resources, and the approval outcome is uncertain.

Generally, in order to gain U.S. FDA approval, a company first must conduct pre-clinical studies in the laboratory and in animal models to gain preliminary information on a compound’s activity and to identify any safety problems. Pre-clinical studies must be conducted in accordance with U.S. FDA regulations. The results of these studies are submitted as part of an IND application that the U.S. FDA must review before human clinical trials of an investigational drug can start. If the U.S. FDA does not respond with any questions, a drug developer can commence clinical trials thirty days after the submission of an IND.

In order to eventually commercialize any products, we or our collaborator first will be required to sponsor and file an IND and will be responsible for initiating and overseeing the clinical studies to demonstrate the safety and efficacy that are necessary to obtain U.S. FDA marketing approval. Clinical trials are normally done in three phases and generally take several years, but may take longer to complete. The clinical trials have to be designed taking into account the applicable U.S. FDA guidelines. Furthermore, the U.S. FDA may suspend clinical trials at any time if the U.S. FDA believes that the subjects participating in trials are being exposed to unacceptable risks or if the U.S. FDA finds deficiencies in the conduct of the trials or other problems with our product under development.

After completion of clinical trials of a new product, U.S. FDA marketing approval must be obtained. If the product is classified as a new pharmaceutical, we or our collaborator will be required to file a New Drug Application (“NDA”), and receive approval before

commercial marketing of the drug. The testing and approval processes require substantial time and effort. NDAs submitted to the U.S. FDA can take several years to obtain approval and the U.S. FDA is not obligated to grant approval at all.

Even if U.S. FDA regulatory clearances are obtained, a marketed product is subject to continual review. If and when the U.S. FDA approves any of our or our collaborators’ products under development, the manufacture and marketing of these products will be subject to continuing regulation, including compliance with cGMP, adverse event reporting requirements and prohibitions on promoting a product for unapproved uses. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of pharmaceutical products.

Our research and development processes involve the controlled use of hazardous materials and controlled substances. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products.

Custom Pharmaceutical Services

Our Custom Pharmaceutical Services (“CPS”) segment markets process development and manufacturing services to customers primarily consisting of innovator pharmaceutical and biotechnology companies. This segment accounted for 9.6% of our total revenues for fiscal 2008, contributing Rs.4,817.6 million.

The CPS segment was established in 2001 to leverage our strength in process chemistry to serve the niche segment of the pharmaceutical and fine chemicals industry. Over the years, our CPS business strategy has evolved to focus on the marketing of process development and manufacturing services. The objective of our CPS segment is to be the preferred partner for innovator pharmaceutical companies, providing a complete range of services that are necessary to take their innovations to the market speedily and more efficiently. The focus is to leverage our skills in process development, analytical development, formulation development and cGMP manufacture to serve various needs of innovator pharmaceutical companies. We have positioned our CPS segment to be the partner of choice for large and emerging innovator companies across the globe, with service offerings spanning the entire value chain of pharmaceutical services.

Sales, Marketing and Distribution Network.

We have focused business development teams dedicated to our key geographies of North America, the European Union and Asia Pacific targeting large and emerging innovator companies to build long-term business relationships focused on catering to their outsourcing needs.

Manufacturing and Materials

Our CPS segment has well-resourced synthetic organic chemistry laboratories, analytical laboratories and kilo laboratories at our technology development centers at Miyapur and Jeedimetla in Hyderabad. We have added a new crystallisation laboratory which enhances our technical capability to study finishing stages of API manufacturing and process safety. Our chemists and engineers understand cGMP manufacturing and regulatory requirements for synthesis, manufacture and formulation of an NCE from pre-clinical stage to commercialization. With our increased focus on formulation development services, we now have facilities for pre-formulation and formulation development, analytical development, clinical trial supplies, pilot scale and product regulatory support. Larger quantities of APIs and intermediates are sourced internally from our API segment in India and from our plant in Mexico, which we acquired from Roche during fiscal 2006. In addition to manufacturing the active pharmaceutical ingredients naproxen and naproxen sodium and a range of intermediates, the Mexico facility synthesizes steroids for use in pharmaceutical and veterinary products. During fiscal 2008, in the first half, our Mexico business faced raw material constraints and as a result, we were not able to fully service the customer requirements. To address this, a manufacturing facility has been commissioned in India to supply the key ingredients.

Our CPS segment is uniquely positioned in the market where it utilizes assets (both in terms of its physical assets and know-how) of a vertically integrated pharmaceutical company and combines this with the service model built in the last few years.

Competition

Globally, the pharmaceutical manufacturing services industry is estimated to generate sales of U.S.$45 billion and is set to grow to sales of U.S.$70 billion by 2010. Contract manufacturing is a significant opportunity for Indian pharmaceutical companies based on their low-cost manufacturing infrastructure. Key competitors in India include Torrent Pharmaceuticals Limited, Shasun Chemicals & Drugs Limited, Divis’s Laboratories Limited, Matrix Laboratories Limited, Dishman Pharmaceuticals & Chemicals Limited, Syngene Limited, Jubilant Organosys Limited and Nicholas Piramal India Limited. Key competitors from outside India include Lonza Group Limited, Koninklijke DSM N.V., Albany Molecular Research, Inc., Patheon, Inc. and Cardinal Health, Inc. Our CPS segment distinguishes itself from its key competitors by offering a wider range of services spanning the entire pharmaceutical value chain.

Growth in contract manufacturing is likely to be driven by increasing outsourcing of late-stage and off-patent molecules by large pharmaceutical companies to compete with generics. India is emerging as an alliance and outsourcing destination of choice for global pharmaceutical companies. Companies such as Roche, Bayer, Aventis, Novartis, Eli Lilly and GlaxoSmithKline are all executing plans to make India the regional hub for API and supply of bulk drugs.

Government Regulations

The regulations applicable to our CPS segment are similar to those as discussed in our formulations, API and generics segments.

4.C. Organizational structure

Dr. Reddy’s Laboratories Limited is the parent company in our group. We had the following subsidiary companies where our direct and indirect ownership was more than 50% as of March 31, 2008:


		Percentage of Direct/
	Country of	Indirect Ownership
Name of Subsidiary	Incorporation	Interest
DRL Investments Limited	India	100%
Reddy Pharmaceuticals Hong Kong Limited	Hong Kong	100%
OOO JV Reddy Biomed Limited	Russia	100%
Reddy Antilles N.V.	Netherlands	100%
Reddy Netherlands B.V.	Netherlands	100%⁽¹⁾
Reddy US Therapeutics, Inc.	U.S.A.	100%⁽¹⁾
Dr. Reddy’s Laboratories, Inc.	U.S.A.	100%
Dr. Reddy’s Farmaceutica do Brasil Ltda	Brazil	100%
Cheminor Investments Limited	India	100%
Aurigene Discovery Technologies Limited	India	100%
Aurigene Discovery Technologies, Inc.	U.S.A.	100%⁽³⁾
Kunshan Rotam Reddy Pharmaceutical Co. Limited	China	51.33%⁽⁴⁾
Dr. Reddy’s Laboratories (EU) Limited	United Kingdom	100%
Dr. Reddy’s Laboratories (U.K.) Limited	United Kingdom	100%⁽⁵⁾
Dr. Reddy’s Laboratories (Proprietary) Limited	South Africa	60%
Reddy Cheminor S.A.	France	100%⁽²⁾
OOO Dr. Reddy’s Laboratories Limited	Russia	100%
Dr. Reddy’s Bio-sciences Limited	India	100%
Promius Pharma LLC (earlier Reddy Pharmaceuticals, LLC).	U.S.A.	100%⁽⁶⁾
Trigenesis Therapeutics, Inc.	U.S.A.	100%
Industrias Quimicas Falcon de Mexico, SA de CV	Mexico	100%
Reddy Holding GmbH	Germany	100%⁽⁷⁾
Lacock Holdings Limited	Cyprus	100%
betapharm Arzneimittel GmbH	Germany	100%⁽⁸⁾
beta Healthcare Solutions GmbH	Germany	100%⁽⁸⁾
beta institut fur sozialmedizinische Forschung und Entwicklung GmbH	Germany	100%⁽⁸⁾


		Percentage of Direct/
	Country of	Indirect Ownership
Name of Subsidiary	Incorporation	Interest
Reddy Pharma Iberia SA	Spain	100%
Reddy Pharma Italia SPA	Italy	100%⁽⁷⁾
Dr. Reddy’s Laboratories (Australia) Pty Ltd.	Australia	70%
Dr. Reddy’s Laboratories SA	Switzerland	100%
Eurobridge Consulting B.V.	Netherlands	100%⁽¹⁾
OOO DRS Limited	Russia	100%⁽⁹⁾
Aurigene Discovery Technologies(Malaysia) Sdn, Bhd	Malaysia	100%⁽³⁾
Affordable Healthcare Limited	New Zealand	100%⁽¹⁰⁾
Macred India Private Limited	India	100%
Dr. Reddy’s Laboratories Ilac Ticaret Limited	Turkey	100%


(1)		Indirectly owned through Reddy Antilles N.V.

(2)		Subsidiary under liquidation.

(3)		Indirectly owned through Aurigene Discovery Technologies Limited.

(4)		Kunshan Rotam Reddy is a subsidiary as we hold a 51.33% stake; however, we account for this investment by the equity method and do not consolidate it in our financial statements.

(5)		Indirectly owned through Dr. Reddy’s Laboratories (EU) Limited.

(6)		Indirectly owned through Dr. Reddy’s Laboratories Inc.

(7)		Indirectly owned through Lacock Holdings Limited.

(8)		Indirectly owned through Reddy Holding GmbH.

(9)		Indirectly owned through Eurobridge Consulting B.V.

(10)		Indirectly owned through Dr. Reddy’s Laboratories SA.

4.D. Property, plants and equipment

The following table sets forth current information relating to our principal facilities:


	Approximate		Built up			Installed	Actual
Location	Area		Area		Certification	Capacity	Production
	(Square feet)		(Square feet)
Formulations						3,440 (6)(7)	4,062 (6)
Bollaram, Andhra Pradesh, India		217,729		103,894	(1)
Bachupally, Andhra Pradesh, India		1,306,372		357,909	(2)
Yanam, Pondicherry, India		457,000		26,226	None
Baddi, Himachal Pradesh, India		765,542		247,028	None
Bachupally, Andhra Pradesh, India		798,982		132,436	(1)	13,852 (9)	3,697 (9)

Active Pharmaceutical Ingredients & Intermediates						3,901 (8)	3,453 (8)
Bollaram, Andhra Pradesh, India		734,013		191,558	U.S. FDA and EuGMP
Bollaram, Andhra Pradesh, India		648,173		286,193	U.S. FDA and EuGMP
Bollaram, Andhra Pradesh, India		285,235		210,630	U.S. FDA and EuGMP
Jeedimetla, Andhra Pradesh, India		228,033		101,474	U.S. FDA and EuGMP
Miryalaguda, Andhra Pradesh, India		2,787,840		409,553	U.S. FDA and EuGMP
Pydibheemavaram, Andhra Pradesh, India		8,523,466		905,612	U.S. FDA and EuGMP
Pydibheemavaram, Andhra Pradesh, India (4)		737,134		53,854

Generics
Bachupally, Andhra Pradesh, India (4)		783,823		328,644	(3)	9,200 (6)	3,591 (6)
Beverley, East Yorkshire, United Kingdom		81,000		32,500	U.K. Medicine Control Agency, ISO 9001: 2000

Drug Discovery(10)
Miyapur, Andhra Pradesh, India		576,941		234,591	None
Georgia, United States (5)		24,733		24,733	None

Approximate

Built up

Installed

Actual

Location

Area

Certification

Capacity

Production

(Square feet)

Custom Pharmaceutical Services

3,428 (9)(11)

1,978 (9)(11)

Miyapur, Andhra Pradesh, India

113,211

85,767

None

Jeedimetla, Andhra Pradesh, India

68,825

16,597

None

Cuernavaca, Mexico

2,774,378

1,345,488

U.S.FDA,TGA (Australia), TKMA(Denmark), PDMA, MHLW(Japan),SSA (Mexico)


(1)		Ministry of Health, Sudan; Ministry of Health, Uganda; ANVISA, Brazil; National Medicines Agency, Romania; Ministry of Health, Ukraine; GCC group of countries.

(2)		Medicine Control Council, Republic of South Africa; The State Company for Marketing Drugs and Medical Appliances, Ministry of Health, Iraq; Sultanate of Oman, Ministry of Health, Muscat; Ministry of Health, Sudan; Ministry of Health, State of Bahrain; State Pharmaceutical Inspection, Republic of Latvia; Pharmaceutical and Herbal Medicines, Registration and Control Administrations, Ministry of Health, Kuwait; National Medicines Agency, Romania; Ministry of Health, Ukraine; Ministry of Health, Indonesia; Health Authorities, Nigeria; Ministry of Health, Kirgystan; WHO, GMP; ANVISA, Brazil; Medicines and Health Care Products Regulatory Agencies (“MHRA”), U.K.

(3)		U.S. FDA; Medicines and Healthcare Products Regulatory Agency, U.K.; Ministry of Health, UAE; Medicines Control Council, South Africa; ANVISA, Brazil; National Medicines Agency, Romania; Environmental Management System ISO 14001; Occupational Health and Safety Management System — OHSAS 18001; Quality Management System-ISO 9001:2000.

(4)		100% Export Oriented Units. However the income tax benefits under the Indian Income tax Act were exhausted as of the end of fiscal 2008 for our Generics facility at Bachupally.

(5)		Leased facilities.

(6)		Million units.

(7)		On a single shift basis.

(8)		Tonnes.

(9)		Grams.

(10)		Laboratories only.

(11)		Mexico only.

Except as indicated in the notes above, we own all of our facilities. All properties mentioned above, including leased properties, are either used for manufacturing and packaging of pharmaceutical products or for research and development activities. In addition, we have sales, marketing and administrative offices, which are leased properties. We believe that our facilities are optimally utilized.

Our facility for the manufacture of formulations at Baddi, Himachal Pradesh, India was completed in April 2006. This project was initiated to take advantage of certain financial benefits, which include exemption from income tax and excise duty for a specified period, offered by the government of India to encourage industrial growth in the state of Himachal Pradesh, India. Global Distribution Centre (“GDC”) is constructed at Bachupally, Hyderabad, Andhra Pradesh, India, which we put in service during fiscal 2008. An Integrated Product Development (“IPD”) facility has been constructed at Bachupally, Hyderabad, Andhra Pradesh, India and commenced its operations in fiscal 2008.

An expansion project in our Generics plant at Bachupally, Hyderabad, Andhra Pradesh, India was completed in fiscal 2008, which helped to increase the production capacity to manage high demand periods.

We have completed construction of a facility at Special Economic Zone at Visakhapatnam, Andhra Pradesh, India for manufacture of oral and injectible cytotoxic finished dosages for Generics segment. We are in the process of obtaining certification for this facility from the U.S. FDA. During the initial visit to our facility, the U.S. FDA inspectors have given us a Notice in Form 483 for certain deficiencies. This is a part of the regular pre-ANDA approval inspection that the U.S. FDA conducts for all potential U.S. ANDA

filers and pursuant to which the entire manufacturing site is audited. We have promptly responded to this Notice and expect to receive approval for the facility after completion of the U.S. FDA review. Subject to receipt of the approval, commercial production is expected to be initiated in fiscal 2009.

We are in the process of setting up a plant in a Special Economic Zone in Medak District, Andhra Pradesh. Preliminary steps for this are already taken.

We are also in the process of establishing a plant in a Special Economic Zone in Andhra Pradesh, India for the manufacture of APIs.

We have working capital facilities with banks and, in order to secure those facilities, we have created encumbrance charges on certain of our immovable and movable properties.

We are subject to significant national and state environmental laws and regulations which govern the discharge, emission, storage, handling and disposal of a variety of substances that may be used in or result from our operations at the above facilities. Non-compliance with the applicable laws and regulations may subject us to penalties and may also result in the closure of our facilities.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

We are an emerging global pharmaceutical company with proven research capabilities. We derive our revenues from the sale of finished dosage forms, active pharmaceutical ingredients and intermediates, with a focus on India, the United States, Europe and Russia; from development and manufacturing services provided to innovator pharmaceutical and biotechnology companies; and from license fees from our drug discovery operations.

As of March 31, 2008, we had the following business segments:

•

Formulations. In this segment we derive revenues from the sale of finished dosage forms, primarily in India, Russia and other emerging markets. Key drivers of profitability in this segment are the volume and price of products sold, which in turn are dependent upon the popularity of our branded products in the relevant markets. Increases in this segment in recent periods have been on account of our increased marketing efforts and expansion of our markets.

•

Active pharmaceutical ingredients and intermediates. In this segment we derive revenues from our sales to third parties of the principal ingredients for finished dosages. Our principal markets are Europe, the United States and India. Revenues in this segment are dependent upon the number of products that lose patent protection in any given period, and the price of those products, which tends to decline over time. Since these products ultimately become commoditized products, our ability to set prices is limited, while the cost of revenues generally remains stable. Thus, in any given period, different products will contribute varying amounts to our revenues and our gross profits.

•

Generics. In this segment we derive revenues from the sale of therapeutic equivalents of branded drugs, primarily in Europe and the United States. Revenues from our sale of generics are highly cyclical. In the event that we obtain 180-day exclusivity for a particular product in the United States, we generally experience significantly increased revenues for this period, particularly at the beginning of the period, with sales prices decreasing toward the end of the 180 days as other manufacturers enter the market. Cost of sales remains generally constant, however, and thus products coming off patent contribute significantly to gross margins for a limited period, tending to increase volatility in this segment. In fiscal 2007, we launched two products pursuant to an agreement for “authorized generics” in the United States, which the innovator company licensed us to distribute generic versions of their branded product and sell it in competition with the companies that have 180-day exclusivity. In these cases, while sales volumes increase significantly (again, more significantly in the early part of the 180-day period), profit-sharing agreements with the innovator company mean that gross margins are much lower than would be the case if we were distributing the product under 180-day exclusivity. Additionally, the existence of “authorized generic” arrangements by innovator companies with other

		manufacturers in cases where we have obtained 180-day exclusivity could adversely affect overall sales revenues during the 180-day period.

•		Drug discovery. Revenues in this segment are derived from licensing fees for new molecules that we discover. Thus, revenues are dependent upon the success of our research activities, and may vary significantly from period to period depending upon whether specified milestones in licensing agreements are reached. We did not have any significant revenues from out-licensing arrangements during fiscal 2006, 2007 and 2008. In September, 2005, we formed Perlecan Pharma Private Limited as a joint venture with Citigroup Venture Capital International Growth Partnership Mauritius Limited and ICICI Venture Funds Management Company and contributed capital and four NCE assets to Perlecan. During fiscal 2007, Perlecan Pharma discontinued the development of DRL 11605. Perlecan Pharma is exploring out-licensing opportunities for DRF 10945 instead of developing it within Perlecan Pharma. Development of the remaining two molecules, RUS 3108 and DRL 16536, has been discontinued within Perlecan Pharma and back-up molecules are being researched.

•

Custom pharmaceutical services. In this segment we derive revenues from service fees for process development and manufacturing services provided to innovator pharmaceutical and biotechnology companies. The key driver of revenue in this segment is likely to be the increasing outsourcing of late-stage and off-patent molecules by large pharmaceutical companies to compete with generic products.

Our total revenues for fiscal 2008 were Rs.50,005.6 million (U.S.$1,249.5 million). We derived 20.9% of these revenues from sales in India, 22.7% from North America, 11.1% from Russia and other countries of the former Soviet Union, 31.7% from Europe and 13.6% from other countries. Our net income for fiscal 2008 was Rs.4,678.0 million (U.S.$116.9 million).

Critical Accounting Policies

Critical accounting policies are those most important to the portrayal of our financial condition and results and that require the most exercise of our judgment. We consider the policies discussed under the following paragraphs to be critical for an understanding of our financial statements. Our significant accounting policies and application of these are discussed in detail in Note 2 to the Consolidated Financial Statements.

Accounting estimates

While preparing financial statements we make estimates and assumptions that affect the reported amount of assets, liabilities, disclosure of contingent liabilities at the balance sheet date and the reported amount of revenues and expenses for the reporting period. Financial reporting results rely on our estimate of the effect of certain matters that are inherently uncertain. Future events rarely develop exactly as forecast and the best estimates require adjustments, as actual results may differ from these estimates under different assumptions or conditions. We continually evaluate these estimates and assumptions based on the most recently available information. Specifically, we make estimates of:

	•		the useful life of property, plant and equipment and intangible assets;

	•		impairment of long-lived assets, including identifiable intangibles and goodwill;

	•		our future obligations under employee retirement and benefit plans;

	•		allowances for doubtful accounts receivable;

	•		inventory write-downs;

	•		allowances for sales returns; and

	•		valuation allowance in respect of deferred tax assets.

We depreciate property, plant and equipment over their useful lives using the straight-line method. Estimates of useful life are subject to changes in economic environment and different assumptions. Assets under capital leases are amortized over their estimated useful life or lease term as appropriate. We review long-lived assets, including identifiable intangibles and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure

recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual outcomes could vary significantly from such estimates. Factors such as changes in the planned use of buildings, machinery or equipment or lower than anticipated sales for products with capitalized rights could result in shortened useful lives or impairment.

In accordance with applicable Indian laws, we provide a defined benefit retirement plan (“Gratuity Plan”) covering certain categories of employees. The Gratuity Plan provides a lump sum payment to vested employees at retirement or termination of employment, at an amount based on the respective employee’s last drawn salary and the years of employment with us. Liability with regard to the Gratuity Plan is determined by an actuarial valuation, based upon which we make contributions to the Gratuity Fund. In calculating the expense and liability related to this plan, assumptions are made about the discount rate, expected rate of return on plan assets, withdrawal and mortality rates and rate of future compensation increases as determined by us, within certain guidelines. The assumptions used may differ materially from actual results, resulting in a significant impact on the amount of expense recorded by us.

We make allowance for doubtful accounts receivable, based on the present and financial condition of the customer and ageing of the accounts receivable after considering historical experience and the current economic environment. Actual losses due to doubtful accounts may differ from the allowances made. However, we believe that such losses will not materially affect our consolidated results of operations.

We write down inventory for obsolescence, expired inventory and inventories with carrying values in excess of realizable values based on our assessment of future demands, market conditions and our specific inventory management initiatives. If the market conditions and actual demands are less favorable than our estimates, additional inventory write-downs may be required. In all cases, inventory is carried at the lower of historical costs or realizable value.

Revenue recognition

Product sales

Revenue is recognized when significant risks and rewards in respect of ownership of products are transferred to customers, generally, the stockists or formulations manufacturers and when the following criteria are met:

	•		Persuasive evidence of an arrangement exists;

	•		The price to the buyer is fixed and determinable; and

	•		Collectibility of the sales price is reasonably assured.

Revenue from domestic sales of formulation products is recognized on delivery of the product to the stockist by our consignment and clearing and forwarding agent. Revenue from domestic sales of active pharmaceutical ingredients and intermediates is recognized on delivery of products to customers, from our factories. Revenue from export sales is recognized when significant risks and rewards in respect of ownership of products are transferred to customers, which is based on terms of the contract. Revenue from product sales includes excise duty and is recorded net of sales tax and applicable discounts and allowances.

Sales of formulations in India are made through clearing and forwarding agents to stockists. Significant risks and rewards in respect of ownership of formulation products are transferred by us when the goods are delivered to stockists from clearing and forwarding agents. Clearing and forwarding agents are generally compensated on a commission basis as a percentage of sales made by them.

Sales of active pharmaceutical ingredients and intermediates in India are made directly to the end customers generally, formulation manufacturers, from our factories. Sales of formulations and active pharmaceutical ingredients and intermediates outside India are made directly to the end customers, generally stockists or formulations manufacturers, from us or our subsidiaries.

We have entered into marketing arrangements with certain marketing partners for sale of goods. Under such arrangements, we sell generic products to our marketing partners at a price agreed in the arrangement. Revenue is recognized on these transactions upon delivery of products to our marketing partners as all the conditions under Staff Accounting Bulletin No.104 (“SAB 104”) are met.

Subsequently, our marketing partners remit to us an additional amount based on the sale proceeds of sales made by them to the end customer. Such amount is determined as per the terms of the marketing arrangement and is recognized by us when the realization is certain under the guidance given in SAB 104.

Revenue from sales of generic products is recognized as revenue when products are delivered and significant risks and rewards in respect of ownership of products passes on to the customer. Provisions for chargeback, rebates and medicaid payments are estimated and provided for in the year of sales and recorded as reduction of revenue. A chargeback claim is a claim made by the wholesaler for the difference between the price at which the product is initially invoiced to the wholesaler and the net price at which it is agreed to be procured from us. Provision for such chargebacks are accrued and estimated based on historical average chargeback rate actually claimed over a period of time, current contract prices with wholesalers/other customers and average inventory holding by the wholesaler. Such provisions are disclosed as a reduction of accounts receivable.

We account for sales returns in accordance with SFAS 48, “Revenue Recognition when Right to Return Exists” by recording an accrual based on our estimate of expected sales returns.

We deal in various products and operate in various markets and our estimates of sales returns are determined primarily by our experience in these markets. In respect of established products, we determine an estimate of sales returns accrual primarily based on historical experience of such sales returns. Additionally, other factors that we consider in determining the estimate include levels of inventory in the distribution channel, estimated shelf life, product discontinuances, price changes of competitive products and introductions of competitive new products, to the extent each of these factors impact on our business and our markets. We consider all of these factors and adjust the sales returns accrual to reflect our actual experience.

With respect to new products introduced, those are either extensions of an existing line of product or in a general therapeutic category where we have historical experience. Our new product launches have historically been in therapeutic categories where established products exist and are sold either by us or our competitors. We have not yet introduced products in a new therapeutic category where the sales return experience of such products is not known. The amount of sales returns for our newly launched products do not significantly differ from sales return experience of current products marketed by us or competitors (as we understand based on industry publications). Accordingly, we do not expect sales returns for new products to be significantly different from expected sales returns of current products. We evaluate the sales returns of all of our products at the end of each reporting period and record necessary adjustments, if any. To date, no significant revision has been determined to be necessary.

Service income

Income from services, which primarily relates to contract research, is recognized as the related services are performed in accordance with the terms of the contract and when all the conditions under SAB 104 are met. Arrangements with customers for contract research and other related services are either on a fixed price or a time and material basis.

License fees

Non-refundable milestone payments are recognized in the consolidated statement of operations when earned, in accordance with the terms of the license agreement, and when we have no future obligations or continuing involvement pursuant to such milestone payments. Non-refundable up-front license fees are deferred and recognized when the milestones are earned, in proportion to the amount of each milestone earned bears to the total milestone payments agreed in the license agreement. Where the upfront license fees are a composite amount and cannot be attributed to a specific molecule, they are amortized over the development period. The milestone payments increase during the development period as the risk involved decreases. The agreed milestone payments reflect the progress of the development of the molecule and may not be spread evenly over the development period. Accordingly, the milestone payments are a fair representation of the extent of progress made in the development of these underlying molecules. In the event the development of a molecule is discontinued, the corresponding amount of deferred revenue is recognized in the consolidated statement of operations in the period in which the project is terminated.

We have entered into certain dossier sales, licensing and supply arrangements that include certain performance obligations. Based on an evaluation of whether or not these obligations are inconsequential or perfunctory, we defer the upfront payments received under these arrangements. Such deferred revenue is recognized in the consolidated statement of operations in the period in which we complete our remaining performance obligations.

Derivative and hedge accounting

We purchase foreign currency forward contracts/option contracts to mitigate the risk of changes in foreign exchange rates on accounts receivable and forecasted cash flows denominated in certain foreign currencies. We also purchases zero-cost collars, which qualify as net purchased options, to hedge the exposure to variability in expected future foreign currency cash inflows due to exchange rate movements beyond a defined range.

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, we recognize all derivatives as assets or liabilities measured at their fair value, regardless of the purpose or intent of holding them. In respect of derivatives designated and effective as cash flow hedges, gains or losses resulting from changes in the fair value are deferred and recorded as a component of accumulated other comprehensive income within stockholder’s equity until the hedged transaction occurs and are then recognized in the consolidated statement of operations together with the hedged item. We assess hedge effectiveness based on overall change in fair value of derivative instrument.

Changes in fair value of derivatives not designated as hedges and the ineffective portion of the hedging instruments are recognized in the consolidated statements of operations of each period and are reported within foreign exchange gain/(loss), net under operating expenses.

In respect of derivatives designated as hedges, we formally document all relationships between the hedging instrument and the hedged item, as well as its risk management objective and strategy for undertaking the hedge transaction. We also formally assess both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair value or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, we prospectively, discontinue hedge accounting with respect to that derivative.

Stock-based compensation

Generally, we use the Black-Scholes option pricing model to determine the fair value of each option grant. We also use the Binomial model in certain instances as further discussed below. Upon adoption of SFAS 123(R), the Company elected to continue estimating the fair value of stock options using the Black-Scholes option pricing model. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected terms and risk free interest rates. In respect of Par Value Options, the expected term of an option is estimated based on the vesting term, contractual term, as well as expected exercise behavior of the employees receiving the option. With respect to Fair Market Value options, the expected term of an option is estimated based on the simplified method. Expected volatility of the option is based on historical volatility, during a period equivalent to the expected term of the option, of the observed market prices of the Company’s publicly traded equity shares. Dividend yield of the options is based on recent dividend activity. Risk-free interest rates are based on the government securities yield in effect at the time of the grant. These assumptions reflect management’s best estimates, but these assumptions involve inherent market uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used in the current period, stock-based compensation expense could have been materially impacted. Further, if we use different assumptions in future periods, stock based compensation expense could be materially impacted in future years.

The estimated fair value of stock options is charged to income on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards.

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


	Fiscal Year Ended March 31,
	2006			2007			2008
Dividend yield		0.5	%		0.5	%		0.75	%
Expected term	12-78 months			12-48 months			12-48 months
Risk free interest rates		5.7-7.5	%		6.5-7.4	%		7.8-8.2	%

Volatility		23.4-36.9	%		30.5-33.6	%		28.4% – 32.7%

At March 31, 2008, we had four equity -based employee compensation plans, which are described more fully in Section 6.E. under “Employee Stock Incentive Plans”. Our parent company and our subsidiary, Aurigene Discovery Technologies Limited, have two equity based employee compensation plans each.

A recent amendment to the Indian tax regulations requires us to pay a Fringe Benefit Tax on exercise of employee stock options. The Fringe Benefit Tax is computed based on the fair market value of the underlying equity share on the date of vesting of an option as reduced by the amount actually paid by the employee for exercise of the options. Our obligation to pay the Fringe Benefit Tax arises only upon exercise of options and is recorded as compensation expense in the statement of operations at that time.

With respect to the grants where we propose to recover the Fringe Benefit Tax amount from the employee, the fair value of each option has been determined using the Binomial option pricing model.

The Binomial model includes assumptions regarding dividend yields, expected volatility, expected terms, risk free interest rates and expected Fringe Benefit Tax recovery. These assumptions reflect management’s best estimates, but these assumptions involve inherent market uncertainties based on market conditions generally outside of Company’s control. As a result, if other assumptions had been used in the current period, stock-based compensation expense could have been materially impacted. Further, if management uses different assumptions in future periods, stock based compensation expense could be materially impacted in future years.

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


	Fiscal Year Ended
	March 31, 2008
Dividend yield		—
Expected term	36-72 months
Risk free interest rates		7.42-7.47	%
Volatility		57.38	%

Functional Currency

Our foreign subsidiaries have different functional currencies, determined based on the currency of the primary economic environment in which they operate. For subsidiaries that operate in a highly inflationary economy, the functional currency is determined as the Indian rupee. Due to various subsidiaries operating in different geographic locations, a significant level of judgment is involved in evaluating the functional currency for each subsidiary.

In respect of our foreign subsidiaries which market our products in their respective countries/regions, the functional currency has been determined as the Indian rupee, based on an individual and collective evaluation of the various economic factors listed below.

The operations of these foreign subsidiaries are largely restricted to importing finished goods from us in India, sale of these products in the foreign country and remitting the sale proceeds to us. The cash flows realized from sale of goods are readily available for remittance to us and cash is remitted to us on a regular basis. The costs incurred by these subsidiaries are primarily the cost of goods imported from us. The financing of these subsidiaries is also done directly or indirectly by us.

In respect of other subsidiaries, the functional currency is determined as the local currency, being the currency of the primary economic environment in which the subsidiary operates.

Income Taxes

As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We are subject to tax assessments in each of these jurisdictions. A tax assessment can involve complex issues, which can only be resolved over extended time periods. Additionally, the provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws. Although we have considered all these issues in estimating our income taxes, there could be an unfavorable resolution of such issues that may affect our results of operations.

We also assess the temporary differences resulting from differential treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recognized in our consolidated financial statements. Deferred taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. In assessing the likelihood of realizing of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We consider the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategy in making this assessment. If we estimate that the deferred tax assets cannot be realized at the recorded value, a valuation allowance is created with a charge to the statement of operations in the period in which such assessment is made.

We account for uncertainty in income taxes in the financial statements in accordance with FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, Accounting for Income Taxes. The accounting and disclosures of tax positions taken or expected to be taken on a tax return are based on the recognition threshold and measurement attribute as prescribed by FIN 48. We recognize penalties and interest related to unrecognized tax benefits as a component of income taxes.

Litigation

We are involved in various patent challenges, product liability, commercial litigation and claims, governmental and/or regulatory inspections, inquiries, investigations and other legal proceedings, including patent and commercial matters that arise from time to time in the ordinary course of our business. We assess in consultation with our counsel, the need to accrue a liability for such contingencies and record a reserve when we determine that a loss related to a matter is both probable and reasonably estimable. Because litigation and other contingencies are inherently unpredictable, our assessment can involve judgments about future events.

5.A. Operating results

Financial Data

The following table sets forth, for the periods indicated, our consolidated net operating revenues by segment:


	Revenues for the Fiscal Year Ended March 31,
	2006		2007			2008		2008
Segment	(Rs. in millions)		(Rs. in millions)			(Rs. in millions)		U.S.$ in millions)

Formulations		10,587.6		13,086.6			15,241.1		380.8
Active pharmaceutical ingredients and intermediates		8,267.5		11,883.0			11,804.8		295.0
Generics		4,055.8		33,224.2			17,781.5		444.3
Drug discovery		—		136.8			39.2		1.0
Custom pharmaceutical services		1,326.8		6,599.8			4,817.6		120.4
Others		29.3		164.7			321.4		8.0


Total revenues		24,267.0		65,095.1			50,005.6		1,249.5

The following table sets forth, for the periods indicated, our gross profit by segment:

	Gross Profit for the Fiscal Year Ended March 31,
	2006		2007			2008		2008
Segment	(Rs. in millions)		(Rs. in millions)			(Rs. in millions)		U.S.$ in millions)

Formulations		7,297.0		9,163.1			11,202.1		279.9
Active pharmaceutical ingredients and intermediates		2,321.4		4,640.7			3,979.5		99.4
Generics		1,887.0		15,125.6			8,470.4		211.7
Drug discovery		—		15.3			3.1		0.1
Custom pharmaceutical services		327.4		1,937.2			1,665.5		41.6
Others		16.8		(6.3	)		87.4		2.2

Total revenues		11,849.6		30,875.6			25,408.0		634.9

The following table sets forth, for the periods indicated, financial data as percentages of total revenues and the increase (or decrease) by item as a percentage of the amount over the comparable period in the previous year.


	Percentage of Sales									Percentage
	Fiscal Year Ended March 31,									Increase/(Decrease)
	2006			2007			2008			2006 to 2007		2007 to 2008

Revenues		100.0			100.0			100.0			168.2		(23.2	)
Gross profit		48.8			47.4			50.8			160.6		(17.7	)

Selling, general and administrative expenses		33.1			21.6			30.3			75.0		8.0
Research and development expenses, net		8.9			3.8			7.1			14.4		43.5
Amortization expenses		1.7			2.4			3.2			274.1		2.8
Write-down of intangible assets		—			2.7			5.0			—		40.6
Impairment of goodwill		—			—			0.2			—		—
Foreign exchange (gain)/loss, net		0.5			(0.2	)		(1.5	)		—		444.5

Operating income		6.0			17.4			6.7			681.9		(70.4	)

Other (expense)/income, net		2.2			(1.2	)		0.2			(246.0)		—
Income before income taxes		7.8			16.1			6.9			456.4		(67.3	)

Income tax benefit/(expenses)		(1.1	)		(1.8	)		2.5			355.5		—
Net income		6.7			14.3			9.4			472.6		(49.8	)

The following table sets forth, for the periods indicated, our consolidated revenues and gross profits by segment:


	Fiscal Year Ended March 31, 2007											Fiscal Year Ended March 31, 2008
	Revenues		Revenues			Gross profit			Gross profit			Revenues		Revenues			Gross profit		Gross profit
	Rs. millions		% to total			Rs. millions			% to sales			Rs. millions		% to total			Rs. millions		% to sales

Formulations	Rs.	1,3086.6		20.1	%	Rs.	9,163.1			70.0	%	Rs.	15,241.1		30.5	%	Rs.	11,202.1		73.5	%
Active pharmaceutical ingredients and intermediates		11,883.0		18.3	%		4,640.7			39.1	%		11,804.8		23.6	%		3,979.5		33.7	%
Generics		33,224.2		51.0	%		15,125.6			45.5	%		17,781.5		35.6	%		8,470.4		47.6	%
Drug discovery		136.8		0.2	%		15.3			11.2	%		39.2		0.1	%		3.1		7.9	%
Custom pharmaceutical services		6,599.8		10.1	%		1,937.2			29.4	%		4,817.6		9.6	%		1,665.5		34.6	%
Others		164.7		0.3	%		(6.3	)		(3.9	%)		321.4		0.6	%		87.4		27.2	%

Total	Rs.	65.095.1		100.0	%	Rs.	30,875.6			47.4	%	Rs.	50,005.6		100.0	%	Rs.	25,408.0		50.8	%

Fiscal Year Ended March 31, 2008 Compared to Fiscal Year Ended March 31, 2007

Revenues

Total revenues decreased by 23.2% to Rs.50,005.6 million in the year ended March 31, 2008, from Rs.65,095.1 million in the year ended March 31, 2007. Excluding the revenues from the sales of authorized generics from both years, revenues in the year ended March 31, 2008 declined by 2.5% to Rs.48,031.3 million in the year ended March 31, 2008 compared to Rs.49,282.3 million in the year ended March 31, 2007.

•		Revenues from our Formulations segment increased by 16.5% compared to year ended March 31, 2007. This increase was primarily driven by increase in revenues from India, Russia, Romania, Venezuela, Vietnam and former CIS countries.

•		Revenues from our Active Pharmaceutical Ingredients (API) segment were largely at the same level at Rs.11,804.8 million compared to Rs.11,883.0 million in the year ended in March 31, 2007.

•		Revenues from our Generics segment decreased by 46.5% compared to the year ended March 31, 2007. Revenues in the year ended March 31, 2007, included revenues from sale of authorized generics of Rs.15,812.8 million. Excluding authorized generics sales from both the years, revenues decreased by 9.2%.

•		Revenues in our CPS segment decreased by 27.0% compared to the year ended March 31, 2007. This decrease was primarily on account of a decrease in sales of key products such as epoxide, naproxen and naproxen sodium.

In the year ended March 31, 2008, we received 22.7% of our revenues from North America (United States and Canada), 31.7% of our revenues from Europe, 11.1% of our revenues from Russia and other CIS countries, 20.9% of our revenues from India and 13.6% of our revenues from other countries. Significant weakening of the United States dollar as compared to the Indian rupee by approximately 11.0% on average for the year ended March 31, 2008 compared to average for the year ended March 31, 2007 had a negative impact on our sales because of the decline in rupee realization on sales made in United States dollars.

Segment analysis

Formulations. In the year ended March 31, 2008 our formulations segment contributed 30.5% of our total revenues, as compared to 20.1% in the year ended March 31, 2007. Revenues in this segment increased by 16.5% to Rs.15,241.1 million in the year ended March 31, 2008, as compared to Rs.13,086.6 million in the year ended March 31, 2007.

Revenues from sales of formulations in India constituted 52.9% of our total formulations revenues in the year ended March 31, 2008 compared to 53.2% in the year ended March 31, 2007. Revenues from India increased by 15.7% to Rs.8,059.6 million in the year ended March 31, 2008 from Rs.6,964.5 million in the year ended March 31, 2007. The increase in revenues was on account of an increase in sales volumes of key brands such as Razo, our brand of rabeprazole, Stamlo, our brand of amlodipine, Omez, our brand of omeprazole and Keterol our brand of ketorolac.

Revenues from sale of formulations outside India increased by 17.3% to Rs.7,181.5 million in the year ended March 31, 2008 from Rs.6,122.1 million in the year ended March 31, 2007. Revenues from sales of formulations in Russia increased by 13.3% to Rs.4,064.4 million in the year ended March 31, 2008 from Rs.3,587.3 million in the year ended March 31, 2007. This increase was on account of higher sales volumes of our key brands such as Nise, our brand of nimesulide, Ketorol, our brand of ketorolac and Mitotax, our brand of paclitaxel. Revenues from other countries of the former Soviet Union increased by 25.3% to Rs.1,461.4 million in the year ended March 31, 2008 as compared to Rs.1,166.4 million in the year ended March 31, 2007, primarily driven by an increase in revenues from sales of formulations in Ukraine, Belarus, Uzbekistan and Kazakhstan. Other key markets grew by 20.8% to Rs.1,655.7 million in the year ended March 31, 2008 compared to Rs.1,365.0 million in the year ended March 31, 2007 driven by growth of revenues in Vietnam, Venezuela and Romania.

Active Pharmaceutical Ingredients and Intermediates. In the year ended March 31, 2008, this segment contributed 23.6% of our total revenues compared to 18.2% in the year ended March 31, 2007. Revenues in this segment were largely at the same level at Rs.11,804.8 million in the year ended March 31, 2008, as compared to Rs.11,883.0 million in the year ended March 31, 2007.

During the year ended March 31, 2008, revenues from sales of API in India accounted for 19.9% of our revenues from this segment compared to 17.5% in the year ended March 31, 2007. Revenues from sales of API in India increased by 13.2% to Rs.2,351.7 million in the year ended March 31, 2008, as compared to Rs.2,077.3 million in the year ended March 31, 2007.

Revenues from sale of API outside India decreased by 3.6% to Rs.9,453.1 million in the year ended March 31, 2008 from Rs.9,805.7 million in the year ended March 31, 2007. Revenues from North America increased by 12.8% to Rs.2,288.6 million in the year ended March 31, 2008 from Rs.2,029.8 million in the year ended March 31, 2007. The increase was driven by an increase in revenues of both our commercial and development products portfolio. Revenues from Europe increased by 19.1% to Rs.2,520.8 million in the year ended March 31, 2008 from Rs. 2,116.8 million in the year ended March 31, 2007. Revenues from other markets decreased by 17.9% to Rs.4,643.7 million in the year ended March 31, 2008 from Rs.5,659.1 million in the year ended March 31, 2007 primarily due to decrease in sales to Israel and South Africa, which was partially offset by an increase in sales to Japan, Turkey and Mexico.

Generics. In the year ended March 31, 2008, this segment contributed 35.6% of our total revenues compared to 51.0% in the year ended March 31, 2007. Revenues decreased by 46.5% to Rs.17,781.5 million in the year ended March 31, 2008 from Rs.33,224.2 million in the year ended March 31, 2007.

Revenues from sales of generic products in North America decreased by 66.0% to Rs.8,024.3 million in the year ended March 31, 2008 from Rs.23,617.1 million in the year ended March 31, 2007. Excluding the revenues from sales of authorized generics, the revenues in this segment decreased by 22.5% to Rs.6,049.8 million. This decrease was primarily due to a decrease in revenues from sales of fexofenadine, launched in April 2006, and ondansetron, launched in December 2006 (under 180 day exclusivity) caused largely by lower sales prices. During the fiscal year ended March 31, 2008, we launched our own OTC business with the launch of two products: ranitidine and cetirizine. Sales of these products contributed Rs.262.9 million in revenues in the fiscal year ended March 31, 2008.

Revenues from sales of generic products in Europe increased by 1.2% to Rs.9,714.9 million in the year ended March 31, 2008, as compared to Rs.9,603.3 million in the year ended March 31, 2007. Revenues of betapharm increased from Rs.8,003.7 million in the year ended March 31, 2007 to Rs.8,188.9 million in the year ended March 31, 2008 primarily on account of an increase in revenues from sales of Oxcycodon HCL beta, our brand of oxycodone, Omebeta, our brand of omeprazole and Ramipril beta Comp, our brand of ramipril+hct, partially offset by a decrease in revenues from sales of Diclofen beta, our brand of diclofenac and Simvabeta our brand of simvastatin. The increase at betapharm was despite of significant stock-outs for a substantial part of the year due to the supply constraints. Revenues from sales of products in the United Kingdom decreased by 3.6% to Rs.1,474.8 million from Rs.1,538.2 million primarily on account of a decrease in the sales volumes of omeprazole, which was partially offset by an increase in the sales volumes of amlodipine maleate.

Custom Pharmaceutical Services (“CPS”).Revenues from our CPS segment decreased by 27.0% to Rs.4,817.6 million in the year ended March 31, 2008 from Rs.6,599.8 million in the year ended March 31, 2007. This decrease was primarily on account of decrease in revenue from sales of our key products naproxen and naproxen sodium due to supply chain constraints at the beginning of the year ended March 31, 2008.

Cost of Revenue

As a result of the trends described in “Revenues” above and “Gross Margin ” below, our cost of revenues decreased by 28.1% to Rs.24,597.6 million in the year ended March 31, 2008 from Rs.34,219.5 million in the year ended March 31, 2007. Cost of revenues, as a percentage of revenues was 49.2% in the year ended March 31, 2008, as compared to 52.6% in the year ended March 31, 2007.

Cost of revenue of the formulations segment decreased to 26.5% in the year ended March 31, 2008, as compared to 30.0% in the year ended March 31, 2007. The cost of revenue for our active pharmaceutical ingredients segment increased to 66.3% in the year ended March 31, 2008, as compared to 60.9% in the year ended March 31, 2007. The cost of revenue for our generics segment decreased to 52.4% in the year ended March 31, 2008, as compared to 54.5% in the year ended March 31, 2007. The cost of revenue of our custom pharmaceuticals services segment was 65.4% in the year ended March 31, 2008, as compared to 70.6% in the year ended March 31, 2007. The cost of revenue in other segments was 74.9% in the year ended March 31, 2008, as compared to 97.0% in the year ended March 31, 2007.

Active Pharmaceutical Ingredients and Intermediates. Gross margin of this segment decreased to 33.7% of this segment’s revenues in the year ended March 31, 2008, as compared to 39.1% of this segment’s revenues in the year ended March 31, 2007. The decrease was primarily on account of an unfavorable impact from the depreciation of the United States dollar as compared to the Indian rupee, which was partially offset by sales of high margin products such as olanzapine in North America and amlodipine in rest of the world markets.

Generics. Gross margin of this segment was 47.6% of this segment’s revenues in the year ended March 31, 2008 compared to 45.5% of this segment’s revenues in the year ended March 31, 2007. The increase in gross margin as a percentage of revenues was primarily due to a decrease in revenues from sales of authorized generics, which earn a gross margin significantly below the average gross margin of this segment. Sales of authorized generics contributed 11.1% of this segment’s revenues in the year ended March 31, 2008 as compared to 47.6% of this segment’s revenues in the year ended March 31, 2007.

Custom Pharmaceutical Services (CPS). Gross margin of this segment increased to 34.6% of this segment’s revenues in the year ended March 31, 2008 as compared to 29.4% in the year ended March 31, 2007. This increase was on account of an increase in the proportion of revenues from our contract research services business, which was partially offset by a decrease in revenues from sales of high margin products naproxen and naproxen sodium and an unfavorable impact from the depreciation of the United States dollar as compared to the Indian rupee.

Selling, general and administrative expenses

Selling, general and administrative expenses as a percentage of total revenues were 30.3% in the year ended March 31, 2008 as compared to 21.6% in the year ended March 31, 2007. Selling, general and administrative expenses increased by 8.0% to Rs.15,175.2 million in the year ended March 31, 2008 from Rs.14,051.1 million in the year ended March 31, 2007. This increase was largely on account of an increase in employee costs by 11.6% due to an increase in the number of employees and annual increments. Marketing expenses increased by 6.7% primarily on account of an increase in advertisement expenses due to advertisements undertaken for key products in Ukraine, Russia and Belarus, and an increase in shipping cost in line with increase in sales volumes. General expense largely remained at the same level as previous year.

Research and development expenses

Research and development costs increased by 43.5% to Rs.3,532.9 million in the year ended March 31, 2008 from Rs.2,462.7 million in the year ended March 31, 2007. Research and development expenditure accounted for 7.1% of total revenue in the year ended March 31, 2008 as compared to 3.8% in the year ended March 31, 2007. Under the terms of our research and development partnership with I-VEN Pharma Capital Limited (“I-VEN”), we received Rs.985.4 million in March 2005 to be applied to research and development costs in our Generics segment, of which Rs.452.8 million was recognized as a reduction in research and development expenses in the year ended March 31, 2007. There was no benefit from the I-VEN agreement in the year ended March 31, 2008. Excluding the impact of above arrangement with I-VEN, expenses have increased by 10.2%. The increase in expenses was primarily on account of an increase in expenses for clinical trial and toxicity studies and product development studies expenses in our formulation and generics segments.

Amortization expenses

Amortization expenses increased by 2.8% to Rs.1,614.8 million in the year ended March 31, 2008 from Rs.1,570.9 million in the year ended March 31, 2007. Amortization increased primarily on account of increased amortization expense at betapharm for a beneficial toll manufacturing contract, the useful life of which was revised downwards as of February 2007. Amortization also

increased marginally on account of the increase in the value of the Euro as compared to the Indian Rupee. The impact of these movements on amortization expenses was partially off-set by the reduced amortization at betapharm for certain product related intangibles due to write-downs recorded in fiscal 2007 and fiscal 2008.

Write-down of intangible assets

During the year ended March 31, 2008 we recorded a write-down of intangible assets for an aggregate amount of Rs.2,488.5 million as compared to Rs.1,770.2 million in the year ended March 31, 2007. The write-down during the year ended March 31, 2008 consisted of:

	•		Rs.2,361 million associated with impairment of certain product related intangibles of betapharm arising out of adverse market conditions in Germany such as decreases in the market price, increases in the value of rebate and supply constraints faced by us; and

	•		Rs.127.5 million of Litaphar S.A.’s (“Litaphar”) product related intangibles arising out of adverse market conditions such as a reduction in sales and margins and an increase in the supply costs.

The write-down during the year ended March 31, 2007 consisted of:

	•		Rs.213.5 million associated with core technology rights and other product related intangible assets acquired through Trigenesis Therapeutics, Inc. The write-down was recorded because commercialization of these intangible assets was deemed to be economically unviable because of further regulatory and approval process requirements and unfeasible partnering prospects; and

	•		Rs.1,556.7 million, associated with impairment of betapharm’s intangibles and the beta brand due to legislative reforms in Germany designed to control healthcare spending, including the WSG and the AVWG, severe pricing pressures thereafter, and the impact of the contract amendment with our toll-manufacturer Salutas.

Foreign exchange gain/loss

Foreign exchange gain was Rs.744.9 million in the year ended March 31, 2008 as compared to Rs.136.8 million in the year ended March 31, 2007. In the year ended March 31, 2008, the rupee appreciated by Rs.3.35 per U.S.$1.00. Our gain primarily resulted from realized gains on derivative contracts (taken to hedge exchange risk on our foreign currency receivables) and translation gains arising out of foreign currency loans. These gains were partially offset by translation and realization loss on foreign currency receivables.

In the year ended March 31, 2007 the rupee appreciated by Rs.1.145 per U.S.$1.00. Our gain was on account of gain on derivative contracts taken to hedge exchange risk on foreign currency receivables and deposits partially offset by loss on translation and realization loss on foreign currency deposits and debtors.

Other operating income/expense, net

Other operating income was Rs.106.6 million in the year ended March 31, 2008 as compared to income of Rs.174.1 million in the year ended March 31, 2007.

Operating income

As a result of the foregoing, our operating income decreased to Rs.3,357.7 million in the year ended March 31, 2008, as compared to Rs.11,331.5 million in the year ended March 31, 2007.

Other (expense)/income, net

In the year ended March 31, 2008, our other income, net of other expense was Rs.78.6 million, as against other expense, net of other income of Rs.(768.5) million in the year ended March 31, 2007. This was primarily due to a decrease in the net interest expense to Rs.328.4 million in the year ended March 31, 2008 from Rs.1,054.7 million in the year ended March 31, 2007. Net interest expense

in the current year decreased on account of lower interest expense primarily due to repayment of Rs.7,733.3 million (€140 million) in borrowings and lower working capital borrowings and higher interest income in the current year on account of higher rates of return earned on fixed deposits.

We also earned Rs.110.3 million from our short-term investments in mutual funds.

Income before income taxes and minority interest

As a result of the foregoing, income before income taxes and minority interest decreased to Rs.3,438.1 million in the year ended March 31, 2008 as compared to Rs.10,500.3 million in the year ended March 31, 2007.

Income tax benefit/expense

We had an income tax benefit of Rs.1,229.4 million in the year ended March 31, 2008 as compared to an expense of Rs.1,176.9 million in the year ended March 31, 2007. The benefit in the year ended March 31, 2008 was primarily on account of the deferred tax benefit of Rs.1,505.2 million, which was due to reduction in tax rates in Germany, and a release of deferred tax liability of Rs.733.1 million, which was due to write-down of intangibles amounting to Rs.2,361 million recorded in the year ended March 31, 2008. Eliminating the impact of the deferred tax benefits recognized on account of changes in tax laws and on impairment write downs recorded, the annual effective tax rate for fiscal 2008 was 16.8% as compared to 14.6% for fiscal 2007. The adjusted effective tax rate increased during fiscal 2008 primarily on account of higher amounts of expenses not deductible for tax purposes, higher amount of valuation allowance created during the year and significantly lower profit before taxes in fiscal 2008 as compared to fiscal 2007.

Net income

As a result of the above, our net income decreased to Rs.4,678.0 million in the year ended March 31, 2008 as compared to Rs.9,326.8 million in the year ended March 31, 2007.

Fiscal Year Ended March 31, 2007 Compared to Fiscal Year Ended March 31, 2006

Certain amounts in the fiscal 2007 and fiscal 2006 have been reclassified / regrouped to conform to the presentation of fiscal 2008. The explanations below have been suitably modified in line with such reclassifications.

Revenues

Total revenues increased by 168.2% to Rs.65,095.1 million in fiscal 2007, as compared to Rs.24,267.0 million in fiscal 2006, primarily due to revenues from sales of authorized generics, revenues from Falcon (acquired December 30, 2005) and betapharm (acquired March 3, 2006), and an increase of revenues across our other business segments. Excluding revenues from sales of authorized generics and revenues from Falcon and betapharm, revenues increased by 57.7% to Rs.35,881.2 million in fiscal 2007. In fiscal 2007, we received 43.5% of our revenues from North America (United States and Canada), 14.1% of our revenues from India, 7.3% of our revenues from Russia and other countries of the former Soviet Union, 22.8% of our revenues from Europe and 12.3% of our revenues from other countries.

Revenues from sales to Russia and other former Soviet Union countries increased by 33.5% to Rs.4,752.1 million in fiscal 2007, as compared to Rs.3,559.5 million in fiscal 2006. The increase was primarily due to an increase in sales of our major brands such as Nise, our brand of nimesulide, Keterol, our brand of ketorolac tromethamine, Ciprolet, our brand of ciprofloxacin, Cetrine, our brand of cetrizine, and Omez, our brand of omeprazole. Revenues from sales in India increased by 11.0% to Rs.9,178.6 million in fiscal 2007, as compared to Rs.8,272.5 million in fiscal 2006, primarily due to an increase in revenues in our formulations segment and partially offset by a decline in revenues of our active pharmaceutical ingredients and intermediates segment. Revenues from sales to Europe increased by 243.0% to Rs.14,839.1 million in fiscal 2007, as compared to Rs.4,326.4 million in fiscal 2006, primarily as a result of an increase in revenues from sales in our generics, custom pharmaceuticals services and API segments, as well as revenues from betapharm. Revenues from sales to North America increased by 611.3% to Rs.28,336.5 million in fiscal 2007, as compared to Rs.3,983.9 million in fiscal 2006. Excluding the revenues from sale of authorized generics, revenues increased by 214.4% to Rs.12,523.7 in fiscal 2007, primarily due to increases in sales in our generics, CPS and API segments.

Formulations. In fiscal 2007, we received 20.1% of our total revenues from the formulations segment, as compared to 43.6% in fiscal 2006. Revenues in this segment increased by 23.6% to Rs.13,086.6 million in fiscal 2007, as compared to Rs.10,587.6 million in fiscal 2006.

Revenues in India constituted 53.2% of our total formulations revenues in fiscal 2007 as compared to 56.4% in fiscal 2006. Revenues from sales of formulations products in India increased by 16.6% to Rs.6,964.5 million in fiscal 2007, as compared to Rs.5,968.1 million in fiscal 2006. This was driven by increased sales volumes of our key brands such as Omez, our brand of omeprazole, Nise, our brand of nimesulide, Stamlo, our brand of amlodipine, Razo, our brand of rabeprazole, and Recliment, our brand of gliclazide and metformin. The revenue increase was led by special marketing initiatives and other product specific initiatives and focused promotion with specialist physicians. The revenue increases were also attributable to the launch of extensions of current product lines such as Omez D and Razo D. New products launched in fiscal 2007 contributed revenues of Rs.247 million (4% of revenues in India).

Revenues from sales of formulations products outside India increased by 32.6% to Rs.6,122.1 million in fiscal 2007, as compared to Rs.4,619.5 million in fiscal 2006. Revenues from sales of formulations products in Russia accounted for 58.5% of our formulation revenues outside India in fiscal 2007, as compared to 58.0% in fiscal 2006. Revenues from sales of formulations products in Russia increased by 33.9% to Rs.3,587.3 million in fiscal 2007, as compared to Rs.2,676.8 million in fiscal 2006. The increase was primarily due to an increase in revenues from the sale of key brands such as Nise, our brand of nimesulide, Omez, our brand of omeprazole, and Cetrine, our brand of cetrizine. This increase in revenues was primarily driven by an increase in our sales volumes to hospitals, as well as increased prescription sales due to various advertising campaigns. Revenues from sales to other countries of the former Soviet Union increased by 32.2% to Rs.1,166.4 million for fiscal 2007, as compared to Rs.883.5 million for fiscal 2006, primarily driven by an increase in revenues from sales in Ukraine, Uzbekistan, Kazakhstan and Belarus.

Revenues from sales of formulations products in Europe increased by 45.3% to Rs.376.1 million in fiscal 2007 as compared to Rs.259.1 million in fiscal 2006, primarily due to an increase in revenues from sales in Romania. The increase in revenues from Romania was primarily due to an increase in sales volume attributable to an increase in Romanian Government spending on medical reimbursement to comply with EU standards, as well as promotional campaigns.

Revenues from sales to the rest of the world increased by 24.7% to Rs.992.3 million in fiscal 2007, as compared to Rs.796.1 million in fiscal 2006. This increase was primarily due to an increase in revenues from sales of products in South Africa, Myanmar, Venezuela and Jamaica, and was offset by a decrease in revenues from sales of products in Vietnam.

Active Pharmaceutical Ingredients and Intermediates. In fiscal 2007, we received 18.2% of our total revenues from this segment, as compared to 34.1% in fiscal 2006. Revenues in this segment increased by 43.7% to Rs.11,883.0 million in fiscal 2007, as compared to Rs.8,267.5 million in fiscal 2006.

During fiscal 2007, revenues from sales in India accounted for 17.5% of our revenues from this segment, as compared to 27.8% in fiscal 2006. Revenues from sales in India decreased by 9.7% to Rs.2,077.3 million in fiscal 2007, as compared to Rs.2,300.4 million in fiscal 2006. This decrease was primarily due to a decrease in revenues from sales of quinolones (antibiotics), due to a significant decline in prices resulting from increased competition.

Revenues from sales outside India increased by 64.3% to Rs.9,805.7 million in fiscal 2007, as compared to Rs.5,967.1 million in fiscal 2006. Revenues from sales in Europe increased by 49.0% to Rs.2,116.8 million in fiscal 2007, as compared to Rs.1,420.9 million in fiscal 2006, primarily due to an increase in revenues from sales of sertraline, finasteride, losartan and ramipril. Revenues from sales of API in North America (United States and Canada) increased by 22.6% to Rs.2,029.7 million in fiscal 2007, as compared to Rs.1,655.0 million in fiscal 2006, primarily due to an increase in sales volumes of naproxen sodium, ibuprofen, naproxen and sertraline, as well as increase in sales volumes of API used by our customers in the development of their formulations. Revenues from sales of API in the rest of the world increased from Rs.2,891.3 million in fiscal 2006 to Rs.5,659.2 in fiscal 2007, driven primarily by the growth of revenues from Israel, South Korea, Brazil and Japan.

Generics. In fiscal 2007, we received 51.0% of our total revenues from this segment, as compared to 16.7% in fiscal 2006. This segment’s revenues increased by 719.2% to Rs.33,224.2 million in fiscal 2007, as compared to Rs.4,055.8 million in fiscal 2006. Revenues from sales of products in North America increased to Rs.23,619.4 million in fiscal 2007, as compared to Rs.1,630.6 million in fiscal 2006. The increase was primarily due to revenues of Rs.15,812.8 million from sales of simvastatin and finasteride (our authorized generic versions of Merck’s Zocor^® and Proscar^®, respectively), launched in June 2006; revenues of Rs.2,429.3 million from sales of fexofenadine (our generic version of Allegra ^®), launched in April 2006; and revenues of Rs.2,890.1 million from sales of ondansetron (our generic version of Zofran^®), launched at the end of December 2006 with 180 day marketing exclusivity. Excluding revenues from authorized generics, fexofenadine and ondansetron, revenues from sales of generic products increased by 52.5% to Rs.2,487.1 million, primarily on account of an increase in sales volumes as well as the launch of new products, such as pravastatin and simvastatin (a non-authorized generic product).

Revenues from sales of generic products in Europe and other markets increased by 296.6% to Rs.9,604.8 million in fiscal 2007, as compared to Rs.2,425.2 million in fiscal 2006. Revenues of betapharm (in its first full year of consolidation) and sales of products acquired from Litaphar in Spain (in fiscal 2007) together contributed Rs.8,065.0 million to revenues in fiscal 2007, as compared to revenues contributed by betapharm of Rs.704.9 million in fiscal 2006 (which represented less than one month of revenues, as it was acquired on March 3, 2006). In the United Kingdom, we experienced a decline in the prices of some of our key generics products, amlodipine and omeprazole. As a result, our U.K. generics revenues declined by 10.5% to Rs.1,539.8 million in fiscal 2007 from Rs.1,716.6 million in fiscal 2006.

Custom Pharmaceutical Services. Revenues from custom pharmaceutical services, including revenues from our subsidiary Falcon, grew to Rs.6,599.8 million in fiscal 2007 as compared to Rs.1,326.8 million in fiscal 2006. Revenues contributed from Falcon increased from Rs.804.9 in fiscal 2006 (this represents approximately three months of revenues, as it was acquired on December 30, 2005 in the fiscal year ended March 31, 2006) to Rs.5,396.8 million (this represents the first full year of consolidation of Falcon’s revenues). Revenues in Falcon were driven by sales of naproxen sodium, naproxen and epoxide. Excluding revenues from Falcon, revenues in this segment grew to Rs.1,203.0 million in fiscal 2007, from Rs.521.9 in fiscal 2006, driven by growth in our customer base and product portfolio.

Cost of revenues

Total cost of revenues increased by 175.6% to Rs.34,219.5 million for fiscal 2007, as compared to Rs.12,417.3 million for fiscal 2006. As a percentage of total revenues, total cost of revenues was 52.6% for fiscal 2007, as compared to 51.2% for fiscal 2006.

Formulations. Cost of revenues in this segment increased by 19.2% to Rs.3,923.5 million in fiscal 2007, as compared to Rs.3,290.6 million in fiscal 2006. Cost of revenues in this segment was 30.0% of revenues for fiscal 2007, as compared to 31.1% of revenues for fiscal 2006. As a percentage of revenues, cost of revenues decreased by 1.1% primarily on account of a decrease in excise duties in fiscal 2007. This decrease in excise duties was due to our new formulations facility at Baddi (operational from July 2006), which enjoys excise duty exemption.

Active Pharmaceutical Ingredients and Intermediates. Cost of revenues increased by 21.8% to Rs.7,242.3 million in fiscal 2007, as compared to Rs.5,946.1 million in fiscal 2006. Cost of revenues in this segment as a percentage of revenue decreased to 60.9% of this segment’s revenues in fiscal 2007, as compared to 71.9% of this segment’s revenues in fiscal 2006. One reason for this decrease was an increase in the proportion of higher margin revenues from sales outside of India from 72.1% of total revenues in fiscal 2006 to 82.5% of total revenues in fiscal 2007. Another reason for this decrease was an increase of sales of high gross margin products, such as our generic version of sertraline (launched in June, 2006).

Generics. Cost of revenues in this segment increased by 734.5% to Rs.18,098.6 million in fiscal 2007, as compared to Rs.2,168.8 million in fiscal 2006. Cost of revenue was 54.5% of this segment’s revenues in fiscal 2007, as compared to 53.5% in fiscal 2006. The increase in cost of revenues as a percentage of sales in this segment was primarily as a result of revenues from newly launched authorized generics, which contributed 47.6% to total revenues of this segment and have gross margins which are significantly below the average gross margin of this segment. The increase in cost of revenues associated with sales of these lower margin products was substantially offset by increased sales of ondansetron and fexofenadine, which have gross margins which are significantly above the average gross margin of this segment.

Custom Pharmaceutical Services. Cost of revenues in this segment increased by 366.5% from Rs.999.4 million in fiscal 2006 (this represents approximately three months of revenues from Falcon, as it was acquired on December 30, 2005 and the fiscal year ended March 31, 2006) to Rs.4,662.5 million in fiscal 2007 (this represents the first full year of consolidation of the cost of Falcon’s revenues). Cost of revenues was 70.6% of this segment’s revenues in fiscal 2007, as compared to 75.3% in fiscal 2006. This decrease was primarily on account of increased sales of naproxen sodium and naproxen, which are higher margin products.

Gross profit

As a result of the trends described in “Revenues” and “Cost of revenues” above, our gross profit increased by 160.6% to Rs.30,875.6 million for fiscal 2007 from Rs.11,849.7 million for fiscal 2006. Gross margin percentage was 47.4% in fiscal 2007, as compared to 48.8% in fiscal 2006.

Gross profit of the formulations segment increased to 70.0% in fiscal 2007, as compared to 68.9% in fiscal 2006. The gross profit for our active pharmaceutical ingredients segment increased to 39.1% in fiscal 2007, as compared to 28.1% in fiscal 2006. The gross profit for our generics segment decreased to 45.5% in fiscal 2007, as compared to 46.5% in fiscal 2006. The gross profit for our custom pharmaceutical services segment was 29.4% in fiscal 2007, as compared to 24.7% in fiscal 2006.

Selling, general and administrative expenses

Selling, general and administrative expenses, as a percentage of total revenues, were 21.6% for fiscal 2007 as compared to 33.1% for fiscal 2006. The decrease in these expenses as a percentage of revenues was due to an increase in our total revenues with no commensurate increase in costs. Selling, general and administrative expenses increased by 75.0% to Rs.14,051.1 million in fiscal 2007, as compared to Rs.8,028.9 million in fiscal 2006.

The increase in selling, general and administrative expenses as a whole was largely due to the full year consolidation of expenses of betapharm and Falcon, as well as an increase in employee costs and marketing costs. After excluding expenses of betapharm and Falcon, employee costs increased by 41.1% in fiscal 2007, primarily due to annual compensation increases and market corrections as well as an increase in the number of employees. Marketing expenses increased by 33.2% in fiscal 2007, primarily on account of higher selling expenses and higher shipping costs, all incurred in connection with the increase in total revenues.

Research and development expenses

Research and development costs increased by 14.4% to Rs.2,462.7 million for fiscal 2007, as compared to Rs.2,153.0 million for fiscal 2006. As a percentage of total revenue, research and development expenses were 3.8% of our total revenue in fiscal 2007 as compared to 8.9% in fiscal 2006.

Under the terms of our research and development partnership agreement with I-VEN Pharma Capital Limited (“I-VEN”), we received Rs.985.4 million (U.S.$22.5 million) in March 2005 to be applied to research and development costs in our generics segment, of which Rs.452.8 million (U.S.$10.5 million) was recorded as a reduction in the research and development expense in fiscal 2007 as compared to Rs.384.5 million (U.S.$8.6 million) recognized in fiscal 2006. Furthermore, in fiscal 2007, our research and development expenses in our drug discovery segment were lower on account of our receipt of Rs.372.6 million from Perlecan Pharma Private Limited (“Perlecan”) as reimbursement of expenses incurred by us in the development of New Chemical Entities (“NCEs”) assigned to Perlecan under the terms of our research and development partnership agreement. This reimbursement payment was recorded as a reduction in research and development expenses. Excluding the impact of the above arrangements with I-VEN and Perlecan, expenses increased to Rs.3,288.1 million in fiscal 2007 as compared to Rs.2,537.5 million in fiscal 2006. The increase in expenses was primarily on account of an increase in product development studies in our formulations and generics segments, as well as an increase in clinical trials expenses in our discovery segment.

Amortization expenses

Amortization expenses increased by 274.1% to Rs.1,570.9 million in fiscal 2007 from Rs.419.9 million in fiscal 2006. The increase was primarily on account of amortization of intangibles acquired in the acquisition of betapharm and Falcon amounting to Rs.1,247.8 million and Rs.26.8 million, respectively, in fiscal 2007.

Write-down of Intangible Assets

During fiscal 2007, we wrote-down certain intangible assets in an aggregate amount of Rs.1,770.2 million. These write-downs primarily consisted of:

•		Write-down expense amounting to Rs.213.5 million associated with core technology rights and other product related intangible assets acquired through Trigenesis Therapeutics, Inc. During the fourth quarter ended March 31, 2007, we completed our detailed review of business opportunities against each of the core technology rights, licenses and marketing rights. As a result of this review, we determined that the further commercialization of the intangible assets that are being carried forward may not be economically viable because of further regulatory and approval process requirements and unfeasible partnering prospects, and therefore discontinued our efforts to further develop these assets.

•		Due to legislative reforms in Germany designed to control healthcare spending, including the WSG and the AVWG, severe pricing pressures thereafter, and impact of the Salutas contract amendment, certain product-related intangibles and the beta brand were tested for impairment. Consequently, an impairment charge of Rs.1,556.7 million was recorded.

Foreign exchange gain/loss

Foreign exchange gain was Rs.136.8 million for fiscal 2007, as compared to a loss of Rs.126.3 million for fiscal 2006. In fiscal 2007, the rupee appreciated by 2.57%. The fiscal 2007 foreign exchange gain was primarily on account of our marking to market of our outstanding forward foreign exchange contracts (entered into in order to hedge our receivables exchange risk) and foreign currency loans, which gains were partially offset by our marking to market of our U.S.$ deposits and receivables. In contrast to this, the rupee depreciated by 1.99% in fiscal 2006. Foreign exchange loss in fiscal 2006 was primarily on account of our marking to market of our forward foreign exchange contracts and foreign currency loans.

Other operating expense/(income), net

Other operating income, net, amounted to Rs.174.1 million in fiscal 2007, as compared to Rs.327.7 million in fiscal 2006. This includes a profit of Rs.387.3 million in fiscal 2006 resulting from the sale of our finished dosages manufacturing facility located in Goa, India.

Operating income

As a result of the foregoing, our operating income was Rs.11,331.5 million in fiscal 2007, as compared to operating income of Rs.1,449.2 million in fiscal 2006. Operating income as a percentage of total revenues was 17.4% in fiscal 2007, as compared to 6.0% in fiscal 2006.

Other income (expense), net

For fiscal 2007, our net other expense was Rs.768.5 million, as compared to net other income of Rs.526.3 million for fiscal 2006. This was primarily on account of net interest expense of Rs.1,054.7 million in fiscal 2007 compared to net interest income Rs.418.8 million in fiscal 2006. Net interest expense was primarily on account of interest expense incurred on a loan in the original principal amount of €400 million (Rs.21,598.30 million) taken for the acquisition of betapharm in fiscal 2006, partially offset by interest income on fixed deposits.

Equity in loss of affiliates

Equity in loss of affiliates was Rs.62.7 million for fiscal 2007, a decline from Rs.88.2 million for fiscal 2006. The fiscal 2007 loss consists of a loss pick-up from Perlecan Pharma Private Limited of Rs.63.3 million offset by a gain pick-up from Kunshan Rotam Reddy Pharmaceuticals of Rs.0.7 million. In fiscal 2006, equity in loss of affiliates consisted of a Rs.40.0 million loss pick-up from Perlecan Pharma Private Limited plus a Rs.48.2 million loss pick-up from Kunshan Rotam Reddy Pharmaceuticals.

Income before income taxes and minority interest

As a result of the foregoing, income before income taxes and minority interest increased to Rs.10,500.3 million in fiscal 2007, as compared to Rs.1,887.3 million in fiscal 2006. As a percentage of revenues, income before income taxes and minority interest was 16.1% of revenues in fiscal 2007, as compared to 7.8% of revenues in fiscal 2006.

Income tax expense

Income tax expense for fiscal 2007 was Rs.1,176.9 million as compared to an income tax expense of Rs.258.3 million for fiscal 2006. As a percentage of income before taxes and minority interest, income tax expense decreased from 13.7% for fiscal 2006 to 11.2% for fiscal 2007. In absolute terms, the income tax expense increased primarily a result of significantly higher income from operations in fiscal 2007 as compared to fiscal 2006. The effective tax rate decreased primarily on account of increased sales in generics business, which in India enjoys tax exemptions. Further, whilst a significant portion of the increased profitability has been out of North America generics operations, the corresponding tax expense has been lower since the business had net operating losses, which were utilized in the current year. The Company had recorded a full valuation allowance on the deferred tax assets on net operating losses, which was reversed in the current year.

Minority interest

Minority interest for fiscal 2007, was a gain of Rs.3.5 million resulting from the allocation of our minority’s share in the losses of Dr. Reddy’s Laboratories (Proprietary) Limited, our partially owned subsidiary in South Africa. During fiscal 2006, we realized a loss of Rs.0.1 million representing our minority share in the profits of this partially owned subsidiary.

Net income

As a result of the above factors, our net income increased to Rs.9,326.8 million in fiscal 2007, as compared to Rs.1,628.9 million in fiscal 2006. Net income as a percentage of total revenues increased to 14.3% in fiscal 2007 from 6.7% in fiscal 2006.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This Statement establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but provides guidance on determination of fair value and lays down the fair value hierarchy to classify the source of information used in fair value measurements. Upon adoption of the Statement, difference between the carrying amounts and the fair values of instruments should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. SFAS 157-2 (“FSP FAS 157-2”) which delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP FAS 157-2 partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for items within the scope of FSP FAS 157-2. We will be required to adopt this new standard for the fiscal year beginning April 1, 2008. We are currently evaluating the requirements of SFAS 157 and have not yet determined the impact adoption of this standard will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to measure eligible financial assets and liabilities, firm commitments and other eligible items at fair value, on an instrument-by-instrument basis, that is otherwise not permitted under other generally accepted accounting principles. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. At the effective date, on adopting this irrevocable fair value option for eligible items that exist on that date, the effect of such re-measurement to fair value should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. We will be required to adopt this new standard for the fiscal year beginning April 1, 2008. We have evaluated the impact of this Statement and believe that adoption of SFAS 159, prospectively, on April 1, 2008, will not have a material effect on our consolidated financial statements.

In December 2007, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-1”). EITF 07-1 provides guidance concerning: determining whether an arrangement constitutes a collaborative arrangement within the scope of the Issue; how costs incurred and revenue generated on sales to third parties should be reported in the income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the financial statements about a collaborative arrangement. We will be required to apply this issue for all collaborative arrangements retrospectively for financial statements issued for fiscal years beginning after December 15, 2008. We are in the process of evaluating the impact of adopting EITF 07-01 on our consolidated financial statements.

In June 2007, the EITF issued EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to be Used in Future Research and Development Activities (“EITF 07-3”). EITF 07-3 provides guidance concerning the accounting for non-refundable advance payments for goods and services that will be used in future research and development activities and requires that they be expensed when the research and development activity has been performed and not at the time of payment. The provisions of EITF 07-3 are effective for fiscal years beginning after December 15, 2007, with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. We are currently evaluating the impact of adopting EITF 07-3 on our consolidated financial statements, however we do not expect EITF 07-3 to have a material impact on our consolidated financial statements.

In December 2007, FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R replaces SFAS No. 141, Business Combinations, and requires an acquirer to recognize the assets acquired, the liabilities assumed including contingencies and non-controlling interest in the acquiree, at the acquisition date, measured at their fair value, with limited exceptions specified in the statement. With respect to a business combination achieved in stages, SFAS 141R requires the acquirer to recognize the identifiable assets and liabilities as well as the non-controlling interest in the acquiree at full amounts of their fair values. SFAS 141R requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date. We will be required to apply this new Statement prospectively to business combinations consummated in fiscal years beginning after December 15, 2008. Early adoption is prohibited.

In December 2007, FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires the recognition of a non-controlling interest as

equity in the consolidated financial statements and separate from the parent’s equity. Purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. We will be required to adopt this new Statement prospectively to all non-controlling interest, including any that arose before the effective date, for fiscal years, beginning after December 15, 2008. Early adoption is prohibited. We are currently evaluating the requirements of SFAS 160 and have not yet determined the impact this Statement may have on our consolidated financial statements.

In March 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures on derivative and hedging activities by requiring objectives to be disclosed for using derivative instruments in terms of underlying risk and accounting designation. SFAS 161 requires disclosures on the need of using derivative instruments, accounting of derivative instruments and related hedged items, if any, under FASB Statement No. 133 and the effect of such instruments and related hedge items, if any, on financial position, financial performance and cash flows. We will be required to adopt this new Statement prospectively, for fiscal years beginning after November 15, 2008. We are currently evaluating the requirements of SFAS 161 and have not yet determined the impact that the adoption of this standard will have on our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for non-governmental entities. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect the adoption of SFAS No. 162 to have a material impact on our consolidated financial statements.

5.B. Liquidity and capital resources

Liquidity

We have primarily financed our operations through cash flows generated from operations and through short-term borrowings for working capital. Our principal liquidity and capital needs are for making investments, the purchase of property, plant and equipment, regular business operations and drug discovery.

Our principal sources of short-term liquidity are internally generated funds and short-term borrowings, which we believe are sufficient to meet our working capital requirements and currently anticipated capital expenditures over the near term. As part of our growth strategy, we continue to review opportunities to acquire companies, complementary technologies or product rights. To fund the acquisition of betapharm in Germany in fiscal 2006, we borrowed €400 million under a bank loan facility with a maturity period of five years. If our future acquisitions involve significant cash payments, rather than the issuance of shares, we may need to further borrow from banks or raise additional funds from the debt or equity markets.

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


	Fiscal Year Ended March 31,
	2006			2007		2008			2008
	(Rs. in million, U.S.$ in millions)
Net cash provided by /(used in):
Operating activities	Rs.	1,696.5		Rs.	11,960.6	Rs.	6,122.6		U.S.$	153.0
Investing activities		(34,577.8	)		436.4		(9,599.9	)		(239.9	)
Financing activities		27,210.9			1,753.7		(6,827.6	)		(170.6	)
Net increase / (decrease) in cash and cash equivalents	Rs.	(5,670.3	)	Rs.	14,150.7	Rs.	(10,304.9	)	U.S.$	(257.5	)

Effect of exchange rate changes on cash	Rs.	95.1		Rs.	118.2	Rs.	(278.2	)	U.S.$	(7.0	)

Cash Flow from Operating Activities

Net cash provided by operating activities decreased from Rs.11,960.6 million in fiscal 2007 to Rs.6,122.6 million in fiscal 2008. This was primarily due to a lower level of operating profit as compared to fiscal 2007. The net income for fiscal 2008 was lower than fiscal 2007 primarily on account of the absence of any significant new product launches in the current year. In fiscal 2007, we had

significant revenues and profits in our North America generics business from sales of Merck’s authorized generics (simvastatin and pravastatin) and from 180-days exclusivity for ondansetron tablets.

Net cash provided by operating activities in fiscal 2008 consisted primarily of:

	•		Net income of Rs. 4,678.0 million (Rs.9,326.8 million in fiscal 2007);

	•		Adjustment for non-cash items amounting to Rs.4,704.1 million (Rs.5,530.1 million in fiscal 2007); and

	•		Increase in net operating assets by Rs.3,249.3 million (Rs.2,896.3 million in fiscal 2007).

Cash Flow from Investing Activities

While investing activities provided net cash of Rs.436.4 million in fiscal 2007, there was a cash outflow of Rs.9,599.9 million in fiscal 2008. This was primarily on account of:

	•		Expenditure on property, plant and equipment of Rs.6,348.1 million (Rs.4,477.0 million in fiscal 2007);

	•		Inflows due to the reduction in restricted cash by Rs.583 million (Rs.5,468.9 million in fiscal 2007);

	•		Purchase of investment securities, net, of to Rs.3,382.1 million (Rs.0.9 million in fiscal 2007); and

	•		Acquisition of intangible assets of Rs.507.8 million (Rs.325.9 million in fiscal 2007).

Cash outflows from investing activities were significant during fiscal 2008 primarily on account of large investments made in facilities/capital projects to enhance our future capacity. Further, during fiscal 2008 we made short term investments in mutual funds. Furthermore, in fiscal 2007, we had significant inflows on account of release in restricted cash which had overall offset all other outflows from investing activities. This was primarily on account of the release of the restriction on cash deposits of Rs.4,468.8 million, pledged against the long-term debt taken from Citibank (Euro loan), on closure of the syndication process and which was accordingly liquidated.

Cash Flows from Financing Activities

While financing activities provided net cash of Rs.1,753.7 million for fiscal 2007, there was a net cash outflow of Rs.6,827.6 million for fiscal 2008. This was primarily on account of:

	•		Repayment of long term debt of Rs.7,718.5 million (Rs.1,888.5 million in fiscal 2007);and

	•		Dividend payment of Rs.737.3 million (Rs.437.5 million in fiscal 2007), partially offset by additional bank borrowings amounting to Rs.1,612.9 million (Rs.(5,870.8) million in fiscal 2007).

In fiscal 2008, we had significant outflows from financing activities primarily on account of the repayment of our long term debt. In fiscal 2007, we had net inflows from the issuance of shares pursuant to a secondary offering in the United States, which was partially offset due to the net repayment of short term borrowings.

Principal obligations

The following table summarizes our principal debt obligations (excluding capital lease obligations) outstanding as of March 31, 2008:

Payments due by period (Rs. in millions)

Financial Contractual

Less than

After

Obligations

Total

1 year

1-3 years

3-5 years

5 years

Annual Interest Rate

Short-term borrowings from banks

4,862.7

—

LIBOR + 100bps for foreign currency denominated loans

Long term debt

From Indian Renewable Energy

13.3

5.9

7.4

—

2%*

Payments due by period (Rs. in millions)

Financial Contractual

Less than

After

Obligations

Total

1 year

1-3 years

3-5 years

5 years

Annual Interest Rate

Development Agency

Foreign currency loan (for betapharm acquisition)

14,374.3

1,796.8

7,187.2

5,390.3

EURIBOR + 70 bps LIBOR + 70 bps

Total obligations

19,250.3

6,665.4

7,194.6

5,390.3

—


*		Loan received at a subsidized rate of interest from Indian Renewable Energy Development Agency Limited promoting use of alternative sources of energy.

Subject to obtaining certain regulatory approvals, there are no legal or economic restrictions on the transfer of funds between us and our subsidiaries or for the transfer of funds in the form of cash dividends, loans or advances.

The maturities of our short-term borrowings from banks vary from one month to approximately six months. Our objective in determining the borrowing maturity is to ensure a balance between flexibility, cost and the continuing availability of funds.

Cash and cash equivalents are primarily held in Indian rupees, U.S. dollars, U.K. pounds sterling, Brazilian real, Euros, Russian roubles, South African rand, Hong Kong dollars, New Zealand dollars, Malaysian ringgits and Swiss francs.

As of March 31, 2007 and 2008, we had committed to spend approximately Rs.1,186.0 million and Rs.1,552.4 million, respectively, under agreements to purchase property and equipment and other capital commitments. These amounts are net of capital advances paid in respect of such purchases and we anticipate funding them from internally generated funds.

5.C. Research and development, patents and licenses, etc.

Research and Development

Our research and development activities can be classified into several categories, which run parallel to the activities in our principal areas of operations:

•		Formulations, where our research and development activities are directed at the development of product formulations, process validation, bioequivalence testing and other data needed to prepare a growing list of drugs that are equivalent to numerous brand name products for sale in the emerging markets. Formulations also includes our biologics business, where research and development activities are directed at the development of biologics products for the emerging as well as regulated markets. Our new biologics research and development facility caters to the highest development standards, including cGMP, Good Laboratory Practices and bio-safety level IIA.

•		Active pharmaceutical ingredients and intermediates, where our research and development activities concentrate on development of chemical processes for the synthesis of active pharmaceutical ingredients for use in our generics and formulations segments and for sales in the emerging and developed markets to third parties.

•		Generics, where our research and development activities are directed at the development of product formulations, process validation, bioequivalence testing and other data needed to prepare a growing list of drugs that are equivalent to numerous brand name products whose patents and regulatory exclusivity periods have expired or are nearing expiration in the regulated markets of the United States and Europe.

•		Drug discovery, where we are actively pursuing discovery and development of NCEs. Our research programs focus on the following therapeutic areas:

	o		Metabolic disorders

	o		Cardiovascular disorders

	o		Bacterial infections

	o		Inflammation

	o		Cancer

•

Custom pharmaceutical services, where we intend to leverage the strength of our process chemistry and finished dosage development expertise to target innovator as well as emerging pharmaceutical companies. The research and development is directed toward providing services to support the entire pharmaceutical value chain — from discovery all the way to the market.

In fiscal 2006, 2007 and 2008, we expended Rs.2,153.0 million, Rs.2,462.7 and Rs.3,532.9 million, respectively, on research and development activities.

Patents, Trademarks and Licenses

We have filed and been issued numerous patents in our principal areas of operations: drug discovery, active pharmaceutical ingredients and intermediates and generics. We expect to continue to file patent applications seeking to protect our innovations and novel processes in several countries, including the United States. Any existing or future patents issued to or licensed by us may not provide us with any competitive advantages for our products or may even be challenged, invalidated or circumvented by our competitors. In addition, such patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products. As of March 31, 2008, we had filed a total of 1,160 trademarks with the Registrar of Trademarks in India, of which 551 are already registered. We also have made application for registration for non-U.S. trademarks in other countries in which we do business. We market several products under licenses in several countries where we operate.

5.D. Trend information

Formulations

India and Russia are two strategic markets for our formulations business contributing to roughly 80% of the revenues for fiscal 2008 of this segment. In both of these markets, we continue to grow our revenues and our rank in the market consistently year after year as a result of our product franchise and customer relationships built over the years.

ORG IMS in its report for the year ended March 31, 2008 has noted that the Indian pharmaceutical market continues to be highly fragmented and dominated by Indian companies. The industry recorded retail sales of approximately U.S.$8 billion, representing a growth in value of 14.8 per cent over the previous year on a Moving Annual Total (“MAT”) basis. The Indian pharmaceutical market is projected to grow at 11-13 per cent per annum between 2008 and 2020, achieving a terminal market value of U.S.$ 30 billion. The major growth influencers will be population dynamics, high disease prevalence, increased health care access, changing health care models and greater capacity to spend.

According to ORG IMS report for the year ended March 31, 2008, the market share of the No. 1 player in Indian retail sales was only 5.1%. In this competitive scenario, we have been listed as one of the top 10 players with a market share of 2.3%. Overall growth during fiscal 2008 was driven by the performance of our key brands as well as new products launched. We also benefited from the launch of our second biologics product in India — Reditux. Even one year after our launch, there are no new entrants in the marketplace and we expect to launch more products from our biologics pipeline in India.

In Russia, we continue to match the industry growth rate in the retail segment. Revenues in Russia increased by 22% in dollar terms crossing the U.S. $100 million milestone in fiscal 2008. We are among the fastest growing international branded generic company in Russia by product sales volumes. Pharmexpert, a market research firm, ranked us No. 14^th in sales in Russia with a market share of 1.24% as of March 2008 in its MAT report for the first quarter of calendar year 2008 (the “Pharmexpert MAT Q1 2008 Report”) based on our strong performance. We also consolidated our new hospitals and OTC segments which are significantly supplementing the growth led by the prescription segment. All of the companies ranked ahead of us were either multinational corporations or of European origin. Accordingly, we were the top ranked Indian pharmaceutical company in Russia.

The regulatory environment in the developing markets outside of India is changing, with most countries having moved or moving towards recognizing product patents. This implies that gradually these countries will move from being “less-regulated markets” to “semi-regulated markets” wherein the patent regimes and regulatory compliance will start converging with the regulated markets of North America and Europe. Many of the governments in these countries are in the process of implementing various healthcare reforms to promote the consumption of generic drugs in order to contain their healthcare costs. This presents growth opportunities in several of these markets. We continue to experience significant growth from the countries in the former Soviet Union, South Africa, Venezuela

and China through new product launches. We are also increasing our efforts to expand our business in other markets such as Australia and New Zealand.

Active Pharmaceutical Ingredients and Intermediates

In this segment, we are focused on acquiring new customers and increasing our level of engagement with existing customers in global key markets by marketing additional products from our product portfolio. We are also focused on identifying unique product opportunities in key markets and protecting them through patenting strategies. As of March 31, 2008, we had a pipeline of 281 drug master filings (“DMFs”) of which 127 were in the United States. With patent expiries in several markets in the next few years, we intend to promote growth in fiscal 2009 and beyond by leveraging our portfolio of markets and products. The success of our API products in our key markets is contingent upon the extent of competition in the generics market, and we anticipate that such competition will continue to be significant.

Generics

In this segment, we are focused on the regulated markets of North America (the United States and Canada) and Europe. In the United States, our revenues during fiscal 2007 benefited significantly from the launch of fexofenadine, the generic version of Allegra^® (launched at risk (i.e., prior to resolution of patent infringement claims) in April 2006), simvastatin, the authorized generic version of Zocor^®, finasteride 5 mg, the authorized generic version of Proscar^®, and ondansetron, the generic version of Zofran^®. The benefit of these high value launches in terms of marketing exclusivity, higher market share and higher pricing was for a limited period and was mostly accrued in fiscal 2007. Similar high value launches were largely absent in the fiscal 2008. In view of this, the overall revenues in North America in fiscal 2008 declined as compared to fiscal 2007.

Revenues in fiscal 2008 in North America thus represent normalized base business revenues. Continuing with our stated strategy, we intend to expand our portfolio over the next few years by adding solid dosages forms as well as alternate dosage forms by complementing our internal product development effort through business alliances.

Following the suspension of OTC packaging and distribution activities at Leiner Health Products, Inc., which was our important customer, we entered the private label OTC business in fiscal 2008 by launching two products. The initial response from various customer groups has been positive. We have also initiated the supply to U.S. Government agencies of veteran affairs and department of defense. The first product to be supplied to the U.S. Government was finasteride 5mg.

Wherever possible, we will continue to explore the possibilities of mutually beneficial settlement of ongoing Paragraph IV litigation cases. As an example, in fiscal 2007, we settled the litigation for sumatriptan, the generic version of Imitrex^®, with the innovator GlaxoSmithKline. Similarly, in fiscal 2008, we settled the litigation for rivastigmine, the generic version of Exelon^®, with the innovator Novartis.

Apart from the abovementioned initiatives of diversifying into new channels and lines of businesses and entering into litigation settlements, we are also acting on other fronts to establish our generics business in the U.S. as a profitable business. We are conscious of the extremely competitive nature of the market which continuously causes downward pressure on product selling prices. We have initiated on an ongoing basis a review and execution mechanism to reduce the delivered cost of our products through several cost reduction initiatives. We intend to diversify not only our customer base but our products also by focusing more on difficult-to-make and low competition products to safeguard our margins.

As of March 31, 2008, we had filed a total of 122 ANDAs with the U.S. FDA. We had 70 ANDAs pending approval with the U.S. FDA as of March 31, 2008, which included 10 tentative approvals.

In Germany, fiscal 2008 represented the second full year of consolidation of revenues and net income of betapharm Arzneimittel GmbH, which we acquired in March 2006. The German pharmaceutical industry continues to go through health care reforms which have put pressure on prices. As of April 1, 2007, the GKV-WSG Act took effect in Germany with the purpose of strengthening competition in public health insurance to regulate the German health care system. The law has significantly increased the power of the insurance companies and SHI funds by allowing them to enter into direct rebate contracts with suppliers of pharmaceuticals. It further incentivizes doctors to prescribe generic drugs covered by such rebate contracts. The pharmacist is also required to dispense such drugs as are covered by rebate contracts. Thus, successfully concluding rebate contracts with insurance companies is a factor critical to succeeding in the competition for market share in the generic prescription drug market. betapharm has signed for rebate contracts with a large number of SHI funds covering a major part of the insured population in the aggregate. In January 2008, new reference

prices became effective. Subsequently new co-payment release prices were announced and which were effective June 1, 2008. These health care reforms have resulted in pressure on price realization in Germany. We expect pricing pressures to continue in this market and are watching these trends closely.

During the fiscal 2008, we have successfully transferred a large number of products to secured supply sources. We remain on track to completely mitigate the risk of the supply situation and expect to realize the full benefits of this transfer in fiscal 2009. The benefits of this transfer include reduced product manufacturing cost and supply assurance. As of March 31, 2008, we had begun to realize the benefits from the easing of the supply situation and the market share of betapharm had recovered sharply to 2.96% in March 2008 as against a low of 1.74% in April 2007.

We remain committed to building a strong European generics business and consolidating our existing assets and market franchise in the countries of Germany, the United Kingdom, Spain, Italy and others.

Custom pharmaceutical services.

Our Custom Pharmaceutical Services (“CPS”) business unit markets process development and manufacturing services to customers primarily consisting of innovator pharmaceutical and biotechnology companies with an objective to become their preferred partner of choice. The focus is to leverage our skills in process development, analytical development, formulation development and cGMP manufacture to serve the customer needs.

In fiscal 2008, the base organic business continued its high growth trajectory, as we expanded the portfolio of relationships and projects with large pharmaceutical companies and emerging pharmaceutical and biotechnology companies. However, our Falcon business in Mexico went through certain challenges. It sustained raw material constraints in the first half of fiscal 2008 and as a result, we were not able to fully service our customer requirements. To address this, a manufacturing facility has been commissioned in India to supply a key ingredient to Falcon.

Drug discovery

Our investments into research and development of NCEs have been consistently focused towards developing promising therapeutics. Strategically, we continue to seek licensing and development arrangements with third parties to further develop our pipeline products. As part of our research program, we also pursue collaborations with leading institutions and laboratories all over the world. We enter into these collaborations to utilize the expertise and facilities these institutions and laboratories provide.

Currently, we have a pipeline of 2 NCEs in clinical development and 1 in pre-clinical development. These compounds are being developed in partnership with Rheoscience, ClinTec and Argenta. The status of development and details of the compound are discussed in the Business Overview section of this Annual report. As we make progress in advancing our pipeline through various stages of clinical development we are also building capabilities in drug development. We believe this will help to enhance the value of our NCE assets. We expect to further complement our internal research and development efforts by pursuing strategic partnerships and alliances in our key focus areas.

Specialty

Building a specialty branded business in the U.S. is one of the important aspects of our innovation strategy. The specialty business is close to launching its own sales and marketing operations for in-licensed products in the dermatology therapeutic area in US while continuing to work on development of new in-house products. This is the result of our continued efforts over the last few years to establish this business through a combination of in-licensing initiatives as well as internal pipeline development programs. While initially this will not be a very significant business in terms of financial parameters, it is an important step in our journey of building a business based on innovative products.

Research and development expenses

In fiscal 2008, our research and development expenses were Rs.3,532.9 million. Compared to the fiscal year ended March 31, 2007, the benefit of income recognition under the Perlecan and I-VEN agreements was very low in 2008. Excluding the benefit of income under I-VEN and Perlecan agreements from fiscal 2008 and fiscal 2007, expenses have increased by 10.2%. This expense increase resulted from a commitment of additional resources towards to clinical trial and toxicology studies for biologics products and

an increase in product development studies in our formulation and generics segments. We have also prioritized our development efforts towards key high value opportunities.

5.E. Off-balance sheet arrangements

Guarantees. We adopted the provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. The Interpretation requires that we recognize the fair value of guarantee and indemnification arrangements issued or modified by us if these arrangements are within the scope of that Interpretation. In addition, under previously existing generally accepted accounting principles, we continue to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses can be estimated.

Our equity investee, Kunshan Rotam Reddy Pharmaceuticals Co. Limited (“KRRP”) secured a credit facility of Rs.27.0 million from Agricultural Bank of China (“Agricultural Bank”). During the year ended March 31, 2008, we issued a corporate guarantee amounting to Rs.27.2 million in favor of Agricultural Bank to enhance the credit standing of KRRP. The guarantee is required to be renewed every year and our liability may arise in the event of non-payment by KRRP of the amount withdrawn under its credit facility. As of March 31, 2008, we believed that the fair value of such liability was not material.

5.F. Tabular Disclosure of Contractual Obligations

The following summarizes our contractual obligations as of March 31, 2008 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.


	Payments Due by Period
	(Rs. in millions)
			Less than						More than
Contractual Obligations	Total		1 year		1-3 years		3-5 years		5 years
Operating lease obligations	Rs.	528.4	Rs.	161.5	Rs.	209.7	Rs.	126.2	Rs.	31.0


Capital lease obligations		291.3		12.1		29.7		16.5		233.0

Current portion		12.1		12.1		—		—		—

Non-current portion		279.2		—		29.7		16.5		233.0


Purchase obligations
Agreements to purchase property and equipment and other capital commitments⁽¹⁾		1,552.4		1,552.4		—		—		—


Borrowings from banks		4,862.7		4,862.7		—		—		—


Long term debt obligations		14,387.6		1,802.7		7,194.6		5,390.3		—

Current portion		1,802.7		1,802.7		—		—		—
Non-current portion		12,584.9		—		7,194.6		5,390.3		—

Post retirement benefits obligations		740.1		58.4		109.3		143.2		429.2


Liabilities related to unrecognized tax benefits (2)		—		—		—		—		—

Total contractual obligations	Rs.	21,622.5	Rs.	8,391.4	Rs.	7,434.0	Rs.	5,569.1	Rs.	264.0


(1)		These amounts are net of capital advances paid in respect of such purchases and are expected to be funded from internally generated funds.

(2)		As of March 31, 2008, we had total unrecognized tax benefits of Rs. 1,395.3 million. However, we have paid advance taxes with the tax authorities towards liability for such unrecognized tax benefits in the corresponding years and accordingly, no material cash outflows are expected with respect to such unrecognized tax benefits in the future.

5.G. Safe harbor

See page 2.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6.A. Directors and senior management

The list of our directors and executive officers and their respective age and position as of March 31, 2008 was as follows:

Directors


Name(1)	Age (in yrs)		Position
Dr. K. Anji Reddy(2)		69	Chairman
Mr. G.V. Prasad(2),(3)		47	Chief Executive Officer and Vice Chairman
Mr. Satish Reddy(2),(4)		40	Chief Operating Officer and Managing Director
Mr. Anupam Puri		62	Director
Dr. J.P. Moreau		60	Director
Ms. Kalpana Morparia		59	Director
Prof. Krishna G. Palepu		53	Director
Dr. Omkar Goswami		51	Director
Mr. P.N. Devarajan(5)		73	Director
Mr. Ravi Bhoothalingam		62	Director


(1)		Except for Dr. K. Anji Reddy, Mr. G.V. Prasad and Mr. Satish Reddy, all of the directors are independent directors under the corporate governance rules of the New York Stock Exchange.

(2)		Full-time director.

(3)		Son-in-law of Dr. K Anji Reddy.

(4)		Son of Dr. K Anji Reddy.

(5)		Mr. P.N. Devarajan provided us with a notice of his unwillingness to be re-appointed as a director and ceased to be a director of the Company effective May 20, 2008.

Executive Officers

Our policy is to classify our officers as “executive officers” if they have membership on our Management Council. Our Management Council consists of various business and functional heads and is our senior management organization. As of March 31, 2008, the Management Council consisted of:

Date of

Education/

Experience in

commencement of

Name and Designation

Degrees Held

Age

years

employment

Particulars of last employment

G.V. Prasad(1)
Vice Chairman and
Chief Executive Officer

B. Sc.(Chem. Eng.), M.S. (Indl. Admn.)

June 30, 1990

Promoter Director, Benzex Labs Private Limited

Satish Reddy (2)
Managing Director and
Chief Operating Officer

B. Tech., M.S.

January 18, 1993

Director, Globe Organics Limited

Abhijit Mukherjee
President — Custom Pharmaceutical Services
and Chemical Technical Operations

B. Tech. (Chem.)

January 15, 2003

President, Atul Limited

Date of

Education/

Experience in

commencement of

Name and Designation

Degrees Held

Age

years

employment

Particulars of last employment

Amit Patel,
Senior Vice President
— Corporate Development and Strategic Planning

B.A.S, BS (Eco), MBA

August 6, 2003

V P Corporate Development, CTIS Inc

Arun Sawhney
President — Active Pharmaceutical Ingredients
and Intermediates (3)

B. Com. PGDBM

June 1, 2001

Chief Executive, Max-GB Ltd.

Ashwani Kumar Malhotra Executive Vice President — Formulations Technical Operations

M. Pharma., PGD-IE&M, PGD-CD

February 8, 2001

Unit Head, Cipla Limited

Dr. C. Cartikeya Reddy,
Senior Vice President and Head Biologics

B Tech, MS and PhD

July 20, 2004

Senior Engineer, Genetech Inc

Jaspal Singh Bajwa
President — Branded Formulations
(Rest Of the World)(4)

MBA

April 10, 2003

Executive Director and COO, Marico Industries Limited

Jeffrey Wasserstein
Executive Vice President — Specialty Operations

B.A., J.D.

January 31, 2005

EVP & Chief Business Officer -Avigenics, Inc.

K. B. Sankara Rao
Executive Vice President — Integrated Product Development

M. Pharma.

September 29, 1986

Production Executive, Cipla Limited

Mark Hartman
President — North America Generics

B.Sc. Dairy Science

January 4, 2002

VP Sales & Marketing - Generics, Watson Laboratories

Mr. Prabir Kumar Jha
Senior Vice President and Global Chief of Human Resources

M.A., PGDM

November 29, 2002

Regional HR Head-Mahindra British Telecon Ltd

Raghu Cidambi
Advisor

B.Sc., PGDBM, LLB.

October 1, 2001

Director — Eenadu, Margadarsi Group

Dr. Rajinder Kumar
President — Research, Development and Commercialization

M.Sc., MBBS, PG Dip in Psychiatry & Neurology

April 30, 2007

CEO and Founding Member, MeRaD Pharmaceuticals Ltd.

Date of

Education/

Experience in

commencement of

Name and Designation

Degrees Held

Age

years

employment

Particulars of last employment

Saumen Chakraborty
Chief Financial Officer and President Information Technology and Business Process Excellence

PGDM

July 2, 2001

Vice President, Tecumseh

V. S. Vasudevan
President — European Generics Business

B. Com. ACA

April 1, 1986

Finance Head, Standard Equity Fund Limited


(1)		Son-in-law of Dr. K Anji Reddy.

(2)		Son of Dr. K Anji Reddy.

(3)		Ceased to be an employee with effect from May 5, 2008

(4)		Does not include North America and Europe.

There was no arrangement or understanding with major shareholders, customers, suppliers or others pursuant to which any director or executive officer referred to above was selected as a director or member of senior management.

Biographies

Directors

Dr. K. Anji Reddy is our Founder and Chairman of our Board of Directors. He is also the Founder of Dr. Reddy’s Research Foundation and Dr. Reddy’s Foundation. He has an undergraduate degree in Technology of Pharmaceuticals and Fine Chemicals from the University of Bombay and a Ph.D. in Chemical Engineering from National Chemical Laboratories, Pune. He has six years experience with Indian Drugs and Pharmaceuticals Limited in the manufacture and implementation of new technologies in bulk drugs. He is a member of the Board of Trade as well as the Prime Minister’s Task force on pharmaceuticals and knowledge-based industries. The Government of India bestowed the Padmashri Award upon him for his distinguished service in the field of trade and commerce. In addition to positions held in our subsidiaries and joint ventures, he is a Director in Diana Hotels Limited, OOO JV Reddy Biomed Limited, Pathenco APS and GAIN Foundation, Switzerland.

Mr. G.V. Prasad is a member of our Board of Directors and serves as our Vice-Chairman and Chief Executive Officer. He was the Managing Director of Cheminor Drugs Limited, a Dr. Reddy’s Group Company, prior to its merger with us. He has a Bachelor of Science degree in Chemical Engineering from Illinois Institute of Technology, Chicago, U.S.A. and an M.S. in Industrial Administration from Purdue University, U.S.A. He is also an active member of several associations including the National Committee on Drugs & Pharmaceuticals. In addition to positions held in our subsidiaries and joint ventures, he is a Director of Diana Hotels Limited, Nipuna Services Ltd and Ocimum Bio Solutions Limited.

Mr. Satish Reddy is a member of our Board of Directors and serves as our Managing Director and Chief Operating Officer. He has a Master of Science degree in Medicinal Chemistry from Purdue University, U.S.A. and a Bachelor of Technology degree in Chemical Engineering from Osmania University, Hyderabad. He is the member of the Confederation of Indian Industries for Andhra Pradesh. In addition to positions held in our subsidiaries and joint ventures, he is also a Director of Diana Hotels Limited and OOO JV Reddy Biomed Limited.

Mr. Anupam Puri has been a member of our Board of Directors since 2002. He retired from McKinsey & Company in late 2000. He was a Director and played a variety of other leadership roles during his 30-year career there. Before joining McKinsey & Company, he was Advisor for Industrial Development to the President of Algeria, and consultant to General Electric’s Center for Advanced Studies. He holds a Bachelor of Arts degree in Economics from St. Stephen’s College, Delhi University, and Master of Arts and M. Phil. degrees from Oxford University. He is also on the Boards of ICICI Bank Limited, Mahindra & Mahindra Limited and Tech Mahindra Limited.

Professor Krishna G. Palepu has been a member of our Board of Directors since 2002. He is the Ross Graham Walker Professor of Business Administration at the Harvard Business School. He holds the title of Senior Associate Dean, Director of Research. Professor Palepu has a Masters degree in physics from Andhra University, an M.B.A. from the Indian Institute of Management and a Ph.D. from the Massachusetts Institute of Technology. He is also a recipient of an honorary M.A. from Harvard, and an honorary Doctorate from the Helsinki School of Economics. He teaches finance, control and strategy in Harvard’s M.B.A. and Executive programs. He has published numerous research papers and is also the co-author of the book titled “Business Analysis & Valuation: Text and Cases.” He serves as a consultant to a wide variety of businesses and is on the boards of Satyam Computer Services Limited, Exetor Group, Enamics Limited and Harvard Business School Publishing Company.

Dr. Omkar Goswami has been a member of our Board of Directors since 2000. He is a founder and Chairman of CERG Advisory Private Limited, a corporate advisory and economic research and consulting company. He was a senior consultant and chief economist at the Confederation of Indian Industry for six years. He has also served as editor of Business India, associate professor at the Indian Statistical Institute, Delhi, and as an honorary advisor to the Ministry of Finance. He holds a Bachelor of Economics degree from St. Xavier’s College, Calcutta University, a Master of Economics degree from the Delhi School of Economics, Delhi University and a Ph.D. degree from Oxford University. He is also a Director on the Boards of Infosys Technologies Limited, DSP-Merrill-lynch Fund Managers Limited, Crompton Greaves Limited, Infrastructure Development Finance Company Limited, Gujarat Ambuja Cements Limited, Sona Koyo Steering Systems Limited and Cairn India Limited.

Mr. P.N. Devarajan has been a member of our Board of Directors since 2000. He has previously served as a Director of Cheminor Drugs Limited. He was a member of the Planning Board of Madhya Pradesh, Chairman of Research at the Council of National Environment Engineering Research Institute, member of the Assessment Committee of the Council of Scientific and Industrial Research and a member of the Research Council of National Chemical Laboratory. He has previously served as a Director of the Bank of Baroda, a member of the Central Board of Directors of the Reserve Bank of India and Group President and consultant of Reliance Industries Limited. Currently, he is also a Director on the Board of Kothari Sugars and Chemicals Limited, Shriram EPC Ltd. and Tropical Technologies Pvt Ltd and provided notice to us of his unwillingness to be re-appointed as a director and ceased to be a member of our Board of Directors effective May 20, 2008.

Mr. Ravi Bhoothalingam has been a member of our Board of Directors since 2000. He has served as the President of The Oberoi Group and was responsible for its worldwide operations. He has also served as the Head of Personnel at BAT Plc, Managing Director of VST Industries Limited, and as a Director of ITC Limited. He holds a Bachelor of Science degree in physics from St. Stephens College, Delhi and a Master of experimental psychology degree from Gonville and Caius College, Cambridge University. He is also a Director of Nicco Internet Ventures Limited and Sona Koyo Steering Systems Limited.

Dr. J.P. Moreau joined our Board as a member on May 18, 2007. He is presently working as Executive Vice-President and Chief Scientific Officer of the IPSEN Group where he is responsible for the Group’s research and development programs in Paris, London, Barcelona and Boston. Before that, he was IPSEN Group’s Vice-President, Research from April 1994 and has been a member of the Executive Committee of IPSEN Group since that date. Dr. Moreau has a degree in Chemistry from the University of Orléans and a D.Sc in biochemistry. He has also conducted post-doctorate research at the École polytechnique. He has published over 50 articles in scientific journals and is named as inventor or co-inventor in more than 30 patents. He is a regular speaker at scientific conferences and a member of Nitto Denko Scientific Advisory Board. In October 1976, Dr. Moreau founded Biomeasure Incorporated, based near Boston, and has been its President and CEO since then. He was also responsible for establishing Kinerton Ltd. in Ireland in March 1989, a wholesale manufacturer of therapeutic peptides, of which he is currently a Director.

Ms. Kalpana Morparia joined our Board as a member on June 5, 2007. She is Chief Strategy and Communications Officer of ICICI Group. She was previously the Joint Managing Director of ICICI Bank Limited and was responsible for the Corporate Centre at ICICI Bank Limited, comprising operations, planning and strategy, risk management, human resources management, legal and corporate communications and corporate brand management. A graduate in law from Bombay University, Ms. Morparia joined ICICI Limited in 1975. She worked in the areas of planning, treasury, resources and corporate legal services. In 2001, she led the ICICI Group’s major corporate structuring initiative, the merger of ICICI Limited with ICICI Bank to create India’s second largest bank. Ms. Morparia has served on several committees constituted by the Government of India. In November 2005, she was honored with the Economic Times ‘Business Women of the Year’ award. In September 2006, she was named one of ‘The 100 Most Powerful Women’ by Forbes Magazine. She also serves on the Board of ICICI Prudential Life Insurance Company Limited, ICICI Lombard General Insurance Company Limited, ICICI Prudential Asset Management Company Limited, ICICI Securities Limited, Bennet Coleman & Co Limited, CMC Limited and ICICI Foundation for Inclusive Growth.

Executive Officers

Mr. Abhijit Mukherjee is President of our Custom Pharmaceutical Services business and Chemical Technical Operations . Before joining us, he worked with Atul Limited for 10 years, where he held numerous positions of increasing responsibility. In his last assignment there he was President, Bulk Chemicals and Intermediates Business, and Managing Director, Amal Products Limited. He started his career as a management trainee in Hindustan Lever Limited (“HLL”) and put in 13 years in that company including 3 years in a Unilever company. He was primarily involved in the technical assignments in Aroma chemicals business in HLL and Unilever and also in detergents and sulphonation plants of HLL. He is a graduate in Chemical Engineering from the Indian Institute of Technology, Kharagpur.

Amit Patel is Senior Vice President of Corporate Development & Strategic Planning. His responsibilities include chairing our Global Business Development Council, pursuing alliances and M&A, and driving global strategic initiatives to accelerate growth in various businesses and regions. He is also responsible for select long-term strategic business planning efforts and for coordination of external relations activities in North America. Prior to joining us in 2003, Amit was co-founder and CEO of a healthcare services startup called MedOnTime that was later acquired by CTIS, at which he served as Vice President of Corporate Development. Earlier, he was a strategy consultant with Marakon Associates where he focused on value-based management and M&A. He received a Bachelor of Science degree in Economics from the Wharton School of Business at the University of Pennsylvania, a Bachelor of Applied Science degree in Systems Engineering from the Moore School at the University of Pennsylvania, and a Master of Business Administration degree from Harvard Business School.

Mr. Arun Sawhney was President of our Global API businesses. He joined us in 2001 as President of our API business from Max-GB Limited, where he was Chief Executive. Prior to that he headed the Global Business Development function at Ranbaxy Laboratories Limited. He has also had successful stints as Manager Exports with Hindustan Ciba Geigy and as Regional Sales Manager with Bayer India, earlier in his career. He holds an MBA from and was a silver-medalist (an award for being at the top of his class) from the International Management Institute, New Delhi, and a Bachelor’s degree in Commerce from Sydenham College of Commerce and Economics, Mumbai. He resigned from his position effective as of May 5, 2008.

Mr. Ashwani Kumar Malhotra is Executive Vice President of our Formulations Technical Operations and from March 2004 is responsible for formulation manufacturing operations, supply chain management and projects. He joined us as Vice President in February 2001, and was responsible for the India operations supporting our generics and specialty businesses with new product development filings and manufacturing and supply of products to regulated markets such as the United States, Canada, Europe, the United Kingdom, South Africa, Australia and New Zealand. Prior to joining us, he worked with Cipla Limited for 13 years in various capacities and with Warner Hindustan, a division of Parke Davis in formulations development and manufacturing for 7 years. He holds a postgraduate degree in Pharmacy from the Institute of Technology, Banaras Hindu University. He also holds a Diploma in Industrial Engineering & Management and a Postgraduate Diploma in Computer Systems from the Institute of Public Enterprises, Government of India.

Cartikeya Reddy is a Senior Vice President and heads our Biologics division that focuses on the development of biosimilar molecules for the Indian and global markets. Prior to joining us in 2004, he worked with Genentech Inc, where he was a Group Leader in the area of Cell Culture Process Development. Before that, he was with the Biotechnology Division of Bayer Corporation, where he successfully led teams in the areas of Bioprocess Development & Pilot Scale Manufacturing. He holds a Master of Science degree and Ph.D. in Chemical Engineering from the University of Illinois, Urbana-Champaign, and was a Visiting Scholar at the Massachusetts Institute of Technology, Cambridge, USA. He also graduated with a Bachelor of Technology degree in Chemical Engineering from the Indian Institute of Technology, Chennai, India.

Mr. Jaspal Singh Bajwa is President of our Branded Formulations (Rest of the World) business. He joined us from Marico Industries, where he was Executive Director and Chief Operating Officer. He has 27 years of diverse experience in the consumer and healthcare products industries, having worked with Nestlé, S.A. and Bausch and Lomb, Inc. He started his career with Nestlé, S.A. After 15 years with Nestlé, S.A. in Sales and Marketing, his last position was Chief of Marketing in India. Subsequently, he spent over 10 years with Bausch and Lomb, Inc., where he held several senior management positions including those of Managing Director for India/ SAARC, and Head of their Canadian Subsidiary. He has a Bachelor’s degree in Food Technology and an MBA from the Indian Institute of Management, Ahmedabad.

Mr. Jeffrey Wasserstein is Executive Vice President of our North America Specialty business and head of our North America business. He joined us in January 2005. He focuses on building our specialty business in North America and in addition works with the North American Management Team on selected opportunities for adding value to our other businesses in North America. He is also head of our New Jersey office where he leads our North America Operations function. Immediately prior to joining us he was EVP and Chief Business Officer of Avigenics, Inc., a biotechnology company engaged in the development of therapeutic proteins. He

had a long career with Schering Plough Corporation where he was Senior Vice President of Corporate Consent Decree Integration. Prior to this role, he was the President of Schering Canada. He also held several positions of increasing responsibility at the Vice President level over Corporate Business Development, Strategic Planning and Internal Consulting and as Associate General Counsel-Commercial. Prior to joining Schering Plough Corporation, he was an Associate Attorney with Wachtell, Lipton, Rosen & Katz. He holds a Bachelor of Arts degree from Franklin & Marshall College and a J.D. degree from New York University School of Law.

Mr. K.B. Sankara Rao is Executive Vice President responsible for Integrated Product Development for our Branded Formulations, Generics, API and specialty businesses and for formulation development of NCEs. He has been with us since 1986 in various capacities, establishing the manufacturing facilities, quality assurance systems, formulation research and development and managing supply chain for our formulations business. He also upgraded manufacturing facilities to the present day business needs, which resulted in the attainment of various statutory approvals, including U.K. MHRA approval. He is also responsible for the design and implementation of the “Self Managed Team” concept in two of our formulations manufacturing units. He holds a Masters degree in Pharmacy from Andhra University. He is a life member of the Indian Pharmaceutical Association, Indian pharmacy graduates association amongst his other affiliations. He has also been a member of CII-Southern Regional Quality & Productivity Sub-committee.

Mr. Mark Hartman is President of our North America Generics business. He has 22 years of experience in the pharmaceutical industry. Before joining us, Mark spent five years at Watson Laboratories. His last three positions at Watson were Director of Marketing for Trade and Managed Care, Executive Director, Sales and Marketing — Watson Generics, and Vice President, Sales and Marketing, Watson Generics. He was involved in multiple product and company acquisitions during his tenure with Watson. Before Watson, he was Director of Marketing for Alpharma USPD, Marketing Manager at Geneva Pharmaceuticals, and held various brand and generic sales and marketing positions during his 10 years at Lederle Laboratories. He holds a bachelors degree in Dairy Science from Virginia Tech, Virginia.

Prabir Jha is our Senior Vice President and Global Chief of Human Resources. He moved to the private sector after almost 10 years in the Indian Government. He has worked for organizations such as Thermax and Mahindra British Telecom prior to joining us, where he has been key to many of the high-end human resources interventions. He has handled all areas in human resources, with special interest in change management, global human resources strategy, employer branding and leadership capability development. He is an alumnus of St. Stephen’s College, Delhi and XLRI Jamshedpur. During his time as a government employee, he handled the entire gamut of human resources and industrial relations issues in the Indian Ordinance Factories. A recipient of several academic and professional awards, he has been on the CII Panel for human resources and industrial relations for Andhra Pradesh.

Mr. Raghu Cidambi is Advisor and Head of Corporate Intellectual Property Management and Strategic Planning. Prior to joining us, he served with the Eenadu Group, a large south India-based media conglomerate, where he was responsible for its legal affairs. He has graduated from the Indian Institute of Management, Calcutta and thereafter obtained a Bachelor’s Degree in Law from the Osmania University in Hyderabad.

Dr. Rajinder Kumar is our President — Research, Development and Commercialization. He is a graduate of University of London, University of Birmingham and University of Dundee. After receiving his degree in Medicine and Surgery, he obtained his post-graduate diploma in psychiatry and neurology from The Royal College of Surgeons in Ireland in 1990. He has held various leadership roles in the vision, development and implementation of the overall brand strategies to support the research and development and business development operations across different therapeutic areas within the pharmaceutical industry. He has extensive experience in drug development, regulatory affairs, and commercial strategy in North America, Europe, Japan and Asia. He has presented at various international meetings, has chaired international symposia and scientific advisory boards and has to his credit a range of highly respected publications. He is a member of many international scientific and clinical organizations, including Fellow of the Royal Society of Medicine and is a member of the Institute of Directors in the United Kingdom. He has an extensive history of building and managing strong result-focused teams. With his wide array of experience across research and development, expertise in regulatory affairs across the globe and clinical expertise, coupled with membership in various international forums, Dr. Kumar adds significant strength to our organizational capabilities. Prior to joining us, he was an independent consultant to several organizations in the areas of medical and commercial strategy and in the development of early stage molecules to proof-of-concept.

Mr. Saumen Chakraborty is currently our Chief Financial Officer and President- Information Technology & Business Process Excellence. Prior to this role he was our Global Chief of HR. He has 23 years of experience in strategic and operational aspects of management. Prior to joining us, he held various positions including line manager and a human resources facilitator, with diverse portfolios such as Senior Manager (Finance and Accounts) in Eicher, and Vice President (Operations) in Tecumseh. A member of various industry forums including the CII and the National HRD Network, he graduated with honors as the valedictorian of his class

from Visva—Bharati University in Physics, and went on to pursue management from the Indian Institute of Management, Ahmedabad. He continues to be responsible for Information Technology and Business Process Excellence.

Mr. V.S. Vasudevan is currently the President — European Generics business. Prior to this role he was our Chief Financial Officer. In the position of Chief Financial Officer, he was responsible for managing our finance organization. He also was the head of the Secretarial, Legal, Compliance, Investor Relations and Internal Audit functions. He played an important role in establishment of our corporate governance framework. Under his leadership, we received external recognition for our corporate governance and financial reporting practices from the Institute of Company Secretaries of India and the Institute of Chartered Accountants of India. He played a key role in the integration of Cheminor Drugs Limited with us, the acquisition of betapharm in Germany and in our growth through various other corporate initiatives, including the acquisition of other companies in India and overseas and the acquisition of brands in India. He is a Chartered Accountant by qualification, and a member of the Peer Review Board of the Institute of Chartered Accountants of India.

6.B. Compensation

Directors’ compensation

Full-Time Directors. The compensation of our Chairman, Chief Executive Officer and Chief Operating Officer (who we refer to as our “full-time directors”) is divided into salary, commission and benefits. They are not eligible to participate in the stock option plan. The compensation committee of the Board of Directors initially recommends the compensation for full-time directors. If the Board of Directors (the “Board”) approves the recommendation, it is then submitted to the shareholders for approval at the general shareholders meeting.

On July 28, 2006, our shareholders re-appointed Dr. K. Anji Reddy as Chairman with effect from July 13, 2006, Mr. G. V. Prasad as Vice Chairman and CEO with effect from January 30, 2006. On July 24, 2007, our shareholders re-appointed Mr. Satish Reddy as Managing Director and COO with effect from October 1, 2007. Our Managing Director and COO and Vice Chairman and CEO are each entitled to receive a maximum commission of up to 0.75% of our net profit (as defined under the Indian Companies Act, 1956) for the fiscal year. Our Chairman is entitled to receive a maximum commission of up to 1.0% of our net profit (as defined under the Indian Companies Act, 1956) for the fiscal year. The compensation committee, which is composed of independent directors, recommends the commission for our Chairman, Vice Chairman and CEO and Managing Director and COO within the limits of 1%, 0.75% and 0.75%, respectively, of the net profits (as defined under the Indian Companies Act, 1956) for each fiscal year.

Non-Full Time Directors. Each of our non-full time directors receives an attendance fee of Rs.5,000 (U.S.$124.6) for every Board meeting and Board committee meeting they attend. In fiscal 2008, we paid an aggregate of Rs.365,000 (U.S.$9097.7) to our non-full time directors as attendance fees. Non-full time directors are also eligible to receive a commission on our net profit (as defined under the Indian Companies Act, 1956) for each fiscal year. Our shareholders have approved a maximum commission of up to 0.5% of the net profits (as defined under the Indian Companies Act, 1956) for the fiscal year for all non-full time directors in a year. The Board determines the entitlement of each of the non-full time directors to commission within the overall limit. The non-full time directors were granted stock options under the Dr. Reddy’s Employees Stock Option Scheme, 2002 in fiscal 2008 as provided in the table below.

For fiscal 2008, the directors were entitled to the following amounts as compensation:


			Amount Rs. (in thousands)
Name of Directors	Attendance fees		Commission(2)		Salary		Perquisites		Total		Stock Options
Dr. K. Anji Reddy		—		60,310		5,400		497		66,207		—
Mr. G.V. Prasad		—		45,233		3,600		687		49,520		—
Mr. Satish Reddy		—		45,233		3,600		695		49,528		—
Mr. Anupam Puri		60		2,848		—		—		2,908		3,000
Dr. J.P. Moreau		25		2,588		—		—		2,613		3,000
Ms. Kalpana Morparia		30		2,407		—		—		2,437		3,000
Prof. Krishna G. Palepu		35		2,648		—		—		2,683		3,000


			Amount Rs. (in thousands)
Name of Directors	Attendance fees		Commission(2)		Salary		Perquisites		Total		Stock Options
Dr. Omkar Goswami		55		2,808		—		—		2,863		3,000
Mr. P.N. Devarajan(1)		85		2,608		—		—		2,693		3,000
Mr. Ravi Bhoothalingam		75		2,608		—		—		2,683		3,000


(1)		Ceased to be a member of our Board of Directors effective May 20, 2008

(2)		The Board of Directors recommended for a fixed commission of Rs.2,407 thousands (U.S.$60,000) per director applicable to all the independent directors, a specific commission of Rs.401 thousands (U.S.$10,000) to the Chairman of the Audit Committee and Rs.200 thousands (U.S.$5,000) to the Chairman of other Committees other than the above, a specific compensation of Rs.60 thousands (U.S.$1,500) was paid towards foreign travel to the directors residing outside India.

The options granted to directors in fiscal 2008 have an exercise price of Rs.5 per option, vest in one year, and expire five years from the date of vesting.

Executive officers’ compensation

The initial compensation to all our executive officers is determined through appointment letters issued at the time of employment. The appointment letter provides the initial amount of salary and benefits the executive officer will receive as well as a confidentiality provision and a non-compete provision applicable during the course of the executive officer’s employment with us. We provide salary, certain perquisites, retirement benefits, stock options and variable pay to our executive officers. The compensation committee of the Board reviews the compensation of executive officers on a periodic basis.

All of our employees at the managerial and staff levels are eligible to participate in a variable pay program, which consists of performance bonuses based on the performance of their function or business unit, and a profit sharing plan through which part of our profits can be shared with our employees. Our variable pay program is aimed at rewarding performance of the individual, business unit/function and the organization, with significantly higher rewards for superior performances.

We also have two employee stock option schemes: the Dr. Reddy’s Employees Stock Option Scheme, 2002 and the Dr. Reddy’s Employees ADR Stock Option Scheme, 2007. The stock option schemes are applicable to all of our employees and directors and employees and directors of our subsidiaries. The stock option schemes are not applicable to promoter directors, promoter employees and persons holding 2% or more of our outstanding share capital. The compensation committee of the Board of Directors awards options pursuant to the stock option schemes based on the employee’s performance appraisal. Some employees have also been granted options upon joining us.

Compensation for executive officers who are full time directors is summarized in the table under “Directors’ compensation,” above. The following table presents the annual compensation paid for services rendered to us for fiscal 2008 and stock options held by all of our other executive officers as of March 31, 2008:


	Compensation		No. of		Fiscal Year				Expiration
Name	(Rs.)		options held		of the Grant		Exercise price		date
Mr. Abhijit Mukherjee	Rs.13,711,512			1,600		2005		5.00		(1	)
				5,000		2006		5.00		(1	)
				6,000		2007		5.00		(1	)
				8,000		2008		5.00		(1	)
Mr. Amit Patel		12,639,997		4,000		2005		442.50		(1	)
				1,400		2006		5.00		(1	)
				1,250		2007		5.00		(1	)
				10,650		2008		5.00		(3	)
Arun Sawhney (4)		15,636,448		4,570		2005		5.00		(1	)
				4,000		2006		5.00		(1	)
				4,800		2007		5.00		(1	)
				8,000		2008		5.00		(1	)
Mr. Ashwani Kumar Malhotra		10,682,044		3,002		2005		5.00		(1	)
				3,500		2006		5.00		(1	)
				3,750		2007		5.00		(1	)
				6,000		2008		5.00		(1	)
Dr. C. Cartikeya Reddy		5,927,933		2,400		2006		5.00		(1	)
				2,000		2007		5.00		(1	)
				4,000		2008		5.00		(1	)
Mr. Jaspal Singh Bajwa		14,777,682		3,500		2005		5.00		(1	)
				5,000		2006		5.00		(1	)
				6,000		2007		5.00		(1	)
				8,000		2008		5.00		(1	)
Mr. Jeffrey Wasserstein		21,020,940		22,000		2008		5.00		(3	)
Mr. K.B. Sankara Rao		10,484,928		6,160		2005		5.00		(1	)
				6,000		2006		5.00		(1	)
				6,400		2007		5.00		(1	)
				6,000		2008		5.00		(1	)
Mr. Mark Hartman		21,020,943		20,000		2004		441.50		(1	)
				12,000		2005		442.50		(1	)
				20,000		2008		5.00		(3	)
Mr. Prabir Kumar Jha		8,215,047		800		2005		5.00		(1	)
				1,500		2006		5.00		(1	)
				1,950		2007		5.00		(1	)
				4,000		2008		5.00		(1	)
Dr. Rajinder Kumar		21,374,919		7,500		2008		5.00		(2	)
Mr. Raghu Cidambi		9,200,000		7,000		2005		5.00		(1	)
				5,000		2006		5.00		(1	)
				3,750		2007		5.00		(1	)
				6,000		2008		5.00		(1	)
Mr. Saumen Chakraborty		14,223,788		5,000		2004		441.50		(1	)
				2,550		2005		5.00		(1	)
				5,000		2006		5.00		(1	)
				6,000		2007		5.00		(1	)
				8,000		2008		5.00		(1	)
Mr. V.S. Vasudevan		18,855,933		11,480		2003		531.51		(1	)
				20,000		2004		441.50		(1	)
				20,000		2005		442.50		(1	)
				50,000		2006		362.50		(1	)
				8,000		2007		5.00		(1	)
				7,000		2008		5.00		(1	)


(1)		The expiration date is five years from the date of vesting. The options vest in annual increments over a period of four years.

(2)		The expiration date is five years from the date of vesting. The options vest in one year.

(3)		The expiration date is five years from the date of vesting. The options vest in three years.

(4)		Ceased to be an employee effective as of May 5, 2008

Retirement benefits.

We provide the following benefit plans to our employees:

Gratuity benefits: In accordance with applicable Indian laws, we provide for gratuity, a defined benefit retirement plan (the “Gratuity Plan”) covering certain categories of employees. The Gratuity Plan provides a lump sum payment to vested employees, at retirement or termination of employment, at an amount based on the respective employee’s last drawn salary and the years of employment with the Company. Effective September 1, 1999, we established Dr. Reddy’s Laboratories Gratuity Fund (the “Gratuity Fund”). Liability with regard to the Gratuity Plan is determined by an actuarial valuation, based upon which we make contributions to the Gratuity Fund. Trustees administer the contributions made to the Gratuity Fund. The amounts contributed to the Gratuity Fund are invested in specific securities as mandated by Indian law and generally consist of federal and state Indian Government bonds and the debt instruments of Indian Government-owned corporations.

The net periodic benefit costs recognized by us were Rs.52.3 million, Rs.31.5 million and Rs.39.3 million during the years ended March 31, 2006, 2007 and 2008 respectively.

Superannuation benefits. Apart from being covered under the Gratuity Plan described above, our senior officers also participate in superannuation, a defined contribution plan administered by the Life Insurance Corporation of India. We make annual contributions based on a specified percentage of each covered employee’s salary. We have no further obligations under the plan beyond our annual contributions. We contributed Rs.24.8 million, Rs.28.0 million and Rs.39.9 million to the superannuation plan during the years ended March 31, 2006, 2007 and 2008, respectively.

Provident fund benefits. In addition to the above benefits, all employees receive benefits from a provident fund, a defined contribution plan. Both the employee and employer each make monthly contributions to the plan equal to 12% of the covered employee’s basic salary. We have no further obligations under the plan beyond our monthly contributions. We contributed Rs. 64.4 million, Rs.113.5 million and Rs.144.5 million to the provident fund plan during the years ended March 31, 2006, 2007 and 2008, respectively.

Pension plans. All employees of Falcon (Mexico) are governed by a defined benefit pension plan. The pension plan provides a payment to vested employees at retirement or termination of employment. This payment is based on the employee’s integrated salary and is paid in the form of a monthly pension over a period of 20 years computed based on a predefined formula. Liabilities in respect of the pension plan are determined by an actuarial valuation, based on which the Company makes contributions to the pension plan fund. This fund is administered by a third party who is provided guidance by a technical committee formed by senior employees of Falcon.

6.C. Board practices

Our Articles of Association require us to have a minimum of three and a maximum of 20 directors. As of March 31, 2008, we had ten directors on our Board, of which seven were non-full time independent directors.

The Companies Act, 1956 and our Articles of Association require that at least two-thirds of our directors be subject to re-election by our shareholders in rotation. At every annual general meeting, one-third of the directors who are subject to re-election must retire and, if eligible for re-election, may be reappointed at the annual general meeting. Our full time directors are not subject to re-election.

The terms of each of our directors and their expiration dates are provided in the table below.


	Expiration of Current
Name	Term of Office	Term of Office	Period of Service
Dr. K. Anji Reddy (1)	July 12, 2011	5 years	24 years
Mr. Satish Reddy (1)(3)	September 30, 2012	5 years	15 years
Mr. G.V. Prasad (1)	January 30, 2011	5 years	22 years
Mr. Anupam Puri (2)	Retirement by rotation	Due for retirement by rotation in 2008	6 years
Dr. J. P. Moreau(2)	Retirement by rotation	Due for retirement by rotation in 2009	1 year
Ms. Kalpana Morpaira(2)	Retirement by rotation	Due for retirement by rotation in 2010	1 year
Dr. Krishna G. Palepu (2)	Retirement by rotation	Due for retirement by rotation in 2008	6 years
Mr. P.N. Devarajan (2)(4)	Retirement by rotation	Due for retirement by rotation in 2008	7.5 years
Dr. Omkar Goswami (2)(3)	Retirement by rotation	Due for retirement by rotation in 2010	7.5 years
Mr. Ravi Bhoothalingam (2)	Retirement by rotation	Due for retirement by rotation in 2009	7.5 years


(1)		Full time director.

(2)		Non-full time independent director.

(3)		Reappointed at the 23rd Annual General Meeting of Shareholders held on July 24, 2007

(4)		Director liable to retire by rotation provided us with a notice of his unwillingness to be re-appointed and ceased to be a member of the Board of Directors effective as of May 20, 2008.

The terms of the contracts with our full-time directors are also disclosed to all the shareholders in the notice of the general meeting. The directors are not eligible for any termination benefit on the termination of their tenure with us.

Committees of the Board

Committees appointed by the Board focus on specific areas and take decisions within the authority delegated to them. The Committees also make specific recommendations to the Board on various matters from time-to-time. All decisions and recommendations of the Committees are placed before the Board for information or approval. We have six Board-level Committees:

	•		Audit Committee.

	•		Compensation Committee.

	•		Governance Committee.

	•		Shareholders’ Grievance Committee.

	•		Management Committee.

	•		Investment Committee.

The details of the Audit Committee, Compensation Committee and Governance Committee are discussed hereunder.

Audit Committee. Our management is primarily responsible for our internal controls and financial reporting process. Our independent registered public accounting firm is responsible for performing independent audits of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and for issuing reports based on such audits. The Board of Directors has entrusted the Audit Committee to supervise these processes and thus ensure accurate and timely disclosures that maintain the transparency, integrity and quality of financial controls and reporting.

The Audit Committee consists of the following three non-full time independent directors:

	•		Dr. Omkar Goswami (Chairman)

	•		Ms. Kalpana Morparia

	•		Mr. Ravi Bhoothalingam

Our Company Secretary is the Secretary of the Audit Committee. This Committee met on four occasions during fiscal 2008. Our independent registered public accounting firm was present at all Audit Committee meetings during the year.

The primary responsibilities of the Audit Committee are to:

	•		Supervise the financial reporting process;

	•		Review the financial results, along with the related public filings, before recommending them to the Board;

	•		Review the adequacy of our internal controls, including the plan, scope and performance of our internal audit function;

	•		Discuss with management our major policies with respect to risk assessment and risk management;

	•		Hold discussions with independent registered public accounting firm on the nature and scope of audits, and any views that they have about the financial control and reporting processes;

	•		Ensure compliance with accounting standards, and with listing requirements with respect to the financial statements;

	•		Recommend the appointment and removal of independent registered public accounting firm and their fees;

	•		Review the independence of our independent registered public accounting firm;

	•		Ensure that adequate safeguards have been taken for legal compliance both for us and for our Indian and foreign subsidiaries;

	•		Review related party transactions; and

	•		Review the functioning of our whistle blower policies and procedures.

Compensation Committee. The Compensation Committee considers and recommends to the Board the compensation of the full time directors and executives above Vice-President level, and also reviews the remuneration package that we offer to different grades/levels of our employees. The Compensation Committee also administers our Employee Stock Option Scheme.

The Compensation Committee consists of the following four non-full time, independent directors:

	•		Mr. Ravi Bhoothalingam (Chairman)

	•		Dr. J.P. Moreau

	•		Ms. Kalpana Morpaira

	•		Mr. P. N. Devarajan

The Chief of Human Resources is the Secretary of the Committee. The Compensation Committee met four times during fiscal 2008.

Governance Committee. The primary function of the Governance Committee is to assist the Board of Directors in fulfilling its responsibilities by reviewing and making recommendations to the Board regarding the Board’s composition and structure, establishing criteria for Board membership and evaluating corporate policies relating to the recruitment of Board members and establishing,

implementing and monitoring policies and processes regarding principles of corporate governance in order to ensure the Board’s compliance with its fiduciary duties.

The Governance Committee consists of the following three non-full time, independent directors:

	•		Mr. Anupam Puri (Chairman)

	•		Prof. Krishna G. Palepu

	•		Dr. Omkar Goswami

Our Company Secretary is the Secretary of the Committee. The Governance Committee met once during fiscal 2008.

Corporate Governance

Companies listed on the New York Stock Exchange (“NYSE”) must comply with certain standards regarding corporate governance as codified in Section 303A of the NYSE’s Listed Company Manual. Listed companies that are foreign private issuers (as such term is defined in Rule 3b-4 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are permitted to follow home country practice in lieu of the provisions of this Section 303A, except that such companies are required to comply with the requirements of Sections 303A.06, 303A.11 and 303A.12(b) and (c), which are as follows:

	(i)		establish an independent audit committee that has specified responsibilities;

	(ii)		provide prompt certification by its chief executive officer of any material non-compliance with any corporate governance rules;

	(iii)		provide periodic written affirmations to the NYSE with respect to its corporate governance practices; and

	(iv)		provide a brief description of significant differences between its corporate governance practices and those followed by U.S. companies.

The following table compares our principal corporate governance practices to those required of U.S. NYSE listed companies.


Standard for U.S. NYSE Listed Companies		Our practice
Listed companies must have a majority of “independent directors,” as defined by the NYSE.		We comply with this standard. Seven of our ten directors are “independent directors,” as defined by the NYSE.

The non-management directors of each listed company must meet at regularly scheduled executive sessions without management.		We comply with this standard. Our non-management directors meet periodically without management directors in scheduled executive sessions.

Listed companies must have a nominating/corporate governance committee composed entirely of independent directors. The nominating/corporate governance committee must have a written charter that addresses the committee’s purpose and responsibilities, subject to the minimum purpose and responsibilities established by the NYSE, and an annual evaluation of the committee.		We have a Governance Committee composed entirely of independent directors which meets these requirements. The committee has a written charter that meets these requirements. We do not have a practice of evaluating the performance of the Governance Committee.

Listed companies must have a compensation committee composed entirely of independent directors. The compensation committee must have a written charter that addresses the committee’s purpose and responsibilities, subject to the minimum purpose and responsibilities established by the NYSE, and an annual evaluation of the committee.		We have a Compensation Committee composed entirely of independent directors which meets these requirements. The committee has a written charter that meets these requirements. We do not have a practice of evaluating the performance of our Compensation Committee.

Listed companies must have an audit committee that satisfies the		Our Audit Committee satisfies the requirements of Rule 10A-3


Standard for U.S. NYSE Listed Companies		Our practice
requirements of Rule 10A-3 under the Exchange Act		under the Exchange Act.

The audit committee must have a minimum of three members all being independent directors. The audit committee must have a written charter that addresses the committee’s purpose and responsibilities, subject to the minimum purpose and responsibilities established by the NYSE, and an annual evaluation of the committee.		We have an Audit Committee composed of three members, all being independent directors. The committee has a written charter that meets these requirements. We also have an internal audit function. We do not have a practice of evaluating the performance of our Audit Committee.

Each listed company must have an internal audit function.		We have an Internal Audit function.

Shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, with limited exceptions.		We comply with this standard. Our Employee Stock Option Plan was approved by our shareholders.

Listed companies must adopt and disclose corporate governance guidelines.		We have not adopted corporate governance guidelines.

All listed companies, U.S. and foreign, must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.		We comply with this standard. More details on our Code of Business Conduct and Ethics are given under Item 16.B.

Listed foreign private issuers must disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under NYSE listing standards.		This requirement is being addressed by way of this table.

Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards, qualifying the certification to the extent necessary.		We filed our most recent written certification on September 26, 2007

Each listed company CEO must promptly notify the NYSE in writing after any executive officer of the listed company becomes aware of any material non-compliance with any applicable provisions of this Section 303A.		There are no such instances.

Each listed company must submit an executed Written Affirmation annually to the NYSE. In addition, each listed company must submit an interim Written Affirmation each time a change occurs to the board or any of the committees subject to Section 303A. The annual and interim Written Affirmations must be in the form specified by the NYSE.		We filed our most recent written affirmation on September 28, 2007

6.D. Employees

The following table sets forth the number of our employees during fiscal 2006, 2007 and 2008.

For the Fiscal Year Ended March 31, 2008


	North America		Europe		Rest of the World		Total
Manufacturing(1)		—		50		3,276		3,326
Sales and Marketing(2)		45		261		3,079		3,385
Research and Development		18		—		1,708		1,726
Others(3)		46		184		908		1,138

Total		109		495		8,971		9,575

For the Fiscal Year Ended March 31, 2007


	North America		Europe		Rest of the World		Total
Manufacturing(1)		—		29		3,566		3,595
Sales and Marketing(2)		21		299		2,546		2,866
Research and Development		18		—		1,381		1,557
Others(3)		58		182		920		1,002

Total		97		510		8,413		9,020

For the Fiscal Year Ended March 31, 2006


	North America		Europe		Rest of the World		Total
Manufacturing(1)		—		56		2,841		2,897
Sales and Marketing(2)		27		291		2,268		2,586
Research and Development		19		—		1,167		1,186
Others(3)		32		129		695		856

Total		78		476		6,971		7,525


(1)		Includes quality, technical services and warehouse.

(2)		Includes business development.

(3)		Includes shared services, corporate business development and the intellectual property management team.

We have not experienced any material work stoppages in the last three fiscal years and we consider our relationship with our employees and labor unions to be good. Approximately 10% of our employees belong to labor unions. We did not experience any strikes at our manufacturing facilities in fiscal 2008.

6.E. Share ownership

The following table sets forth, as of March 31, 2008 for each of our directors and executive officers, the total number of our equity shares and options owned by them:


			% of
	No. of shares		outstanding			No. of		Fiscal Year
Name	held(1),(3)		capital			options held		of the Grant		Exercise price		Expiration date
Dr. K. Anji Reddy(2),(4)		800,956		0.48	%		—		—		—		—
Mr. G.V. Prasad(4)		1,355,840		0.81	%		—		—		—		—
Mr. Satish Reddy(4)		1,205,832		0.72	%		—		—		—		—
Mr. Anupam Puri		1,500					9,000		2007	Rs.	5.00		(6	)
							1500		2007		5.00		(7	)
Dr. J P Moreau							—		—		—		—
Ms Kalpana Morparia							—		—		—		—
Prof. Krishna G Palepu		1,500					9,000		2007		5.00		(6	)
							1,500		2007		5.00		(7	)
Dr. Omkar Goswami		6,000					3,000		2005		5.00		(5	)
							3,000		2007		5.00		(6	)
Mr. P.N. Devarajan		6,200					3,000		2005		5.00		(5	)
							3,000		2007		5.00		(6	)
Mr. Ravi Bhoothalingam		6,000					3,000		2005		5.00		(5	)
							3,000		2007		5.00		(6	)
Mr. Abhijit Mukherjee		11,800					6,600		2005		5.00		(5	)
							6,000		2006		5.00		(5	)
							8,000		2007		5.00		(5	)
Mr. Amit Patel							4,000		2004		442.50		(5	)
							1,400		2005		5.00		(5	)


			% of
	No. of shares		outstanding		No. of		Fiscal Year
Name	held(1),(3)		capital		options held		of the Grant		Exercise price		Expiration date
						1,250		2005		5.00		(5	)
						10,650		2007		5.00		(8	)
Arun Sawhney		12,740				8,570		2005		5.00		(5	)
						4,800		2006		5.00		(5	)
						8,000		2007		5.00		(5	)
Mr. Ashwani Kumar Malhotra		16,564				6,502		2005		5.00		(5	)
						3,750		2006		5.00		(5	)
						6,000		2007		5.00		(5	)
Dr. C. Cartikeya Reddy						2,400		2005		5.00		(5	)
						2,000		2006		5.00		(5	)
						4,000		2007		5.00		(5	)
Mr. Jaspal Singh Bajwa		13,500				8,500		2005		5.00		(5	)
						6,000		2006		5.00		(5	)
						8,000		2007		5.00		(5	)
Mr. Jeffrey Wasserstein						22,000		2007		5.00		(8	)
Mr. K.B. Sankara Rao		42,744		0.03		12,160		2005		5.00		(5	)
						6,400		2006		5.00		(5	)
						6,000		2007		5.00		(5	)
Mr. Mark Hartman						20,000		2003		441.50		(5	)
						12,000		2004		442.50		(5	)
						20,000		2007		5.00		(8	)
Mr. Prabir Kumar Jha		4,550				2,300		2005		5.00		(5	)
						1,950		2006		5.00		(5	)
						4,000		2007		5.00		(5	)
Dr. Rajinder Kumar						7,500		2007		5.00		(6	)
Mr. Raghu Cidambi		15,250				12,000		2005		5.00		(5	)
						3,750		2006		5.00		(5	)
Mr. Saumen Chakraborty		28,850		0.02		5,000		2003		441.50		(5	)
						7,550		2005		5		(5	)
						6,000		2006		5.00		(5	)
						8,000		2007		5.00		(5	)
Mr. V.S. Vasudevan		—				11,480		2002		531.51		(5	)
						20,000		2003		441.50		(5	)
						20,000		2004		442.50		(5	)
						50,000		2005		362.50		(5	)
						8,000		2006		5.00		(5	)
						7,000		2007		5.00		(5	)


(1)		Shares held in their individual name only.

(2)		Does not include shares held beneficially. See Item 7.A. for beneficial ownership of shares by this individual.

(3)		All shares have voting rights.

(4)		Not eligible for grant of Stock Options.

(5)		The expiration date is five years from the date of vesting. The options vest in annual increments over a period of four years.

(6)		The expiration date is five years from the date of vesting. The options vest in one year.

(7)		The expiration date is five years from the date of vesting. The options vest in two years.

(8)		The expiration date is five years from the date of vesting. The options vest in three years.

Employee Stock Incentive Plans

Dr. Reddy’s Employees Stock Option Plan-2002 (the “DRL 2002 Plan”)

The Company instituted the DRL 2002 Plan for all eligible employees in pursuance of the special resolution approved by the shareholders in the Annual General Meeting held on September 24, 2001. The DRL 2002 Plan covers all employees of the Company and all employees and directors of its subsidiaries. The Compensation Committee of the Board (the “Compensation Committee”) shall administer the DRL 2002 Plan and grant stock options to eligible employees of the Company and its subsidiaries. The Compensation Committee shall determine the employees eligible for receiving the options, the number of options to be granted, the exercise price, the vesting period and the exercise period. The vesting period is determined for all options issued on the date of grant. The maximum contractual term for stock options granted pursuant to the DRL 2002 Plan is generally five years. The options issued under the DRL 2002 Plan vest in periods ranging between one and four years.

The DRL 2002 Plan was amended on July 28, 2004 at the annual general meeting of shareholders to provide for stock option grants in two categories:

Category A: 1,721,700 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the fair market value of the underlying equity shares on the date of grant; and

Category B: 573,778 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the par value of the underlying equity shares (i.e., Rs.5 per option).

The DRL 2002 Plan was further amended on July 27, 2005 at the annual general meeting of shareholders to provide for stock option grants in two categories:

Category A: 300,000 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the fair market value of the underlying equity shares on the date of grant; and

Category B: 1,995,478 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the par value of the underlying equity shares (i.e., Rs.5 per option).

Under the DRL 2002 Plan, the exercise price of the fair market value options granted under Category A above is determined based on the average closing price for 30 days prior to the grant in the stock exchange where there is highest trading volume during that period. Notwithstanding the foregoing, the Compensation Committee may, after obtaining the approval of the shareholders in the annual general meeting, grant options with a per share exercise price other than fair market value and par value of the equity shares.

After the stock split effected in the form of a stock dividend issued by the Company in August 2006, the DRL 2002 Plan provides for stock options granted in the above two categories as follows:


	Number of		Number of Options
	Options granted		granted Under
Particulars	Under category A		category B		Total
Options reserved under original Plan		300,000		1,995,478		2,295,478
Options exercised prior to stock dividend date (A)		94,061		147,793		241,854
Balance of shares that can be allotted on exercise of options (B)		205,939		1,847,685		2,053,624
Options arising from stock dividend (C)		205,939		1,847,685		2,053,624
Options reserved after stock dividend (A+B+C)		505,939		3,843,163		4,349,102

In April 2007, certain employees surrendered their par value options under category B of the DRL 2002 Plan in exchange for par value options under category B of the DRL 2007 Plan (discussed below). The incremental cost due to such modifications was insignificant.

At its meeting in October, 2007, the Compensation Committee proposed that the Company should absorb the full liability of Fringe Benefit Tax on exercise of all stock options granted until the date of this resolution. Further, in respect of new grants to be made by the Company subsequent to the date of this resolution, Fringe Benefit Tax will be recovered from employees upon exercise of stock options.

The above amendment is to be proposed at the next Annual General Meeting of the shareholders, which is currently proposed to be held in July 2008.

Stock option activity under the DRL 2002 Plan for the two categories of options was as follows:

Category A — Fair Market Value Options


	Fiscal Year Ended March 31, 2006
								Weighted
						Weighted		average
						average		remaining
	Shares arising			Range of		exercise		contractual
	out of options			exercise prices		price		life (months)
Outstanding at the beginning of the year		597,900		Rs.	373.5-574.5	Rs.	488.66		50
Granted during the year		65,000			362.5		362.5		81
Expired/forfeited during the year		(273,400	)		362.5-574.5		472.18		—
Exercised during the year		(155,000	)		441.5-488.65		471.92		—

Outstanding at the end of the year		234,500			362.5-531.51		439.43		64

Exercisable at the end of the year		75,764		Rs.	362.5-531.51	Rs.	471.93		45

Category A — Fair Market Value Options


	Fiscal Year Ended March 31, 2007
								Weighted
						Weighted		average
						average		remaining
	Shares arising			Range of		exercise		contractual
	out of options			exercise prices		price		life (months)
Outstanding at the beginning of the year		234,500			362.5-531.51		439.43		64
Expired/forfeited during the year		(11,600	)		441.5-574.5		527.8		—
Exercised during the year		(31,320	)		441.5-531.51		477.4		—

Outstanding at the end of the year		191,580			362.5-531.51		427.9		54

Exercisable at the end of the year		103,680		Rs.	362.5-531.51	Rs.	447.58		38

Category A — Fair Market Value Options


	Fiscal Year Ended March 31, 2008
								Weighted
						Weighted		average
						average		remaining
	Shares arising			Range of		exercise		contractual
	out of options			exercise prices		price		life (months)
Outstanding at the beginning of the year		191,580		Rs.	362.5-531.51	Rs.	427.9		54
Expired/forfeited during the year		(2,100	)		442.5		442.5		—
Exercised during the year		(30,700	)		441.5-531.51		458.32		—

Outstanding at the end of the year		158,780			362.5-531.51		421.79		44

Exercisable /vested at the end of the year		119,830			362.5-531.51		433.05		36

Expected to vest at the end of the year		33,030		Rs.	362.5-442.50	Rs.	387.20		67

Category B — Par Value Options


	Fiscal Year Ended March 31, 2006
								Weighted-
						Weighted-		average
						average		remaining
	Shares arising					exercise		contractual life
	out of options			Exercise price		price		(months)
Outstanding at the beginning of the year		759,098		Rs.	5	Rs.	5		84
Granted during the year		433,720			5		5		81
Forfeited during the year		(266,608	)		5		5		—
Exercised during the year		(196,242	)		5		5		—

Outstanding at the end of the year		729,968			5		5		81

Exercisable at the end of the year		36,272		Rs.	5	Rs.	5		59

Category B — Par Value Options


	Fiscal Year Ended March 31, 2007
								Weighted-
						Weighted-		average
						average		remaining
	Shares arising					exercise		contractual life
	out of options			Exercise price		price		(months)
Outstanding at the beginning of the year		729,968		Rs.	5	Rs.	5		81
Granted during the year		427,060			5		5		81
Forfeited during the year		(76,056	)		5		5		—
Exercised during the year		(191,720	)		5		5		—

Outstanding at the end of the year		889,252			5		5		77

Exercisable at the end of the year		43,256		Rs.	5	Rs.	5		51

Category B — Par Value Options


	Fiscal Year Ended March 31, 2008
								Weighted-
						Weighted-		average
						average		remaining
	Shares arising					exercise		contractual life
	out of options			Exercise price		price		(months)
Outstanding at the beginning of the period		889,252		Rs.	5	Rs.	5		77
Granted during the period		386,060			5		5		91
Forfeited during the period		(133,240	)		5		5		—
Surrendered by employees during the period		(138,418	)		5		5		—
Exercised during the period		(229,866	)		5		5		—

Outstanding at the end of the period		773,788			5		5		74

Exercisable/vested at the end of the period		72,364			5		5		50

Expected to vest at the end of the year		594,808		Rs.	5	Rs.	5		76

The weighted average grant date fair value of options granted during the year ended March 31, 2006 under category A – Fair market value options was Rs.293.42. The weighted average grant date fair value of options granted during the years ended March 31, 2006, 2007 and 2008 under category B par value options was Rs.705.88, Rs.575.36 and Rs.549.57, respectively. The aggregate intrinsic value of options exercised under the DRL 2002 Plan (both category A and B) during the years ended March 31, 2006, 2007 and 2008 was Rs.142 million, Rs.145 million and Rs.151 million, respectively. As of March 31, 2008, options outstanding and exercisable/vested under the DRL 2002 Plan (both category A and B) had an aggregate intrinsic value of Rs.481 million and Rs.61 million, respectively. As of March 31, 2008, the intrinsic value of options expected to vest under the DRL 2002 plan (both category A and B) had an aggregate intrinsic value of Rs. 355 million.

Dr. Reddy’s Employees ADR Stock Option Plan-2007 (the “DRL 2007 Plan”):

The Company instituted the DRL 2007 Plan for all eligible employees in pursuance of the special resolution approved by the shareholders in the Annual General Meeting held on July 27, 2005. The DRL 2007 Plan came into effect on approval of the Board of Directors on January 22, 2007. The DRL 2007 Plan covers all employees of DRL and all employees and directors of its subsidiaries. The Compensation Committee administers the DRL 2007 Plan and grants stock options to eligible employees of the Company and its subsidiaries. The Compensation Committee determines the employees eligible for receiving the options, the number of options to be granted, the exercise price, the vesting period and the exercise period. The vesting period is determined for all options issued on the date of grant. The maximum contractual term for aforementioned stock option plan is generally five years. The options issued under DRL 2007 plan vest in periods ranging between one and four years.

The DRL 2007 Plan provides for grant of stock options in two categories:

Category A: 382,695 stock options out of the total of 1,530,779 stock options reserved for grant having an exercise price equal to the fair market value of the underlying equity share on the date of grant; and

Category B: 1,148,084 stock options out of the total of 1,530,779 stock options reserved for grant having an exercise price equal to the par value of the underlying equity share (i.e., Rs.5 per option).

Stock option activity under the DRL 2007 Plan during the year ended March 31, 2008 was as follows:

Category B — Par Value Options


	Fiscal Year Ended March 31, 2008
								Weighted-
						Weighted-		average
						average		remaining
	Shares arising					exercise		contractual life
	out of options			Exercise price		price		(months)
Granted during the year		206,818		Rs.	5	Rs.	5		84
Forfeited during the year		(24,040	)		5		5		—

Outstanding at the end of the year		182,778			5		5		73

Exercisable/vested at the end of the year		—			—		—		—

Expected to vest at the end of the year		154,996		Rs.	5	Rs.	5		73

The weighted average grant date fair value of options granted during the year ended March 31, 2008 under category-B par value options was Rs.550.95. As of March 31, 2008, options outstanding under the DRL 2007 Plan had an aggregate intrinsic value of Rs.107 million. As of March 31, 2008, the intrinsic value of options expected to vest under the DRL 2002 plan (both category A and B) had an aggregate intrinsic value of Rs. 91 million.

Aurigene Discovery Technologies Ltd. Employee Stock Option Plan 2003 (the “Aurigene ESOP Plan”)

Aurigene Discovery Technologies Limited (“Aurigene”), a consolidated subsidiary, adopted the Aurigene Discovery Technologies Limited Employee Stock Option Plan (the “Aurigene Employee Plan”) to provide for issuance of stock options to employees of Aurigene and its subsidiary, Aurigene Discovery Technologies Inc., who have completed one full year of service with Aurigene and its subsidiary. Aurigene has reserved 4,550,000 of its ordinary shares for issuance under this plan. Under the Aurigene Employee Plan, stock options may be granted at an exercise price as determined by Aurigene’s Compensation Committee. The maximum contractual term for aforementioned stock option plan is generally three years. The options issued under Aurigene ESOP Plan vest in periods ranging from one to three years, including certain options which vest immediately on grant.

During the year ended March 31, 2008, the Aurigene Employee Plan was amended to increase the total number of options reserved for issuance to 7,500,000 and to provide for recovery from employees of any Fringe Benefit Taxes assessed under Indian tax laws as a result of the exercise of such options.

As of March 31, 2008, there were 2,961,116 stock options outstanding under the Aurigene Employee Plan.

Stock option activity under the Aurigene Employee Plan was as follows:


	Fiscal Year Ended March 31, 2006
						Weighted-		Weighted- average
	Shares arising			Exercise		average exercise		remaining contractual life
	out of options			price		price		(months)
Outstanding at the beginning of the year		197,178		Rs.	10	Rs.	10		59
Granted during the year		500,000			10		10		70
Expired/forfeited during the year		(168,271	)		10		10		—

Outstanding at the end of the year		528,907		Rs.	10	Rs.	10		67

Exercisable at the end of the year		—			—		—		—


	Fiscal Year Ended March 31, 2007
						Weighted-		Weighted- average
	Shares arising			Exercise		average exercise		remaining contractual life
	out of options			price		price		(months)
Outstanding at the beginning of the year		528,907		Rs.	10	Rs.	10		67
Granted during the year		910,786			10		10		66
Expired/forfeited during the year		(256,110	)		10		10		—

Outstanding at the end of the year		1,183,583			10		10		62

Exercisable at the end of the year		7,470		Rs.	10	Rs.	10		28


	Fiscal Year Ended March 31, 2008
				Range of		Weighted-		Weighted- average
	Shares arising			Exercise		average exercise		remaining contractual life
	out of options			prices		price		(months)
Outstanding at the beginning of the year		1,183,583		Rs.	10	Rs.	10		62
Granted during the year		1,877,369			14.99		14.99		42

Expired/forfeited during the year		(99,836	)		10.00		10.00		—

Outstanding at the end of the year		2,961,116			10-14.99		13.16		45

Exercisable/vested at the end of the year		1,260,815			10-14.99		14.75		33
Expected to vest at the end of the year		1,441,855		Rs.	10-14.99		12.18		54

The option weighted average grant date fair value of options granted under the Aurigene Employee Plan during the years ended March 31, 2006, 2007 and 2008 was Rs.4.01, Rs.3.11 and Rs.18.35, respectively. As of March 31, 2008, options outstanding and exercisable under Aurigene ESOP Plan had an aggregate intrinsic value of Rs.47 million and Rs.18 million, respectively. As of March 31, 2008, the intrinsic value of options expected to vest under the DRL 2002 plan (both category A and B) had an aggregate intrinsic value of Rs. 26 million.

Aurigene Discovery Technologies Limited, Management Group Stock Grant Plan (the “Aurigene Management Plan”)

In fiscal 2004, Aurigene adopted the Aurigene Discovery Technologies Limited Management Group Stock Grant Plan to provide for issuance of stock options to management employees of Aurigene and its subsidiary Aurigene Discovery Technologies Inc. Aurigene has reserved 2,950,000 of its ordinary shares for issuance under this plan. Under the Aurigene Management Plan, stock options may be granted at an exercise price as determined by Aurigene’s Compensation Committee. As of March 31, 2008, there were no stock options outstanding under the Aurigene Management Plan. The plan was closed by a resolution of the shareholders in January 2008.

For the years ended March 31, 2006, 2007 and 2008 an amount of Rs.162,249, Rs.190,186 and Rs.257,788 respectively, has been recorded as total employee stock based compensation expense under all the plans. As of March 31, 2008, there is approximately Rs.228,868 of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 3.03 years. The FBT expense incurred during the year ended March 31, 2008 was Rs.34,957.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7.A. Major shareholders

All of our equity shares have the same voting rights. A total of 25.14% of our equity shares are held by the following parties:

	•		Dr. K. Anji Reddy (Chairman),

	•		Mr. G .V. Prasad (Vice Chairman and Chief Executive Officer),

	•		Mr. Satish Reddy (Managing Director and Chief Operating Officer),

	•		Mrs. K. Samrajyam, wife of Dr. K. Anji Reddy, and Mrs. G. Anuradha, wife of Mr. G.V. Prasad (hereafter collectively referred as the “Family Members”), and

	•		Dr. Reddy’s Holdings Private Limited (a company in which Dr. K. Anji Reddy owns 40% of the equity and the remainder is held by Mr. G.V. Prasad, Mr. Satish Reddy and the Family Members)

The following table sets forth information regarding the beneficial ownership of our shares by the foregoing persons as of March 31, 2008:


	Equity Shares Beneficially Owned (1)
	Number		Percentage
Name	of Shares		of Shares
Dr. K. Anji Reddy (2)		38,599,246		22.95	%
Mr. G.V. Prasad		1,355,840		0.81	%
Mr. Satish Reddy		1,205,832		0.72	%
Family Members		1,116,856		0.66	%
Subtotal		42,277,774		25.14	%

Others/public float		125,894,972		74.86	%

Total number of shares outstanding		168,172,746		100.00	%


(1)		Beneficial ownership is determined in accordance with rules of the U.S. Securities and Exchange Commission, which provides that shares are beneficially owned by any person who has or shares voting or investment power with respect to the shares. All information with respect to the beneficial ownership of any principal shareholder has been furnished by that shareholder and, unless otherwise indicated below, we believe that persons named in the table have sole voting and sole investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable.

(2)		Dr. Reddy’s Holdings Private Limited owns 37,798,290 equity shares of Dr. Reddy’s Laboratories Limited. Dr. K. Anji Reddy owns 40% of Dr. Reddy’s Holdings Private Limited. The remainder is owned by Mr. G.V. Prasad, Mr. Satish Reddy and the Family Members. The entire amount beneficially owned by Dr. Reddy’s Holdings Private Limited is included in the amount shown as beneficially owned by Dr. K. Anji Reddy.

As otherwise stated above and to the best of our knowledge, we are not owned or controlled directly or indirectly by any government or by any other corporation or by any other natural or legal persons. We are not aware of any arrangement, the consummation of which may at a subsequent date result in a change in our control.

The following shareholders hold more than 5% of our equity shares as of March 31, 2008:


Name	March 31, 2008				March 31, 2007				March 31, 2006
	No. of equity		% of equity		No. of equity		% of equity		No. of equity		% of equity
	shares held		shares held		shares held(1)		shares held		shares held(1)		shares held
Dr. Reddy’s Holdings Pvt. Limited		37,798,290		22.48		37,798,290		22.51		37,786,490		24.64
Life Insurance Corporation of India		20,619,743		12.26		13,323,325		7.93		10,312,022		6.72


(1)		Our Board of Directors, at its meeting held on May 31, 2006, recommended the issuance of a one-for-one stock split effected in the form of a stock dividend, which was approved by the shareholders in the Annual General Meeting held on July 28, 2006. The Board paid the above stock split effected in the form of a stock dividend on August 30, 2006 to all of our shareholders of record on August 29, 2006. Accordingly, the number of equity shares held as on March 31, 2006 have been adjusted to reflect the above stock split effected in the form of a stock dividend.

As of March 31, 2008, we had 168,172,746 outstanding equity shares. As of March 31, 2008, there were 100,397 record holders of our equity shares listed and traded on the Indian stock exchanges. Our American Depositary Shares (“ADSs”) are listed on the New York Stock Exchange. One ADS represents one equity share of Rs.5 par value per share. As of March 31, 2008, 16.75% of our issued and outstanding equity shares were held by ADS holders. On March 31, 2008 we had approximately 22,600 ADS holders on record in the United States.

7.B. Related party transactions

We have entered into transactions with the following related parties:

	•		Diana Hotels Limited for availing hotel services;

	•		A.R. Life Sciences Private Limited for availing processing services of raw materials and intermediates;

	•		Dr. Reddy’s Holdings Private Limited for purchase and sale of active pharmaceutical ingredients and intermediates and purchase of land;

	•		Dr. Reddy’s Foundation for Human and Social development towards contribution for social development;

	•		K.K Enterprises for availing packaging services for formulation products; and

	•		SR Enterprises for transportation services.

Our directors have either a significant ownership interest, controlling interest or exercise significant influence over these entities (“significant interest entities”).

We have carried out transactions with its two affiliates, Perlecan Pharma and Reddy Kunshan. These transactions are in the nature of reimbursement of research and development expenses incurred by us on behalf of Perlecan Pharma, revenue from research services performed by us for Perlecan Pharma and purchase of active pharmaceutical ingredients by us from Reddy Kunshan. We have also entered into cancelable operating lease transactions with our directors and their relatives. Further, we have also provided certain short term interest free loans to its employees which are recovered on a regular basis through salary deductions.

One of our former executives and U.S. general counsel (resigned effective July 31, 2006) is a shareholder of a law firm that we engage for provision of legal services. Legal fees paid by us to this law firm during the period this former executive was in our employment were Rs.466.6 million, Rs.153.6 million, (until the date of his resignation) and Rs.0 during the years ended March 31, 2006, 2007 and 2008, respectively. Following this executive’s resignation, we continue to obtain legal services from the law firm in which he is shareholder.

The following is a summary of significant related party transactions:


	Fiscal Year Ended March 31,
	2006		2007		2008
	Rs. in millions
Purchases from:
Significant interest entities		129.3		260.7		219.0
Affiliates		5.4		—		—

Contribution to a significant interest entity towards social development		53.6		34.1		113.6

Revenue from:
Significant interest entities		32.3		—		88.5
Affiliates		—		139.3		40.1

Reimbursement of research and development expenses from:
Affiliates		—		372.6		89.5

Lease rental paid under cancelable operating leases to:
Directors and their relatives		18.9		21.9		22.6

General and administrative expenses paid to:
Significant interest entities		7.4		9.2		12.6

Advance paid to a significant interest entity towards purchase of land:		—		—		680.0

We have the following amounts due from related parties:


	As of March 31,
	2007		2008
	Rs. in millions
Significant interest entities		—		26.4
Directors and their relatives		4.4		4.3
Employee loans (interest free)		2.4		19.4
Affiliates		143.1		27.0

		149.9		77.1
Less: Current portion		145.1		72.8

		4.8		4.3

The above table does not include an amount of Rs.680,0 million paid as an advance towards the purchase of land from a significant interest entity, which has been disclosed under capital work-in-progress.

We have the following amounts due to related parties (current):


	As of March 31,
	2007		2008
	Rs. in millions
Significant interest entities		0.9		16.8

		0.9		16.8

Employee loans outstanding as of March 31, 2008 are repayable within the year ending March 31, 2009

7.C. Interests of experts and counsel

Not applicable.

ITEM 8. FINANCIAL INFORMATION

8.A. Consolidated statements and other financial information

The following financial statements and auditors’ report for fiscal 2008 are included in Item 18 of this report on Form 20-F:

	•		Report of Independent Registered Public Accounting Firm.

	•		Consolidated Balance Sheets as of March 31, 2007 and 2008.

	•		Consolidated Statements of Operations for the years ended March 31, 2006, 2007 and 2008.

	•		Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended March 31, 2006, 2007 and 2008.

	•		Consolidated Statements of Cash Flow for the years ended March 31, 2006, 2007 and 2008.

	•		Notes to the Consolidated Financial Statements.

Amount of Export Sales

For the fiscal year ended March 31, 2008, our export revenues were Rs.39,555.0 million, contributing 79.1% to our total revenues.

Legal Proceedings

Patent Challenges

At times, following our determination that NDA holder’s patent is invalid or not infringed by our products, we seek to develop generic products for sale prior to patent expiration in various countries. In the United States, to obtain generic approval for a product prior to the expiration of the NDA holder’s patent, we challenge it. As a result of invoking such patent challenge procedures, in the ordinary course of business we often become a party to, and expect to continue to be involved in, patent litigation regarding the validity or infringement of patents owned by NDA holders. Additionally, in the ordinary course of business, we defend our right to use certain manufacturing processes in litigation related to process patents owned by NDA holders and third parties.

Environmental Litigation

The Indian Council for Environment Legal Action (the “Council”) filed a writ petition in 1989 under Article 32 of the Indian Constitution against the Union Government and others in the Supreme Court of India. Two hundred twenty five industries in and around Hyderabad, India, including four API manufacturing units belonging to us, are respondents. The Council is seeking relief in the nature of an order directing the Union and the State Government to avert pollution and compensate those affected by such pollution. The Supreme Court of India issued certain directions and sent the writ to the Andhra Pradesh High Court (the “High Court”). Presently the writ is pending before the High Court.

We believe it will be some time before there is a resolution of this environmental litigation as a large number of industries are respondents. We believe that we have been maintaining our effluent treatment plants as per the prescribed norms and the effluents are within the limits prescribed by the environmental authorities. We will continue to upgrade our effluent treatment plants and also comply with any additional directives that may be issued from time to time by the Pollution Control Board and/or by the High Court.

The total compensation that we have paid to date at the direction of the High Court is Rs.2.013 million. Such payments were made during fiscal years 1993, 1994, 1996, 1997, 2001 and 2004 and have been charged to our income statement in the year of payment. Such payments were made in full to the extent demanded from us by the High Court. Although the matter is still pending before the courts, in consultation with our external legal counsel in India, we consider the possibility of additional liability to be remote. We cannot estimate our loss or liability in the event that we are unsuccessful in this litigation. Even if we are discharged from this litigation, the amount already paid to the High Court will not be refunded to us.

Norfloxacin litigation

We manufacture and distribute norfloxacin, a formulations product. Under the Drugs (Prices Control) Order, 1995 (“DPCO”), the Government of India has the authority to designate a pharmaceutical product as a “specified product” and to fix the maximum selling price for such product.

In 1995, the Government of India issued a notification and designated norfloxacin as a “specified product” and fixed the maximum selling price. In 1996, we filed a statutory Form III before the Government of India for the upward revision of the maximum selling price and a legal suit in the High Court challenging the validity of the designation on the grounds that the applicable rules of the DPCO were not complied with while fixing the maximum selling price. The High Court had earlier granted an interim order in our favor, however it subsequently dismissed the case in April 2004. We filed a review petition in the High Court in April 2004 which was also dismissed by the High Court in October 2004. Subsequently, we appealed to the Supreme Court of India, New Delhi (the “Supreme Court”) by filing a Special Leave Petition. The appeal is currently pending with the Supreme Court.

During fiscal 2006, we received a notice from the Government of India demanding the recovery of the price we charged for norfloxacin in excess of the maximum selling price fixed by the Government of India, amounting to Rs.285.0 million including interest thereon. We filed a writ petition in the High Court challenging the Government of India’s demand order. The High Court has admitted the writ petition and granted an interim order, however it ordered us to deposit 50% of the principal amount claimed by the Government of India, which amounts to Rs.77.1 million. We deposited this amount with the Government of India on November 14, 2005 while we await the outcome of our appeal with the Supreme Court. In February 2008, the High Court directed us to deposit additional amount of Rs.30.0 million, which was deposited by us in March 2008. We have fully provided for the potential liability related to the principal amount demanded (which is included under other current liabilities) and believe that the liability on account of interest and penalty is remote. In the event we are unsuccessful in our litigation at the Supreme Court, we will be required to remit the sale proceeds in excess of the maximum selling price to the Government of India including penalties or interest if any, the amounts of which are not readily ascertainable.

Excise litigation

During fiscal 2003, 2005 and 2006, the Indian Central Excise authorities (the “Authorities”) issued a total of three demand notices on one of our vendors with regard to the assessable value of the products it supplied to us, and imposed a total of approximately Rs.435.3 million in claims and penalties against such vendor. We were named as a co-defendant in the notices given during fiscal 2003 and 2005 and, as a result, the Authorities assessed claims and penalties against us in an aggregate amount of Rs.76.50 million. We filed appeals against these notices.

On August 31, 2006 and September 30, 2006 we attended the hearings concluded by the Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”) on the matter. On October 31, 2006, the CESTAT passed an order in our favor setting aside all the above demands. On July 20, 2007, the Authorities appealed against the order in the Supreme Court. We believe that the ultimate outcome of this matter is not expected to have any material adverse effect on its financial position, results of operations or cash flows in any given accounting period.

Fexofenadine litigation

In April 2006, we launched fexofenadine hydrochloride 30 mg, 60 mg and 180 mg tablet products, which are generic versions of Sanofi-Aventis’ (“Aventis”) Allegra^® tablets. According to ORG IMS in its June Moving Annual Total report, Allegra^® tablets had annual sales of approximately U.S.$1.24 billion for the 12-month period ended March 2006. We are currently defending patent infringement actions brought by Aventis in the United States District Court for the District of New Jersey. There are three formulation patents, three use patents, and two active pharmaceutical ingredient (“API”) patents that are the subject matter of litigation concerning our fexofenadine hydrochloride tablets. We have obtained summary judgment as to each of the formulation patents.

In September 2005, pursuant to an agreement with Barr Pharmaceuticals, Inc., Teva Pharmaceuticals Industries Limited (“Teva”) launched its fexofenadine hydrochloride 30 mg, 60 mg and 180 mg tablet products, which are AB-rated (bioequivalent) to Aventis’ Allegra^® tablets. Aventis has brought patent infringement actions against Teva and its API supplier in the United States District Court for the District of New Jersey. There are three formulation patents, three use patents, and two API patents at issue in the litigation and Teva has obtained summary judgment as to each of the formulation patents. On January 27, 2006, the District Court denied Aventis’ motion for a preliminary injunction against Teva and its API supplier on the three use patents, finding those patents likely to be invalid, and one of the API patents, finding that patent likely to be not infringed. The issues presented during that hearing are likely to be substantially similar to those which will be presented with respect to our fexofenadine hydrochloride tablet products. A trial has not been scheduled. If Aventis is ultimately successful on its allegation of patent infringement, we could lose our trial and thereby be required to pay damages related to the sales of our fexofenadine hydrochloride tablets and be prohibited from selling those products in the future. We believe that the ultimate outcome of this matter is not expected to have any material adverse effect on its financial position, results of operations or cash flows in any given accounting period.

Fosamax writ petition

In March 2007, the European patent for Fosamax (Merck & Co.’s brand name for alendronate sodium), the generic version of which we and several other companies sell in Germany, was reinstated in favor of Merck & Co. betapharm has filed protective writs to prevent a preliminary injunction without a hearing. As of March 31, 2008, no injunction had been granted to Merck & Co. Based on a legal evaluation, we continue selling the generic version of the product and believe that the European patent reinstatement does not affect our ability to sell our generics version of the product in Germany. We do not believe that the ultimate outcome of this patent reinstatement matter will have a material adverse effect on our financial position, results of operations or cash flows in any given accounting period.

100

Oxycodon litigation

We are aware of litigation with respect to one of our suppliers for Oxycodon which we and several other companies sell in Germany. The innovator company has claimed an infringement of formulation patents and has sued our supplier. In April 2007 the court rejected an application for a preliminary injunction by the innovator company against our supplier. As of March 31, 2008, we, based on a legal evaluation continue to sell the product and believe that the patent infringement case does not affect our supplier’s to sell. We do not believe that this will have any material impact on our financial position, results of operations or cash flows in any given accounting period.

Investigation by U.S. Federal Trade Commission

In April, 2008, we received a Civil Investigative Demand (“CID”) from the United States Federal Trade Commission (“FTC”). A CID is a request for information in the course of a civil investigation and does not constitute the commencement of legal proceedings. We have been informed that the focus of the civil antitrust investigation relates to the settlement arrangement entered into between us and UCB Pharma Inc. resolving a patent litigation concerning levetiracetam. We believe that the terms of this settlement arrangement are consistent with all applicable antitrust laws. We are cooperating fully with the FTC regarding this investigation and believe that the investigation will not have any effect on our financial position, results of operations or cash flows in any given accounting period.

Others

We and our affiliates are involved in other disputes, lawsuits, claims, governmental and/or regulatory inspections, inquiries, investigations and proceedings, including patent and commercial matters that arise from time to time in the ordinary course of business. We believe that there are no such pending matters that are expected to have any material adverse effect on our financial position, results of operations or cash flows in any given accounting period.

Dividend Policy

In the fiscal years ended March 31, 2005, 2006 and 2007, our shareholders declared cash dividends of Rs.2.50, Rs.2.50 and Rs.3.75, respectively, per equity share. Every year our Board of Directors recommends the amount of dividends to be paid to shareholders, if any, based upon conditions then existing, including our earnings, financial condition, capital requirements and other factors. For the fiscal year ended March 31, 2008, the Board of directors recommended a cash dividend of Rs.3.75 per share subject to Shareholder’s approval at the General Meeting.

Holders of ADSs will be entitled to receive dividends payable on equity shares represented by such ADSs. Cash dividends on equity shares represented by ADSs are paid to the Depositary in Indian rupees and are converted by the Depositary into U.S. Dollars and distributed, net of depositary fees, taxes, if any, and expenses, to the holders of such ADSs.

8.B. Significant changes

In April 2008, we acquired a unit of The Dow Chemical Company associated with its United Kingdom sites in Mirfield and Cambridge for a total cash consideration (subject to adjustments for working capital, etc.) of Rs. 1,354 million (U.S. $ 33.5 million). The acquisition includes customer contracts, associated products, process technology, intellectual property, trademarks and the Dowpharma Small Molecules facilities located in Mirfield and Cambridge, United Kingdom.

In April 2008, we acquired Jet Generici Srl, a company engaged in the sale of generic finished dosages in Italy, for a total cash consideration (subject to adjustments for working capital, etc.) of Rs. 146 million (Euro 2.3 million).

In April 2008, we acquired BASF’s pharmaceutical contract manufacturing business and its manufacturing facility in Shreveport, Louisiana, USA for a total consideration (subject to adjustments for working capital, etc.) of Rs. 1,607 million (U.S. $ 39.8 million). The business involves contract manufacturing of generic prescription and OTC products for branded and generic companies in the United States. This business includes customer contracts, related ANDAs and NDAs, and trademarks, as well as the Shreveport manufacturing facility.

101

ITEM 9. THE OFFER AND LISTING

9.A. Offer and listing details

Information Regarding Price History

The following tables set forth the price history for our shares on the Bombay Stock Exchange Limited, (“BSE”) and for our ADSs on the New York Stock Exchange (“NYSE”).


	BSE				NYSE
Fiscal Year	Price Per Equity Share(1)				Price Per ADS(1)
Ended March 31,	High (Rs.)		Low (Rs.)		High (U.S.$)		Low (U.S.$)
2008		760.00		501.00		18.66		13.07
2007		877.00		608.00		19.06		12.31
2006		756.50		306.50		16.67		7.46
2005		501.45		326.25		12.40		7.53
2004		735.00		404.00		16.53		8.79


	BSE				NYSE
	Price Per Equity Share(1)				Price Per ADS(1)
Quarter Ended	High (Rs.)		Low (Rs.)		High (U.S.$)		Low (U.S.$)
June 30, 2006		877.00		579.00		19.06		12.31
September 30, 2006		758.50		700.00		16.06		15.05
December 31, 2006		840.00		701.00		18.54		15.25
March 31, 2007		835.00		608.00		18.70		13.85
June 30, 2007		757.00		608.90		17.49		14.97
September 30, 2007		694.00		603.30		17.04		14.83
December 31, 2007		748.00		580.00		18.52		14.76
March 31, 2008		760.00		501.00		18.66		13.07


	BSE				NYSE
	Price Per Equity Share(1)				Price Per ADS(1)
Month Ended	High (Rs.)		Low (Rs.)		High (U.S.$)		Low (U.S.$)
October 31, 2007		669.90		580.00		17.05		15.06
November 30, 2007		635.00		595.00		16.13		14.76
December 31, 2007		748.00		625.25		18.52		15.76
January 31, 2008		760.00		520.00		18.66		13.62
February 29, 2008		589.50		501.00		14.75		13.21
March 31, 2008		605.00		506.00		15.03		13.07

Source: www.bseindia.com and www.adr.com, respectively.


(1)		Stock prices per share reflect a stock split effected in the form of a stock dividend, effective on August 30, 2006, of one equity share for each equity share held by our shareholders as of August 29, 2006.

102

ITEM 10. ADDITIONAL INFORMATION

10.A. Share capital

Not applicable.

10.B. Memorandum and articles of association

Dr. Reddy’s Laboratories Limited was incorporated under the Indian Companies Act, 1956. We are registered with the Registrar of Companies, Andhra Pradesh, and Hyderabad, India as Company No. 4507 (Company Identification No. L85195AP1984PLC0004507). Our registered office is located at 7-1-27, Ameerpet, Hyderabad — 500 016, India and the telephone number of our registered office is +91-40-23731946. The summary of our Articles of Association and Memorandum of Association that is included in our registration statement on Form F-1 filed with the U.S. Securities and Exchange Commission’s (the “SEC”) on April 11, 2001, together with copies of the Articles of Association and Memorandum of Association that are included in our registration statement on Form F-1, are incorporated herein by reference.

The Memorandum and Articles of Association were amended at the 17th Annual General Meeting held on September 24, 2001, 18th Annual General Meeting held on August 26, 2002 and 20th Annual General Meeting held on July 28, 2004 and 22nd Annual General Meeting held on July 28, 2006. A full description of these amendments was given in the Form 20-F filed with the SEC on September 30, 2003, September 30, 2004 and October 2, 2006, which description is incorporated herein by reference. The Memorandum and Articles of Association were further amended at the 22nd Annual General Meeting held on July 28, 2006 to increase the authorized share capital in connection with the stock split effected in the form of a stock dividend that occurred on August 30, 2006.

10.C. Material contracts

Other than the contracts entered into in the ordinary course of business, there are no material contracts to which we or any of our direct and indirect subsidiaries is a party for the two years immediately preceding the date of this Form 20-F.

10.D. Exchange controls

Foreign investment in Indian securities, whether in the form of foreign direct investment or in the form of portfolio investment, is governed by the Foreign Exchange Management Act, 1999, as amended (“FEMA”), and the rules, regulations and notifications issued thereunder. Set forth below is a summary of the restrictions on transfers applicable to both foreign direct investments and portfolio investments, including the requirements under Indian law applicable to the issuance and transfer of ADSs.

Foreign Direct Investment

The Foreign Direct Investment Policy under the Reserve Bank of India’s (“RBI”) Automatic Route enables Indian companies (other than those specifically excluded in the scheme) to issue shares to persons who reside outside of India without prior permission from the RBI, except in cases where there are ceilings of investments in certain industry sectors and subject to certain conditions.

The Department of Industrial Policy and Promotion, a part of the Ministry of Commerce and Industry, issued detailed guidelines in January 1997 for consideration of foreign direct investment proposals by the Foreign Investment Promotion Board (the “Guidelines”). The basic objective of the Guidelines is to improve the transparency and objectivity of the Foreign Investment Promotion Board’s consideration of proposals. However, since these are administrative guidelines and have not been codified as either law or regulations, they are not legally binding with respect to any recommendation made by the Foreign Investment Promotion Board or with respect to any decision taken by the Government of India in cases involving foreign direct investment.

104

Under the Guidelines, sector specific guidelines for foreign direct investment and the levels of permitted equity participation have been established. In February 2000, the Department of Industrial Policy and Promotion issued a notification that foreign ownership of up to 50%, 51%, 74% or 100%, depending on the category of industry, would be allowed without prior permission of the Foreign Investment Promotion Board and, in certain cases, without prior permission of the RBI. Over a period of time, the Government of India has relaxed the restrictions on foreign investment, including the revision of the investment cap to 26% in the insurance sector and 74% subject to RBI guidelines for setting up branches/subsidiaries of foreign banks in the private banking sector.

In May 1994, the Government of India announced that purchases by foreign investors of ADSs, as evidenced by ADRs, and foreign currency convertible bonds of Indian companies would be treated as foreign direct investment in the equity issued by Indian companies for such offerings. Therefore, offerings that involve the issuance of equity that results in Foreign Direct Investors holding more than the stipulated percentage of direct foreign investments (which depends on the category of industry) would require approval from the Foreign Investment Promotion Board.

In addition, offerings by Indian companies of any such securities to foreign investors require Foreign Investment Promotion Board approval, whether or not the stipulated percentage limit would be reached if the proceeds will be used for investment in specified industries.

For investments in the pharmaceutical sector, the Foreign Direct Investment limit is 100%. Thus, foreign ownership of up to 100% of our equity shares would be allowed without prior permission of the Foreign Investment Promotion Board and, in certain cases, without prior permission of the RBI.

Portfolio Investment Scheme

Investments by persons of Indian nationality or origin residing outside of India (also known as Non-Resident Indians or “NRIs”) or registered Foreign Institutional Investors (“FIIs”) made through a stock exchange are known as portfolio investments (“Portfolio Investments”).

Portfolio Investments by NRIs

A variety of methods for investing in shares of Indian companies are available to NRIs. These methods allow Non-Resident Indians to make portfolio investments in existing shares and other securities of Indian companies on a basis not generally available to other foreign investors.

The RBI no longer recognizes overseas corporate bodies (“OCBs”) as an eligible class of investment vehicle under various circumstances under the RBI’s foreign exchange regulations.

Portfolio Investments by FIIs

In September 1992, the Government of India issued guidelines that enable FIIs, including institutions such as pension funds, investment trusts, asset management companies, nominee companies and incorporated/institutional portfolio managers, to invest in all of the securities traded on the primary and secondary markets in India. Under the guidelines, FIIs are required to obtain an initial registration from the Securities and Exchange Board of India (“SEBI”), and a general permission from the RBI to engage in transactions regulated under the Foreign Exchange Management Act. FIIs must also comply with the provisions of the SEBI (Foreign Institutional Investors Regulations) 1995. When it receives the initial registration, the FII also obtains general permission from the RBI to engage in transactions regulated under the Foreign Exchange Management Act. Together, the initial registration and the RBI’s general permission enable the registered FII to: (i) buy (subject to the ownership restrictions discussed below) and sell unrestricted securities issued by Indian companies; (ii) realize capital gains on investments made through the initial amount invested in India; (iii) participate in rights offerings for shares; (iv) appoint a domestic custodian for custody of investments held; and (v) repatriate the capital, capital gains, dividends, interest income and any other compensation received pursuant to rights offerings of shares. The current policy with respect to purchase or sale of securities of an Indian company by an FII is in Schedule 2 and Regulation 5(2) of the Foreign Exchange Management (Transfer or Issue of Securities by a Person Resident Outside India) Regulations, 2000.

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Ownership restrictions

The SEBI and the RBI regulations restrict portfolio investments in Indian companies by foreign institutional investors, Non-Resident Indians and overseas corporate bodies, all of which we refer to as “foreign portfolio investors.” Under current Indian law, foreign institutional investors in the aggregate may hold not more than 24.0% of the equity shares of an Indian company, and Non-Resident Indians in the aggregate may hold not more than 10.0% of the shares of an Indian company through portfolio investments. The 24.0% limit referred to above can be increased to sectoral cap/statutory limits as applicable if a resolution is passed by the board of directors of the company followed by a special resolution passed by the shareholders of the company to that effect. The 10.0% limit referred to above may be increased to 24.0% if the shareholders of the company pass a special resolution to that effect. No single foreign institutional investor may hold more than 10.0% of the shares of an Indian company and no single Non-resident Indian may hold more than 5.0% of the shares of an Indian company.

In our case, our shareholders have passed a resolution enhancing the limits of portfolio investment by foreign institutional investors in the aggregate to 49%. Non-Resident Indians in the aggregate may hold not more than 10.0% of our equity shares through portfolio investments. Holders of ADSs are not subject to the rules governing FIIs unless they convert their ADSs into equity shares. As of March 31, 2008, FII’s are holding 24.81-% and NRI’s 1.92-% of our equity shares.

Under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the “Takeover Code”), upon the acquisition of more than 5%, 10%, 14%, 54% or 74% of the outstanding shares or voting rights of a publicly-listed Indian company, the acquirer is required to disclose the aggregate of his shareholding or voting rights in that target company to such company. The target company and the acquirer are required to notify all of the stock exchanges on which the shares of such company are listed. For these purposes, an “acquirer” means any person or entity who, directly or indirectly, either alone or acting in concert with any other person or entity, acquires or agrees to acquire shares or voting rights in, or control over, a target company.

A person or entity who holds more than 15% of the shares or voting rights in any company is required to make an annual disclosure of his, her or its holdings to that company, which in turn is required to disclose the same to each of the stock exchanges on which the company’s shares are listed. A holder of our ADSs would be subject to these notification requirements.

Upon the acquisition of 15% or more of such shares or voting rights, or upon acquiring control of the company, the acquirer is required to make a public announcement offering to purchase from the other shareholders at least a further 20% of all the outstanding shares of the company at a minimum offer price determined pursuant to the Takeover Code. If an acquirer holding more than 15% but less than 55% of shares acquires 5% or more shares during a fiscal year, the acquirer is required to make a public announcement offering to purchase from the other shareholders at least 20% of all the outstanding shares of the company at a minimum offer price determined pursuant to the Takeover Code. Any further acquisition of outstanding shares or voting rights of a publicly listed company by an acquirer who holds more than 55% but less than 75% of shares or voting rights (or where the company concerned has obtained the initial listing of shares by making an offer of at least 10% of the issue size to the public pursuant to Rule 19(2)(b) of the Securities Contracts (Regulations) Rules 1957, less than 90% of the shares or voting right of the company)also requires the making of an open offer to acquire such number of shares as would not result in the public shareholding being reduced to below the minimum specified in the listing agreement. Where the public shareholding in the target company may be reduced to a level below the limit specified in the listing agreement the acquirer may acquire such shares or voting rights only in accordance with guidelines or regulations regarding delisting of securities specified by SEBI.

Since we are a listed company in India, the provisions of the Takeover Code will apply to us and to any person acquiring our equity shares or voting rights in our company. However, the Takeover Code provides for a specific exemption to holders of ADSs from the requirements of making a public announcement for a tender offer. This exemption will apply to a holder of ADSs so long as he or she does not convert the ADSs into the underlying equity shares.

We have entered into listing agreements with each of the Indian stock exchanges on which our equity shares are listed. Each of the listing agreements provides that if a person or entity acquires or agrees to acquire 5% or more of the voting rights of our equity shares, the purchaser shall report its holding to us and we must, in accordance with the provisions of the Takeover Code, report its holding to the relevant stock exchanges.

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Although the provisions of the listing agreements entered into between us and the Indian stock exchanges on which our equity shares are listed will not apply to equity shares represented by ADSs, holders of ADSs may be required to comply with such notification and disclosure obligations pursuant to the provisions of the Deposit Agreement to be entered into by such holders, our company and a depositary.

Subsequent transfer of shares

A person resident outside India holding the shares or debentures of an Indian company may transfer the shares or debentures so held by him, in compliance with the conditions specified in the relevant Schedule of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 as follows:

	(i)		A person resident outside India, not being a Non-Resident Indian (“NRI”) or an overseas corporate body (“OCB”), may transfer by way of sale or gift the shares or convertible debentures held by him or it to any person resident outside India;

	(ii)		A Non-Resident Indian may transfer by way of sale or gift, the shares or convertible debentures held by him or it to another Non-Resident Indian only; provided that the person to whom the shares are being transferred pursuant to clauses (i) or (ii) has obtained prior permission of the Government of India to acquire the shares if he has a previous venture or tie up in India through an investment in shares or debentures or a technical collaboration or a trade mark agreement or investment by whatever name called in the same field or allied field in which the Indian company whose shares are being transferred is engaged.

			Provided further that the restriction in clauses (i) and (ii) shall not apply to the transfer of shares to international financial institutions such as Asian Development Bank (“ADB”), International Finance Corporation (“IFC”), Commonwealth Development Corporation (“CDC”), Deutsche Entwicklungs Gesselschaft (“DEG”) and transfer of shares of an Indian company engaged in the Information Technology sector.

	(iii)		A person resident outside India holding the shares or convertible debentures of an Indian company in accordance with the said Regulations, (a) may transfer the same to a person resident in India by way of gift; or (b) may sell the same on a recognized Stock Exchange in India through a registered broker.

Restrictions for subsequent transfers of shares of Indian companies between residents and non-residents (other than OCBs) were relaxed significantly as of October 2004. As a result, for a transfer between a resident and a non-resident of securities of an Indian company, no prior approval of either the RBI or the Government of India is required, as long as certain conditions are met.

ADS guidelines

Shares of Indian companies represented by ADSs may be approved for issuance to foreign investors by the Government of India under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993 (the “1993 Scheme”), as modified from time to time, promulgated by the Government of India. The 1993 Scheme is in addition but without prejudice to the other policies or facilities, as described below, relating to investments in Indian companies by foreign investors. The issuance of ADSs pursuant to the 1993 Scheme also affords to holders of the ADSs the benefits of Section 115AC of the Income Tax Act, 1961 for purpose of the application of Indian tax laws. In March 2001, the RBI issued a notification permitting, subject to certain conditions, two-way fungibility of ADSs. This notification provides that ADSs converted into Indian shares can be converted back into ADSs, subject to compliance with certain requirements and the limits of sectoral caps.

Fungibility of ADSs

A registered broker in India can purchase shares of an Indian company that has issued ADSs, on behalf of a person resident outside India, for the purposes of converting the shares into ADSs. However, such conversion of equity shares into ADSs is possible only if the following conditions are satisfied:

	(i)		the shares are purchased on a recognized stock exchange;

	(ii)		the shares are purchased with the permission of the Custodian to the ADS offering of the Indian company and are deposited with the Custodian;

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	(iii)		The custodian has been authorized to accept shares from non-resident investors for reissuance of ADSs;

	(iv)		the shares purchased for conversion into ADSs do not exceed the number of shares that were released by the Custodian pursuant to conversions of ADSs into equity shares under the Depositary Agreement; and

	(v)		a non-resident investor, broker, the Custodian and the Depositary comply with the provisions of the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depositary Receipt Mechanism) Scheme, 1993 and the related guidelines issued by the Central Government from time to time.

Transfer of ADSs

A person resident outside India may transfer ADSs held in Indian companies to another person resident outside India without any permission. A person resident in India is not permitted to hold ADSs of an Indian company, except in connection with the exercise of stock options.

Shareholders resident outside India who intend to sell or otherwise transfer equity shares within India should seek the advice of Indian counsel to understand the requirements applicable at that time.

The RBI placed various restrictions on the eligibility of OCBs to make investments in Indian companies in AP (DIR) Series Circular No. 14 dated September 16, 2003. For further information on these restrictions, the circular is available on www.rbi.org.in for review.

10.E. Taxation

Indian Taxation

General. The following summary is based on the law and practice of the Income-tax Act, 1961 (the “Income-tax Act”), including the special tax regime contained in Sections 115AC and 115ACA of the Income-tax Act read with the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 (the “Scheme”), as amended on January 19, 2000. The Income-tax Act is amended every year by the Finance Act of the relevant year. Some or all of the tax consequences of Sections 115AC and 115ACA may be amended or changed by future amendments to the Income-tax Act.

We believe this information is materially complete as of the date hereof. However, this summary is not intended to constitute an authoritative analysis of the individual tax consequences to non-resident holders or employees under Indian law for the acquisition, ownership and sale of ADSs and equity shares. Each prospective investor should consult tax advisors with respect to taxation in India or their respective locations on acquisition, ownership or disposing of equity shares or ADSs.

Residence. For purposes of the Income-tax Act, an individual is considered to be a resident of India during any fiscal year if he or she is in India in that year for:

	•		a period or periods of at least 182 days; or

	•		at least 60 days and, within the four preceding fiscal years has been in India for a period or periods amounting to at least 365 days.

The period of 60 days referred to above shall be read as 182 days in case of a citizen of India or a Person of Indian Origin living outside India who is visiting India.

A company is a resident of India under the Income-tax Act if it is formed or registered in India or the control and the management of its affairs is situated wholly in India. Individuals and companies that are not residents of India would be treated as non-residents for purposes of the Income-tax Act.

Taxation of Distributions.

a) As per Section 10(34) of the Income-tax Act, dividends paid by Indian Companies on or after April 1, 2003 to their shareholders (whether resident in India or not) are not subject to tax in the hands of the shareholders. However, the Indian company

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paying the dividend is subject to a dividend distribution tax at the rate of 16.995%, including applicable surcharges and the special levy called the “Education and Higher Education Cess (education cess) “, on the total amount it distributes, declares or pays as a dividend.

b) Any distributions of additional ADSs or equity shares by way of bonus shares (i.e., stock dividends) to resident or non-resident holders will not be subject to Indian tax.

Taxation of Capital Gains. The following is a brief summary of capital gains taxation of non-resident holders and resident employees relating to the sale of ADSs and equity shares received upon redemption of ADSs. The relevant provisions are contained mainly in sections 10(36), 10(38), 45, 47(viia), 111A, 115AC and 115ACA, of the Income-tax Act, in conjunction with the Scheme. You should consult your own tax advisor concerning the tax consequences of your particular situation.

A non-resident investor transferring our ADS or equity shares, whether transferred in India or outside India to a non-resident investor, will not be liable for income taxes arising from capital gains on such ADS or equity shares under the provisions of the Income-tax Act in certain circumstances. Equity shares (including equity shares issuable on the conversion of the ADSs) held by the non-resident investor for a period of more than 12 months are treated as long-term capital assets. If the equity shares are held for a period of less than 12 months from the date of conversion of the ADSs, the capital gains arising on the sale thereof is to be treated as short-term capital gains.

Capital gains are taxed as follows:

	•		gains from a sale of ADSs outside India by a non-resident to another non-resident are not taxable in India;

	•		long-term capital gains realized by a resident from the transfer of the ADSs will be subject to tax at the rate of 10%, plus the applicable surcharge and education cess; short-term capital gains on such a transfer will be taxed at graduated rates with a maximum of 30%, plus the applicable surcharge and education cess.

	•		long-term capital gains realized by a non-resident upon the sale of equity shares obtained from the conversion of ADSs are subject to tax at a rate of 10%, plus the applicable surcharge and education cess; and short-term capital gains on such transfer will be taxed at the maximum marginal rate of tax applicable to the seller, plus the applicable surcharge and education cess, if the sale of such equity shares is settled outside of a recognized stock exchange in India;

	•		long-term capital gain realized by a non-resident upon the sale of equity shares obtained from the conversion of ADSs is exempt from tax and any short term capital gain is taxed at 10%, plus the applicable surcharge and education cess, if the sale of such equity shares is settled on a recognized stock exchange and securities transaction tax (“STT”) is paid on such sale. The rate of surcharge in the case of individuals whose taxable income is greater than Rs.1,000,000 is 10%; and

	•		short-term capital gains realized upon the sale of equity shares obtained from the redemption of ADSs will be taxed at variable rates with a maximum of (i) 40%, , in case of foreign companies and (ii) 10%, in the case of resident employees or non-resident individuals. An additional surcharge will be charged if the aggregate taxable income exceeds prescribed limit during the relevant year, which is 10% if the aggregate taxable income exceeds Rs.1,000,000 in case of individuals and is 2.5% if the aggregate taxable income exceeds Rs.10,000,000 in case of foreign companies. An education cess of 3% will be charged on tax and surcharge.

As per Section 10(38) of the Income-tax Act, long term capital gains arising from the transfer of equity shares on or after October 1, 2004 in a company completed through a recognized stock exchange in India and on which sale the STT has been paid are exempt from Indian tax.

As per Section 111A of the Income-tax Act, short term capital gains arising from the transfer of equity shares on or after October 1, 2004 in a company completed through a recognized stock exchange in India are subject to tax at a rate of 10.3% including education cess but excluding the applicable surcharge

Purchase or sale of equity shares of a company listed on a recognized stock exchange in India is subject to a security transaction tax of 0.1% (0.125% from June 1, 2006)of the transaction value for any delivery based transaction and 0.02%(0.025% from June 1, 2006) for any non-delivery based transaction.

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The applicable provisions of the Income Tax Act, 1961 in the case of non-residents, may offset the above taxes, except the STT. The capital gains tax is computed by applying the appropriate tax rates to the difference between the sale price and the purchase price of the equity shares or ADSs. Under the Scheme, the purchase price of equity shares in an Indian listed company received in exchange for ADSs will be the market price of the underlying shares on the date that the Depositary gives notice to the custodian of the delivery of the equity shares in exchange for the corresponding ADSs, or the “stepped up” basis purchase price. The market price will be the price of the equity shares prevailing on the Stock Exchange, Mumbai or the National Stock Exchange. There is no corresponding provision under the Income-tax Act in relation to the “stepped up” basis for the purchase price of equity shares. However, the tax department in India has not denied this benefit. In the event that the tax department denies this benefit, the original purchase price of ADSs would be considered the purchase price for computing the capital gains tax.

According to the Scheme, a non-resident holder’s holding period for the purposes of determining the applicable Indian capital gains tax rate relating to equity shares received in exchange for ADSs commences on the date of the notice of the redemption by the Depositary to the custodian. However, the Scheme does not address this issue in the case of resident employees, and it is therefore unclear as to when the holding period for the purposes of determining capital gains tax commences for such a resident employee.

The Scheme provides that if the equity shares are sold on a recognized stock exchange in India against payment in Indian rupees, they will no longer be eligible for the preferential tax treatment.

It is unclear as to whether section 115AC and the Scheme are applicable to a non-resident who acquires equity shares outside India from a non-resident holder of equity shares after receipt of the equity shares upon redemption of the ADSs.

It is unclear as to whether capital gains derived from the sale of subscription rights or other rights by a non-resident holder not entitled to an exemption under a tax treaty will be subject to Indian capital gains tax. If such subscription rights or other rights are deemed by the Indian tax authorities to be situated within India, the gains realized on the sale of such subscription rights or other rights will be subject to Indian taxation. The capital gains realized on the sale of such subscription rights or other rights, which will generally be in the nature of short-term capital gains, will be subject to tax (i) at variable rates with a maximum rate of 42.23%, including the prevailing surcharge and education cess, in the case of a foreign company and (ii) in the range of 30.9% to 33.99%, including the applicable surcharge, in the case of resident employees and of non-resident individuals with taxable income over Rs.500,000 (effective as of April 1, 2008).

Withholding Tax on Capital Gains. Any gain realized by a non-resident or resident employee on the sale of equity shares is subject to Indian capital gains tax, which, in the case of a non-resident is to be withheld at the source by the buyer. However, as per the provisions of Section 196D(2) of the Income-tax Act, no withholding tax is required to be deducted from any income by way of capital gains arising to FIIs (as defined in Section 115AD of the Act) on the transfer of securities (as defined in Section 115AD of the Act).

Buy-back of Securities. Indian companies are not subject to any tax on the buy-back of their shares. However, the shareholders are taxed on any resulting gains. We are required to deduct tax at source according to the capital gains tax liability of a non-resident shareholder.

Stamp Duty and Transfer Tax. Upon issuance of the equity shares underlying our ADSs, we are required to pay a stamp duty of 0.1% per share of the issue price of the underlying equity shares. A transfer of ADSs is not subject to Indian stamp duty. A sale of equity shares in physical form by a non-resident holder is also subject to Indian stamp duty at the rate of 0.25% of the market value of the equity shares on the trade date, although customarily such tax is borne by the transferee. Shares must be traded in dematerialized form. The transfer of shares in dematerialized form is currently not subject to stamp duty.

Wealth Tax. The holding of the ADSs and the holding of underlying equity shares by resident and non-resident holders will be exempt from Indian wealth tax. Non-resident holders are advised to consult their own tax advisors regarding the taxation of ADS in their country of residence.

Gift Tax and Estate Duty. Currently, there are no gift taxes or estate duties. These taxes and duties could be restored in future. Non-resident holders are advised to consult their own tax advisors regarding this issue.

Service Tax. Brokerage or commission paid to stockbrokers in connection with the sale or purchase of shares is subject to a service tax of 12.36%. The stockbroker is responsible for collecting the service tax from the shareholder and paying it to the relevant authority.

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United States Federal Taxation

The following is a summary of the material U.S. federal income and estate tax consequences that may be relevant with respect to the acquisition, ownership and disposition of equity shares or ADSs and is for general information only. This summary addresses the U.S. federal income and estate tax considerations of holders that are U.S. holders. “U.S. holders” are beneficial holders of equity shares or ADSs who are (i) citizens or residents of the United States, (ii) corporations (or other entities treated as corporations for U.S. federal tax purposes) created in or under the laws of the United States or any state thereof or the District of Columbia, (iii) estates, the income of which is subject to U.S. federal income taxation regardless of its source, and (iv) trusts for which a U.S. court exercises primary supervision and a U.S. person has the authority to control all substantial decisions. This summary is limited to U.S. holders who will hold equity shares or ADSs as capital assets. In addition, this summary is limited to U.S. holders who are not resident in India for purposes of the Convention Between the Government of the United States of America and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income. If a partnership holds the equity shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership. A partner in a partnership holding equity shares or ADSs should consult his own tax advisor.

This summary does not address tax considerations applicable to holders that may be subject to special tax rules, such as banks, insurance companies, financial institutions, dealers in securities or currencies, tax-exempt entities, persons that will hold equity shares or ADSs as a position in a “straddle” or as part of a “hedging” or “conversion” transaction for tax purposes, persons that have a “functional currency” other than the U.S. dollar or holders of 10% or more, by voting power or value, of the shares of our company. This summary is based on the tax laws of the United States as in effect on the date of this Annual Report and on United States Treasury Regulations in effect or, in some cases, proposed, as of the date of this Annual Report, as well as judicial and administrative interpretations thereof available on or before such date, and is based in part on the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.

Each prospective investor should consult his, her or its own tax advisor with respect to the U.S. Federal, state, local and non-U.S. tax consequences of acquiring, owning or disposing of equity shares or ADSs.

Ownership of ADSs. For U.S. federal income tax purposes, holders of ADSs will be treated as the holders of equity shares represented by such ADSs.

Dividends. Except for ADSs or equity shares, if any, distributed pro rata to all shareholders of our company, including holders of ADSs, the gross amount of any distributions of cash or property with respect to ADSs or equity shares (before reduction for any Indian withholding taxes) will generally be included in income by a U.S. holder as foreign source dividend income at the time of receipt, which in the case of a U.S. holder of ADSs generally should be the date of receipt by the Depositary, to the extent such distributions are made from our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Such dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. holders. To the extent, if any, that the amount of any distribution by us exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles) such excess will be treated first as a tax-free return of the U.S. holder’s tax basis in the equity shares or ADSs and thereafter as capital gain.

Subject to certain limitations, dividends paid to non-corporate U.S. holders, including individuals, may be eligible for a reduced rate of taxation if we are deemed to be a “qualified foreign corporation” for United States federal income tax purposes and certain holding period requirements are met. A qualified foreign corporation includes a foreign corporation if (1) its shares (or, according to legislative history, its ADSs) are readily tradable on an established securities market in the United States or (2) it is eligible for the benefits under a comprehensive income tax treaty with the United States. In addition, a corporation is not a qualified foreign corporation if it is a passive foreign investment company (as discussed below) for either its taxable year in which the dividend is paid or the preceding taxable year. The ADSs are traded on the New York Stock Exchange. Due to the absence of specific statutory provisions addressing ADSs, however, there can be no assurance that we are a qualified foreign corporation solely as a result of our listing on the New York Stock Exchange. Nonetheless, we may be eligible for benefits under the comprehensive income tax treaty between India and the United States. Absent congressional action to extend these rules, the reduced rate of taxation will not apply to dividends received in taxable years beginning after December 31, 2010. Each U.S. holder should consult its own tax advisor regarding the treatment of dividends and such holder’s eligibility for a reduced rate of taxation.

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Subject to certain conditions and limitations, any Indian withholding tax imposed upon to a U.S. holder with respect to distributions on ADSs or equity shares should be eligible for credit against the U.S. holder’s federal income tax liability. Alternatively, a U.S. holder may claim a deduction for such amount, but only for a year in which a U.S. holder does not claim a credit with respect to any foreign income taxes. The overall limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, distributions on ADSs or equity shares will be income from sources outside the United States, and, for tax years beginning before January 1, 2007, will generally be “passive income” or “financial services income,” and for tax years beginning after December 31, 2006, will generally be “passive category income” or “general category income” for purposes of computing the United States foreign tax credit allowable to a U.S. holder.

If dividends are paid in Indian rupees, the amount of the dividend distribution included in the income of a U.S. holder will be in the U.S. dollar value of the payments made in Indian rupees, determined at a spot exchange rate between Indian rupees and U.S. dollars applicable to the date such dividend is included in the income of the U.S. holder, regardless of whether the payment is in fact converted into U.S. dollars. Generally, gain or loss, if any, resulting from currency exchange fluctuations during the period from the date the dividend is paid to the date such payment is converted into U.S. dollars will be treated as U.S. source ordinary income or loss.

Sale or exchange of equity shares or ADSs. A U.S. holder generally will recognize gain or loss on the sale or exchange of equity shares or ADSs equal to the difference between the amount realized on such sale or exchange and the U.S. holder’s tax basis in the equity shares or ADSs, as the case may be. Such gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the equity shares or ADSs, as the case may be, were held for more than one year. Gain or loss, if any, recognized by a U.S. holder generally will be treated as U.S. source passive category income or loss for U.S. foreign tax credit purposes. Capital gains realized by a U.S. holder upon the sale of equity shares (but not ADSs) may be subject to certain tax in India. See “Taxation—Indian Taxation—Taxation of Capital Gains.” Due to limitations on foreign tax credits, however, a U.S. holder may not be able to utilize any such taxes as a credit against the U.S. holder’s federal income tax liability.

Estate taxes. An individual shareholder who is a citizen or resident of the United States for U.S. federal estate tax purposes will have the value of the equity shares or ADSs held by such holder included in his or her gross estate for U.S. federal estate tax purposes. An individual holder who actually pays Indian estate tax with respect to the equity shares will, however, be entitled to credit the amount of such tax against his or her U.S. federal estate tax liability, subject to a number of conditions and limitations.

Backup withholding tax and information reporting requirements. Any dividends paid, or proceeds on a sale of, equity shares or ADSs to or by a U.S. holder may be subject to U.S. information reporting, and a backup withholding tax (currently at a rate of 28%) may apply unless the holder establishes that he, she or it is an exempt recipient or provides a U.S. taxpayer identification number, certifies that such holder is not subject to backup withholding and otherwise complies with any applicable backup withholding requirements. Any amount withheld under the backup withholding rules will be allowed as a refund or credit against the holder’s U.S. federal income tax, provided that the required information is furnished to the Internal Revenue Service.

Passive foreign investment company. A non-U.S. corporation will be classified as a passive foreign investment company for U.S. Federal income tax purposes if either:

	•		75% or more of its gross income for the taxable year is passive income; or

	•		on average for the taxable year by value, or, if it is not a publicly traded corporation and so elects, by adjusted basis, if 50% or more of its assets produce or are held for the production of passive income.

We do not believe that we will be treated as a passive foreign investment company for the current taxable year. Since this determination is made on an annual basis, however, no assurance can be given that we will not be considered a passive foreign investment company in future taxable years. If we were to be a passive foreign investment company for any taxable year, U.S. holders would be required to either:

	•		pay an interest charge together with tax calculated at ordinary income rates (which may be higher than the ordinary income rates that otherwise apply to U.S. holders) on “excess distributions,” as the term is defined in relevant provisions of the U.S. tax laws, and on any gain on a sale or other disposition of ADSs or equity shares;

	•		if a “qualified electing fund election” (as the term is defined in relevant provisions of the U.S. tax laws) is made, include in their taxable income their pro rata share of undistributed amounts of our income; or

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•

if the equity shares are “marketable stock” and a mark-to-market election is made, mark-to-market the equity shares each taxable year and recognize ordinary gain and, to the extent of prior ordinary gain, ordinary loss for the increase or decrease in market value for such taxable year.

If we are treated as a passive foreign investment company, we do not plan to provide information necessary for the “qualified electing fund” election.

The above summary is not intended to constitute a complete analysis of all tax consequences relating to the ownership of equity shares or ADSs. You should consult your own tax advisor concerning the tax consequences to you based on your particular situation.

10.F. Dividends and paying agents

Not applicable.

10.G. Statements by experts

Not applicable.

10.H. Documents on display

This report and other information filed or to be filed by us can be inspected and copied at the public reference facilities maintained by the SEC at Room 1200, 450 Fifth Street, Washington, DC, U.S.A. These reports and other information may also be accessed via the SEC’s website at www.sec.gov.

Additionally, documents referred to in this Form 20-F may be inspected at our corporate office, which is located at 7-1-27, Ameerpet, Hyderabad, 500016, India.

10.I. Subsidiary information

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss of future earnings or fair values or future cash flows that may result from a change in the price of a financial instrument. The value of a financial instrument may change as a result of changes in the interest rates, foreign currency exchange rates and other market changes that affect market risk sensitive instruments. Market risk is attributable to all market risk sensitive financial instruments including foreign currency receivables and payables and long term debt.

Our exposure to market risk is a function of our investment and borrowing activities and our revenue generating and operating activities in foreign currency. The objective of market risk management is to avoid excessive exposure in our foreign currency revenues and costs.

We are exposed to market risk primarily related to foreign exchange rate risk, interest rate risk and the market value of our investments.

Our major market risks of foreign exchange, interest rate and counter party risk are managed centrally by our Group Treasury department, which evaluates and exercises independent control over the entire process of market risk management.

We have a written treasury policy, and we do regular reconciliations of our positions with our counter-parties. In addition, internal audits of the treasury function are performed at regular intervals.

113

Components of Market Risk

Foreign Exchange Rate Risk

Our exchange rate risk arises from our foreign exchange revenues, primarily in U.S. dollars, British pounds and euros and foreign currency debt in U.S. dollars and euros

Our functional currency is the Indian rupee. But a significant portion of our revenues are in U.S. dollars and in Euro. The exchange rate between Indian rupees and U.S. dollars has fluctuated significantly in recent years and may continue to fluctuate in the future. Appreciation of Indian rupees against U.S. dollars can adversely affect our results of operations.

We purchases forward foreign exchange contracts and option contracts (derivatives) to mitigate the risk of changes in foreign exchange rates on accounts receivable and forecasted cash flows denominated in certain foreign currencies.

As of March 31, 2007, we had forward contracts to sell in the amount of U.S.$397.5 million and Euros 11 million and also had net purchased options to sell in the amount of Euros 30 million. As of March 31, 2008, we had forward contracts to sell and buy in the amount of U.S.$137.5 million and U.S.$77.2 million respectively. In addition, we had net purchased options to sell in the amount of U.S.$270 million and Euros 5 million.

Sensitivity Analysis of Exchange Rate Risk

A Rs.1 decrease/increase in the spot rate for exchange of Indian rupees with U.S. dollars would result in an approximately Rs.330.3 million increase/decrease in the fair value of our short U.S. dollars/Indian rupees forward and option contracts outstanding as of March 31, 2008.

A U.S.$0.01 decrease/increase in the spot rate for exchange of U.S. dollars with Euro would result in approximately Rs.0.05 million increase/decrease in the fair value of our short Euro/U.S.$ option contracts outstanding as of March 31, 2008.

Commodity Rate Risk

Our exposure to market risk with respect to commodity prices primarily arises from the fact that we are a purchaser and seller of active pharmaceutical ingredients and the components for such active pharmaceutical ingredients. These are commodity products whose prices can fluctuate sharply over short periods of time. The prices of our raw materials generally fluctuate in line with commodity cycles, though the prices of raw materials used in our active pharmaceutical ingredients business are generally more volatile. Raw material expense forms the largest portion of our operating expenses. We evaluate and manage our commodity price risk exposure through our operating procedures and sourcing policies.

We do not use any derivative financial instruments or futures contracts to hedge our exposure to fluctuations in commodity prices.

Interest Rate Risk

As of March 31, 2008 we had a loan of Euros 218.9 million at an interest rate of 6-month Euribor plus 70 basis points and $12.2 million at an interest rate of 6-month Libor plus 70 basis points. This exposes us to risk of changes in interest rates, particularly Euribor. Our investments in bank fixed deposits and short-term liquid mutual funds do not expose us to significant interest rate risk.


*		Loan received at a subsidized rate of interest from Indian Renewable Energy Development Agency Limited promoting use of alternative sources of energy.

114

Interest Rate Profile. An interest rate profile of long-term debt is given below:


	For the Fiscal Year Ended March 31,
	2008			2007			2006
Foreign Currency Loans	6-month Euribor +70bps - 200 bps & 6month Libor +70 bps			6-month Euribor +70 - 200 bps & 6month Libor+70 bps			1-month Euribor + 150 bps

Rupee Term Loans*		2	%		2	%		2	%


*		Loan received at a subsidized rate of interest from Indian Renewable Energy Development Agency Limited promoting use of alternative sources of energy.

As of March 31, 2008, we have not entered into any derivative financial instruments to hedge our interest rate risk.

Maturity Profile.

A maturity profile of Long term loans outstanding is as follows:


	Rupee Term Loans	Foreign Currency Loans	Foreign Currency Loans
Maturing in Year ending March 31,	(Rs.in thousands)	(Euros in thousands)	(Dollars in thousands)
2009	5,920	27,360	1,524
2010	5,920	50,160	2,794
2011	1,465	59,280	3,302
2012	0	82,080	4,572
Thereafter	0	0	0

Total	13,305	218,880	12,192

Counter-Party Risk

Counter-party risk encompasses settlement risk on derivative and money market contracts and credit risk on cash and time deposits. Exposure to these risks is closely monitored and kept within predetermined parameters. Our group treasury department does not expect any losses from non-performance by these counter-parties and does not have any significant grouping of exposures to financial sector or country risk.

Derivative financial instruments

The contract or underlying principal amount of derivative financial instruments (in millions) at March 31, 2008 and 2007 are set forth by currency in the table below:


	For the Fiscal Year Ended March 31,
	2008						2007
	U.S.$		Euros		Rs.		U.S.$		Euros		Rs.
	millions		millions		millions		millions		millions		millions

Currency related instruments
Forward foreign exchange rate contracts (sell)		137.5		—		—		397.5		11		—
Forward foreign exchange rate contracts (buy)		77.2		—		—		—		—		—
Option contracts		270.0		5		—		—		30		—

115

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Modification in the rights of security holders

None.

Use of Proceeds

In November 2006, we completed a public offering of our American Depositary Shares (“ADS”) to investors. The offering consisted of 14,300,000 ADSs representing 14,300,000 equity shares having a par value of Rs.5 each, at an offer price of U.S.$16.00 per ADS. The proceeds of the offering (including sales pursuant to the underwriters’ over allotment option, but prior to the underwriting discount and commissions and expenses of the offering) were U.S.$228.8 million. We paid underwriting discounts and commission of approximately U.S.$4.0 million. Accordingly, the net proceeds from the offering after underwriting discounts and commissions was approximately U.S.$224.8 million. None of the net proceeds from the public offering were paid, directly or indirectly, to any of our directors, officers or general partners or any of their associates, or to any persons owing ten percent or more of any class of our equity securities, or any affiliates.

Out of the total net proceeds of U.S.$224.8 million that was raised, U.S.$23.9 million was utilized in fiscal 2007. Out of the balance proceeds of U.S.$200.9 million (Rs.8,732.9 million), Rs.2,725.2 million was utilized during fiscal 2008 to meet our working capital and capital expenditure requirements.

The remaining proceeds of Rs.6,007.7 million have been placed in mutual funds and deposit accounts in India.

116

ITEM 15. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 20-F, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act).

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective, as of March 31, 2008, to provide reasonable assurance that the information required to be disclosed in filings and submissions under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions about required disclosure.

(b) Management’s Annual Report on Internal Control Over Financial Reporting

Management of Dr. Reddy’s Laboratories Limited (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers, and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

The Company’s internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management of the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2008 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”).

Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of March 31, 2008.

The effectiveness of the Company’s internal control over financial reporting as of March 31, 2008 has been audited by KPMG, the independent registered public accounting firm that audited the Company’s financial statements, as stated in their report, a copy of which is included in this annual report on Form 20-F.



/s/ G. V. Prasad		/s/ Saumen Chakraborty
Vice-Chairman and Chief Executive Officer		Chief Financial Officer

117

The following is the attestation report we received from KPMG on assessment of our internal control over financial reporting.

The Board of Directors and Stockholders
Dr. Reddy’s Laboratories Limited:

We have audited Dr. Reddy’s Laboratories Limited and subsidiaries’ (“the Company”) internal control over financial reporting as of March 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of March 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2008, and our report dated June 19, 2008 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG
Hyderabad, India,
June 19, 2008

118

(d) Changes in Internal Control over Financial Reporting

During the period covered by this Annual Report, there were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

ITEM 16. [RESERVED]

ITEM 16.A. AUDIT COMMITTEE FINANCIAL EXPERT

Our Audit Committee is composed of independent directors and brings in expertise in the fields of finance, economics, human resource development, strategy and management. Please see “Item 6. Directors, Senior Management and Employees” for the experience and qualifications of the members of the Audit Committee. As of March 31, 2008, no member of our audit committee met the requirements to be an audit committee financial expert under the SEC definition. We believe that the combined knowledge, skills and experience of the Board of Directors and their authority to engage outside experts as they deem appropriate to provide them with advice on the matters related to their responsibilities, enable them, as a group, to act effectively in the fulfillment of their tasks and responsibilities required under the Sarbanes-Oxley Act of 2002.

ITEM 16.B. CODE OF ETHICS

We have adopted a code of business ethics applicable to our executive officers, directors and all other employees, including a separate code of ethics applicable to our senior financial office. This code has been revised, updated and adopted effective as of May 07, 2008. A copy of the code is available, without charge, to all of our employees upon request to our human resources department, to investors by contacting our investor relations department and to others if a written request is made to our Company Secretary at our corporate office situated at 7-1-27, Ameerpet, Hyderabad — 500 016, Andhra Pradesh, India. The code is also available on our corporate website, www.drreddys.com. Information contained in our website, www.drreddys.com, is not part of this Annual Report and no portion of such information is incorporated herein. Any waivers of this code for executive officers or directors will be disclosed through filing of a Form 6-K. In addition, the audit committee of the Board of Directors has approved a whistleblower policy, which functions in coordination with our code of business ethics and provides an anonymous means for employees and others to communication with various internal organizations, including the audit committee of the Board of Directors.

ITEM 16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth for the fiscal years ended March 31, 2007 and March 31, 2008, the fees paid to our principal accountant and its associated entities for various services they provided us in these periods.


	Fiscal Year Ended
Type of Service	March 31, 2007		March 31, 2008		Description of Services
	(Rs. in millions)
Audit fees	Rs.	67.08	Rs.	44.83	Audit and review of financial statements
Audit related fees		—		8.20	Financial and tax due diligence services
Tax fees		0.33		0.75	Tax returns filing and transfer pricing related services
All other fees		0.91		2.39	Statutory certifications, information security reviews etc.

Total	Rs.	68.32	Rs.	56.17

Our audit committee charter requires us to take the prior approval of our audit committee on every occasion we engage our principal accountants or their associated entities to provide us any non-audit services. We disclose to our audit committee the nature of services that are provided and the fees to be paid for the services. The fees listed in the above table as “Tax Fees” and “All Other Fees” were approved by our audit committee.

ITEM 16.D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

We have not sought any exemption from the listing standards for audit committees applicable to us as foreign private issuer.

119

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Dr. Reddy’s Laboratories Limited:

We have audited the accompanying consolidated balance sheets of Dr. Reddy’s Laboratories Limited and subsidiaries (“the Company”) as of March 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2008, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 19, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

KPMG
Hyderabad, India
June 19, 2008

F-1

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)


				As of March 31,
	2007			2008			2008
							Convenience
							translation into U.S.$
							(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	Rs.	17,981,447		Rs.	7,398,285		U.S.$	184,865
Investment securities		15,325			4,753,580			118,780
Restricted cash		606,159			23,156			579
Accounts receivable, net of allowances		7,518,878			6,823,448			170,501
Inventories		7,545,580			11,132,830			278,182
Deferred income taxes and deferred charges		557,792			587,375			14,677
Due from related parties		145,086			72,817			1,820
Other current assets		3,096,129			3,828,714			95,670
Total current assets		37,466,396			34,620,205			865,073

Property, plant and equipment, net		12,427,798			16,765,432			418,926
Due from related parties		4,856			4,280			107
Investment securities		1,089,950			2,728			68
Investment in affiliates		225,905			237,054			5,923
Goodwill		15,540,688			16,978,916			424,261
Intangible assets, net		18,888,413			16,622,631			415,358
Other assets		275,097			213,810			5,343

Total assets	Rs.	85,919,103		Rs.	85,445,056		U.S.$	2,135,059


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Borrowings from banks	Rs.	3,212,676		Rs	4,862,709		U.S.$	121,507
Current portion of long-term debt		3,670,266			1,814,806			45,347
Trade accounts payable		4,754,978			5,409,782			135,177
Due to related parties		871			16,750			419
Accrued expenses		3,958,539			4,155,252			103,829
Other current liabilities		2,936,103			3,132,965			78,284
Total current liabilities		18,533,433			19,392,264			484,563

Long-term debt, excluding current portion		17,870,983			12,864,163			321,443
Deferred income taxes		7,556,228			5,642,412			140,990
Other liabilities		369,758			479,633			11,984
Total liabilities	Rs.	44,330,402		Rs	38,378,472		U.S.$	958,981


Minority interest		10,473			—			—

Stockholders’ equity:
Equity shares at Rs.5 par value; 200,000,000 shares authorized; Issued and outstanding; 167,912,180 shares and 168,172,746 shares as of March 31, 2007 and March 31, 2008, respectively	Rs.	839,561		Rs.	840,864		U.S.$.	21,011
Additional paid-in capital		19,908,837			20,036,473			500,661
Equity options outstanding		564,937			709,006			17,716
Retained earnings		20,091,135			24,031,890			600,497
Treasury shares held by a consolidated trust: 82,800 shares		(4,882	)		(4,882	)		(122	)
Accumulated other comprehensive income		178,640			1,453,233			36,313
Total stockholders’ equity		41,578,228			47,066,584			1,176,077

Total liabilities and stockholders’ equity	Rs.	85,919,103		Rs.	85,445,056		U.S.$	2,135,059

See accompanying notes to the consolidated financial statements.

F-2

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)


	Fiscal Year ended March 31,
	2006			2007			2008			2008
										Convenience
										translation into
										U.S.$
										(unaudited)
Revenues:
Product sales, net of allowances for sales returns (includes excise duties of Rs.1,153,273, Rs.779,390 and Rs. 558,308 for the years ended March 31, 2006, 2007 and 2008, respectively)	Rs.	24,077,209		Rs.	64,185,378		Rs.	49,230,572		U.S.$	1,230,149
Service Income		142,317			882,172			740,232			18,497
License fees		47,521			27,542			34,822			870

		24,267,047			65,095,092			50,005,626			1,249,516
Cost of revenues		12,417,413			34,219,539			24,597,589			614,632

Gross profit		11,849,634			30,875,553			25,408,037			634,883
Operating expenses:
Selling, general and administrative expenses		8,028,884			14,051,137			15,175,243			379,191
Research and development expenses, net		2,152,950			2,462,660			3,532,878			88,278
Amortization expenses		419,867			1,570,894			1,614,806			40,350
Write-down of intangible assets		—			1,770,221			2,488,514			62,182
Impairment of goodwill		—			—			90,437			2,260
Foreign exchange (gain)/loss, net		126,342			(136,753	)		(744,915	)		(18,614	)
Other operating (income)/expenses, net		(327,688	)		(174,058	)		(106,627	)		(2,664	)

Total operating expenses:		10,400,355			19,544,101			22,050,336			550,983

Operating income		1,449,279			11,331,452			3,357,701			83,901
Equity in (loss) / income of affiliates, net		(88,235	)		(62,676	)		1,783			45
Other income/(expense), net		526,279			(768,501	)		78,656			1,965

Income before income taxes and minority interest		1,887,323			10,500,275			3,438,140			85,911
Income taxes (expense)/benefit		(258,390	)		(1,176,936	)		1,229,429			30,720
Minority interest		(76	)		3,499			10,473			262

Net income	Rs.	1,628,857		Rs.	9,326,838		Rs.	4,678,042		U.S.$	116,893


Earnings per equity share
Basic	Rs.	10.64		Rs.	58.82		Rs.	27.83		U.S.$	0.69
Diluted	Rs.	10.62		Rs.	58.56		Rs.	27.73		U.S.$	0.69
Weighted average number of equity shares used in computing earnings per equity share
Basic		153,093,316			158,552,422			168,075,840			168,075,840
Diluted		153,403,846			159,256,476			168,690,774			168,690,774

See accompanying notes to the consolidated financial statements.

F-3

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
Fiscal year ended March 31, 2006, 2007 and 2008
(in thousands, except share data)


											Accumulated
					Additional						Other
		Equity Shares			Paid In			Comprehensive			Comprehensive

	No. of shares		Amount		Capital			Income			Income

Balance as of April 1, 2005		153,037,898	Rs	382,595	Rs.	10,089,152			—		Rs.	76,240
Issuance of equity shares on exercise of options		351,242		878		172,631			—			—
Cash dividends		—		—		—			—			—
Stock based compensation		—		—		—			—			—
Comprehensive income
Net income		—		—		—		Rs.	1,628,857			—
Translation adjustment		—		—		—			11,041			11,041
Unrealized loss on investments, net of tax benefit Rs 35,079		—		—		—			(120,844	)		(120,844	)

Comprehensive income		—		—		—		Rs.	1,519,054			—

Balance as of March 31, 2006		153,389,140	Rs.	383,473	Rs.	10,261,783			—		Rs.	(33,563	)

Stock split effected in the form of a stock dividend		—		383,789		(383,789	)		—			—
Issuance of equity shares on exercise of options		223,040		799		88,433			—			—
Commons stock issued		14,300,000		71,500		9,942,410			—			—

Cash dividends		—		—		—			—			—

Stock based compensation		—		—		—						—

Cumulative effect adjustment on adoption of SFAS 123 R		—		—		—			—			—

Comprehensive income

Net income		—		—		—		Rs.	9,326,838

Translation adjustment				—		—			251,353			251,353

Unrealized loss on investments, net of tax benefit Rs 127				—		—			(114	)		(114	)

Comprehensive income		—		—		—		Rs.	9,578,077

Initial adoption of SFAS 158, net of tax benefit Rs.20,019		—		—		—						(39,036	)

Balance as of March 31, 2007		167,912,180	Rs.	839,561	Rs.	19,908,837					Rs.	178,640

See accompanying notes to the consolidated financial statements.

F-4

[Continued from above table, first column(s) repeated]



						Equity
	Equity Shares held by Controlled Trust					Options			Retained			Total Stockholders’
	No. of shares		Amount			Outstanding			Earnings			Equity

Balance as of April 1, 2005		82,800	Rs.	(4,882	)	Rs.	400,749		Rs.	10,009,305		Rs.	20,953,159

Issuance of equity shares on exercise of options		—		—			(99,870	)		—			73,639
Cash dividends		—		—			—			(436,368	)		(436,368	)
Stock based compensation		—		—			162,249			—			162,249
Comprehensive income
Net income		—		—			—			1,628,857			1,628,857
Translation adjustment		—		—			—			—			11,041
Unrealized loss on investments, net of tax benefit Rs 35,079		—		—			—			—			(120,844	)
Comprehensive income		—		—			—			—			—


Balance as of March 31, 2006		82,800	Rs.	(4,882	)	Rs.	463,128		Rs.	11,201,794		Rs.	22,271,733

Stock split effected in the form of a stock dividend		82,800		—			—			—			—

Issuance of equity shares on exercise of options		—		—			(73,571	)		—			15,661

Commons stock issued		—		—			—			—			10,013,910

Cash dividends		—		—			—			(437,497	)		(437,497	)

Stock based compensation		—		—			190,186			—			190,186

Cumulative effect adjustment on adoption of SFAS 123 R		—		—			(14,806	)		—			(14,806	)
Comprehensive income
Net income		—		—			—			9,326,838			9,326,838
Translation adjustment		—		—			—			—			251,353
Unrealized loss on investments, net of tax benefit Rs 127		—		—			—			—			(114	)
Comprehensive income		—		—			—			—			—
Initial adoption of SFAS 158, net of tax benefit Rs.20,019		—		—			—			—			(39,036	)

Balance as of March 31, 2007		82,800	Rs.	(4,882	)	Rs.	564,937		Rs.	20,091,135		Rs.	41,578,228

See accompanying notes to the consolidated financial statements.

F-5


					Additional
	Equity Shares				Paid In		Comprehensive			Accumulated Other
	No. of shares		Amount		Capital		Income			Comprehensive Income
Balance as of April 1, 2007		167,912,180	Rs.	839,561	Rs.	19,908,837		—		Rs.	178,640
Issuance of equity shares on exercise of options		260,566		1,303		127,636
Cash dividends
Stock based compensation		—		—		—					—
Comprehensive income		—		—		—					—
Net income		—		—		—		4,678,042			—
Translation adjustment, net of tax expense of Rs. 42,262		—		—		—		1,216,478			1,216,478
Unrealized gain on investments, net of tax expense Rs. 35,260		—		—		—		123,425			123,425
Actuarial gain/loss net, of tax benefit Rs. 18,771								(41,841	)		(41,841	)
Unrealized loss on cash flow hedging derivatives, net of tax benefit Rs. 12,085		—		—		—		(23,469	)		(23,469	)

Comprehensive income		—		—		—	Rs.	5,952,635			—



Balance as of March 31, 2008		168,172,746	Rs.	840,864	Rs.	20,036,473				Rs.	1,453,233

Convenience translation into U.S.$ (unaudited)			U.S.$	21,011	U.S.$	500,661				U.S.$	36,313

[Continued from above table, first column(s) repeated]


						Equity —
	Equity Shares held by a Controlled Trust					Options			Retained			Total Stockholders’
	No. of shares		Amount			Outstanding			Earnings			Equity
Balance as of April 1, 2007		82,800	Rs.	(4,882	)	Rs.	564,937		Rs.	20,091,135		Rs.	41,578,228
Issuance of equity shares on exercise of options							(113,719	)		—			15,220
Cash dividends										(737,287	)		(737,287	)
Stock based compensation		—		—			257,788			—			257,788
Comprehensive income		—					—			—
Net income		—		—			—			4,678,042			4,678,042
Translation adjustment, net of tax expense of Rs. 42,262		—		—			—			—			1,216,478
Unrealized gain on investments, net of tax expense Rs. 35,260		—		—			—			—			123,425
Actuarial gain/loss net, of tax benefit Rs. 18,771		—		—			—			—			(41,841	)
Unrealized loss on cash flow hedging derivatives, net of tax benefit Rs. 12,085		—		—			—			—			(23,469	)
Comprehensive income		—		—			—			—			—


Balance as of March 31, 2008		82,800	Rs.	(4,882	)	Rs.	709,006		Rs.	24,031,890		Rs.	47,066,584

Convenience translation into U.S.$ (unaudited)			U.S.$	($122	)	U.S.$	17,716		U.S.$	600,497		U.S.$	1,176,077

See accompanying notes to the consolidated financial statements.

F-6

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)


	Fiscal Year ended March 31,
	2006			2007			2008			2008
										Convenience
										translation into
										U.S.$
										(unaudited)
Cash flows from operating activities:
Net income	Rs	1,628,857		Rs.	9,326,838		Rs.	4,678,042		U.S.$	116,893

Adjustments to reconcile net income to net cash from operating activities:
Deferred tax benefit		(55,157	)		(1,103,598	)		(2,351,120	)		(58,749	)
(Gain)/loss on sale of available for sale securities, net		3,924			(869	)		(110,269	)		(2,755	)
Depreciation and amortization		1,567,090			3,010,192			3,388,304			84,665
Write-down of intangible assets		—			1,770,221			2,488,514			62,182
Impairment of goodwill		—			—			90,437			2,260
Loss/(gain) on sale of property, plant and equipment		(320,361	)		(67,039	)		7,629			191
Provision for doubtful accounts receivable		33,629			151,620			226,932			5,665
Allowance for sales returns		239,462			1,325,981			164,295			4,105
Inventory write-downs		100,783			306,235			327,997			8,196
Equity in loss/(income) of affiliates, net		88,235			62,676			(1,783	)		(45	)
Unrealized foreign exchange (gain)/loss, net		67,650			(97,232	)		225,893			5,670
Stock based compensation		162,249			175,380			257,788			6,441
Minority interest		76			(3,499	)		(10,473	)		(262	)
Changes in operating assets and liabilities:
Accounts receivable		(781,607	)		(3,032,373	)		608,250			15,199
Inventories		(1,851,724	)		(995,342	)		(3,908,736	)		(97,670	)
Other assets		(1,123,076	)		(371,099	)		1,654,006			41,329
Due to/from related parties, net		15,223			(48,206	)		88,724			2,217
Trade accounts payable		1,564,454			1,045,753			1,076,159			26,891
Accrued expenses		243,625			825,207			134,848			3,370
Other liabilities		113,201			(320,250	)		(2,902,578	)		(72,528	)

Net cash provided by operating activities		1,696,533			11,960,596			6,122,627			152,989


Cash flows from investing activities:
Restricted cash		(6,017,219	)		5,468,926			583,003			14,568
Expenditure on property, plant and equipment		(1,873,268	)		(4,477,049	)		(6,348,085	)		(158,623	)
Proceeds from sale of property, plant and equipment		691,273			84,061			55,032			1,375
Investment in affiliates		(100,800	)		(158,474	)		—			—
Purchase of investment securities		(5,074,184	)		(331,000	)		(15,859,878	)		(396,299	)
Proceeds from sale of investment securities		5,274,899			331,869			12,477,799			311,789
Expenditure on intangible assets		(41,517	)		(259,198	)		(421,503	)		(10,532	)
Cash paid towards contingent consideration		(114,244	)		(66,677	)		(86,319	)		(2,157	)
Cash paid for acquisition, net of cash acquired		(27,322,762	)		(156,076	)		—			—

Net cash provided by/(used in) investing activities		(34,577,822	)		436,382			(9,599,951	)		(239,879	)


Cash flows from financing activities:
Proceeds from issuance of equity shares		73,639			10,029,571			15,220			380
Proceeds from minority interest shareholder		—			10,473			—			—
Proceeds from bank borrowings		6,322,206			2,212,983			3,554,417			88,816
Repayment of bank borrowings		—			(8,083,745	)		(1,941,458	)		(48,512	)
Proceeds from long-term debt		21,598,301			—			—			—
Repayment of long-term debt		(6,577	)		(1,888,540	)		(7,718,506	)		(192,866	)
Debt issuance costs		(340,243	)		(89,565	)		—			—
Dividends		(436,368	)		(437,497	)		(737,287	)		(18,423	)

Net cash provided by/(used in) financing activities		27,210,958			1,753,680			(6,827,614	)		(170,605	)


Net increase/(decrease) in cash and cash equivalents during the year		(5,670,331	)		14,150,658			(10,304,938	)		(257,495	)

Effect of exchange rate changes on cash and cash equivalents, net		95,104			118,152			(278,224	)		(6,952	)
Cash and cash equivalents at the beginning of the year		9,287,864			3,712,637			17,981,447			449,312

Cash and cash equivalents at the end of the year	Rs.	3,712,637		Rs.	17,981,447		Rs.	7,398,285		U.S.$	184,865

See accompanying notes to the consolidated financial statements.

F-7

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

1. Overview

Dr. Reddy’s Laboratories Limited (“DRL”) together with its subsidiaries (collectively, the “Company”) is a leading India-based pharmaceutical company headquartered in Hyderabad, India. The Company’s principal areas of operation are formulations, active pharmaceutical ingredients and intermediates, generics, custom pharmaceutical services and drug discovery. The Company’s principal research and development facilities are located in Andhra Pradesh, India and in the United States; its principal manufacturing facilities are located in Andhra Pradesh, India, Himachal Pradesh, India and Cuernavaca-Cuautla, Mexico; and its principal marketing facilities are located in India, Russia, the United States, the United Kingdom, Brazil and Germany. The Company’s shares trade on the Bombay Stock Exchange and the National Stock Exchange in India and, since April 11, 2001, on the New York Stock Exchange in the United States. As of March 31, 2008, the list of subsidiaries is as follows:

	•		DRL Investments Limited (“DRL Investments”)

	•		Reddy Pharmaceuticals Hong Kong Limited (“RPHL”)

	•		Reddy Antilles N.V. (“RANV”)

	•		Reddy US Therapeutics Inc. (“Reddy US”)

	•		Dr. Reddy’s Laboratories Inc. (“DRLI”)

	•		Dr. Reddy’s Farmaceutica Do Brazil Ltda. (“DRFBL”)

	•		Aurigene Discovery Technologies Limited (“ADTL”)

	•		Dr. Reddy’s Laboratories (EU) Limited (“DRL EU”)

	•		Dr. Reddy’s Laboratories (Proprietary) Limited (“DRSA”)

	•		Promius Pharma LLC (Previously Reddy Pharmaceuticals LLC.) (“PPLLC”)

	•		Reddy Holding GmbH (“RHG”)

	•		Beta Healthcare Solutions GmbH (“Beta HSG”)

	•		betapharm Arzneimittel GmbH (“Beta AG”)

	•		Beta institut fur sozialmedizinische Forschung und Entwicklung GmbH (“Beta IG”)

	•		Lacock Holdings Limited (“LHL”)

	•		OOO JV Reddy Biomed Limited (“Reddy Biomed “ or “RBL”)

	•		Reddy Netherlands B.V. (“RNBV”)

	•		Reddy Cheminor SA (“RCSA”)

	•		Aurigene Discovery Technologies Inc. (“ADTI”)

	•		Dr. Reddy’s Laboratories (U.K.) Limited (“DRL U.K.”)

	•		Cheminor Investment Limited (“CIL”)

	•		Dr. Reddy’s Bio-sciences Limited (“RBSL”)

F-9

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

1. Overview (continued)

	•		Trigenesis Therapeutics Inc. (“Trigenesis”)

	•		Industrias Quimicas Falcon de Mexico S.A.de.C.V. (“FALCON”)

	•		OOO Dr. Reddy’s Laboratories Limited, Russia (“OOO DRL”)

	•		Dr. Reddy’s Laboratories (Australia) Pty Limited (“DRLA”)

	•		Reddy Pharma Iberia S.A. (“RPISA”)

	•		Reddy Pharma Italia SPA. (“RPISPA”)

	•		Dr. Reddy’s Laboratories Switzerland (“DRSL”)

	•		Affordable Health Care Limited (“AHL”)

	•		Eurobridge Consulting BV, Netherlands (“Eurobridge”)

	•		OOO DRS Limited, Russia (“DRSR”)

	•		Aurigene Discovery Technologies (M) Sdn bhd (“ADTM”)

	•		Macred India Private Limited (“MIPL”)

	•		Dr. Reddy’s Laboratories Ilac Ticaret Limited (“DRIT”)

During fiscal 2007, beta Healthcare Verwaltungs GmbH (“Beta HVG”), beta Healthcare GmbH & Co KG (“Beta KG”) and beta Holding GmbH (“Beta HG”) were merged into RHG. RHG, Beta HSG, Beta AG and Beta IG are collectively referred to as betapharm, unless explicitly stated.

F-10

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

2. Significant accounting policies

a) Basis of preparation

The accompanying consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States (U.S. GAAP).

b) Estimates and assumptions

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates.

c) Functional currency

The functional currency of DRL is the Indian rupee, being the currency of the primary economic environment in which it operates. The functional currencies of the subsidiaries have been determined as follows, based on an individual and collective evaluation of economic factors described in Statement of Financial Accounting Standards (“SFAS”) SFAS 52, “Foreign currency translation”:


		Functional
Name of the subsidiary		Currency
DRL Investments, RPHL, RANV, DRLI, DRFBL, ADTL, DRSA, PPLLC, OOO DRL, RBL, RNBV, RCSA, CIL, RBSL, Trigenesis, DRLA, DRSL, ADTM, Eurobridge, DRSR, AHL, MIPL and DRIT		Indian Rupee

Reddy US and ADTI		U.S. Dollar

DRL EU and DRL U.K.		Pound Sterling

FALCON		Mexican Peso

RHG, Beta HSG, Beta AG, Beta IG, RPISA, RPISPA and LHL		Euro

In respect of all non-Indian subsidiaries that operate as marketing arms of DRL (“the parent company”) in their respective countries/regions (i.e., all those listed in the first row of the table above), the functional currency has been determined to be the functional currency of the parent company, i.e. the Indian rupee. Accordingly, the operations of these entities are largely restricted to import of finished goods from the parent company in India, sale of these products in the foreign country and remittance of the sale proceeds to the parent. The cash flows realized from sale of goods are readily available for remittance to the parent company and cash is remitted to the parent company on a regular basis. The costs incurred by these entities are primarily the cost of goods imported from the parent. The financing of these subsidiaries is done directly or indirectly by the parent company. In respect of subsidiaries, whose operations are self contained and integrated within their respective countries/regions (i.e., all those listed in the second through fifth rows of the table above), the functional currency has been determined to be the local currency of those countries/regions. The assets and liabilities of such subsidiaries are translated into Indian rupees at the rate of exchange prevailing as at the balance sheet date. Revenues and expenses are translated into Indian rupees at average monthly exchange rates prevailing during the year. Resulting translation adjustments are included in accumulated other comprehensive income.

d) Foreign currency transactions

Foreign currency transactions are translated into the functional currency at the rates of exchange prevailing on the date of the respective transactions. Monetary assets and liabilities in foreign currency are converted into the functional currency at the exchange rate prevailing on the balance sheet date. The resulting exchange gains/losses are included in the consolidated statement of operations.

F-11

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

2. Significant accounting policies (continued)

e) Convenience translation (unaudited)

The accompanying financial statements have been prepared in Indian rupees, the national currency of India. Solely for the convenience of the reader, the financial statements as of and for the fiscal year ended March 31, 2008 have been translated into United States dollars at the noon buying rate in New York City on March 31, 2008 for cable transfers in Indian rupees, as certified for customs purposes by the Federal Reserve Bank of New York of U.S.$1 = Rs. 40.02. No representation is made that the Indian rupee amounts have been, could have been or could be converted into United States dollars at such a rate or any other rate.

f) Principles of consolidation

The consolidated financial statements include the financial statements of DRL and all of its subsidiaries which it owns or controls more than 50% of the voting rights, except where the minority shareholders have certain significant participating rights that provide for effective involvement in significant decisions in the ordinary course of business of such entities, which are accounted for under the equity method. DRL consolidates Dr. Reddy’s Research Foundation (the “Research Foundation”), a non-profit organization that is funded by and carries out research activities on behalf of and for the benefit of the Company, and beta Institut for sociomedical research GmbH, a non-profit organization which is engaged in research and development to seek ways to improve the healthcare process in ways which promote the psychological welfare of patients, including development of patient pathways, case management, disease management and health systems management. All inter-company balances and transactions are eliminated on consolidation. Newly acquired subsidiaries are included in the consolidated financial statements from the date of acquisition.

The Company follows Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003 “FIN 46R”), Consolidation of Variable Interest Entities (“VIE”), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. For any VIEs that must be consolidated under FIN 46R, the interpretation generally requires the primary beneficiary initially to measure the assets, liabilities and non-controlling interests of the newly consolidated VIE at their fair values at the date the enterprise first becomes the primary beneficiary. Based on evaluation of FIN 46R, the Company has consolidated APR LLC, a VIE.

The Company accounts for investments by the equity method of accounting where it is able to exercise significant influence over the operating and financing policies of the investee. The Company’s equity in the income/loss of equity method affiliates, Kunshan Rotam Reddy Pharmaceuticals (“Reddy Kunshan” or “KRRP”) and Perlecan Pharma Private Limited (“Perlecan Pharma”) is included in the consolidated statement of operations. Inter company profits and losses have been eliminated until realized by the investor or investee.

g) Cash equivalents

The Company considers all highly liquid investments with remaining maturities at the date of purchase/investment, of three months or less to be cash equivalents.

F-12

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

2. Significant accounting policies (continued)

h) Revenue recognition

Product sales

	•		Persuasive evidence of an arrangement exists;

	•		The price to the buyer is fixed and determinable; and

	•		Collectibility of the sales price is reasonably assured.

Revenue from domestic sales of formulation products is recognized on delivery of the product to the stockist by the consignment and clearing and forwarding agent of the Company. Revenue from domestic sales of active pharmaceutical ingredients and intermediates is recognized on delivery of products to customers, from the factories of the Company. Revenue from export sales is recognized when significant risks and rewards in respect of ownership of products are transferred to customers, which is based on terms of the contract. Revenue from product sales includes excise duty and is recorded net of sales tax and applicable discounts and allowances.

Sales of formulations in India are made through clearing and forwarding agents to stockists. Significant risks and rewards in respect of ownership of formulation products are transferred by the Company when the goods are delivered to stockists from clearing and forwarding agents. Clearing and forwarding agents are generally compensated on a commission basis as a percentage of sales made by them.

Sales of active pharmaceutical ingredients and intermediates in India are made directly to the end customers generally, formulation manufacturers, from the factories of the Company. Sales of formulations and active pharmaceutical ingredients and intermediates outside India are made directly to the end customers, generally stockists or formulations manufacturers, from the Company or its consolidated subsidiaries.

The Company has entered into marketing arrangements with certain marketing partners for sale of goods. Under such arrangements, the Company sells generic products to the marketing partners at a price agreed in the arrangement. Revenue is recognized on these transactions upon delivery of products to the marketing partners, as all the conditions under Staff Accounting Bulletin No.104 (“SAB 104”) are met. Subsequently, the marketing partners remit to the Company an additional amount based on the sale proceeds of sales made by them to the end customer. Such amount is determined per the terms of the marketing arrangement, and is recognized by the Company when the realization is certain under the guidance given in SAB 104.

Revenue from sales of generic products is recognized when products are delivered and significant risks and rewards in respect of ownership of products passes on to the customer. Provisions for chargeback, rebates and medicaid payments are estimated and provided for in the year of sales and recorded as reduction of revenue. A chargeback claim is a claim made by the wholesaler for the difference between the price at which the product is initially invoiced to the wholesaler and the net price at which it is agreed to be procured from the Company. Provision for such chargebacks are accrued and estimated based on historical average chargeback rate actually claimed over a period of time, current contract prices with wholesalers/other customers and average inventory holding by the wholesaler. Such provisions are disclosed as a reduction of accounts receivable.

The Company accounts for sales returns in accordance with SFAS 48, “Revenue Recognition when Right to Return Exists” by recording an accrual based on Company’s estimate of expected sales returns.

The Company deals in various products and operates in various markets. Accordingly, the Company’s estimate of sales returns is determined primarily by its experience in these markets. In respect of established products, the Company determines an estimate of sales returns accrual primarily based on historical experience of such sales returns. Additionally, other factors that the Company considers in determining the estimate include levels of inventory in the distribution channel, estimated shelf life, product discontinuances, price changes of competitive products, and introduction of competitive new products, to the extent each of these factors impact the Company’s business and markets. The Company considers all these factors and adjusts the sales return accrual to reflect its actual experience.

F-13

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

2. Significant accounting policies (continued)

With respect to new products introduced by the Company, those are either extensions of an existing line of product or in a general therapeutic category where the Company has historical experience. The Company’s new product launches have historically been in therapeutic categories where established products exist and are sold either by the Company or its competitors. The Company has not yet introduced products in a new therapeutic category where the sales returns experience of such products is not known. The amount of sales returns for the Company’s newly launched products do not significantly differ from sales returns experience of current products marketed by the Company or competitors (as the Company understands based on industry publications). Accordingly, the Company does not expect sales returns for new products to be significantly different from expected sales returns of current products. The Company evaluates sales returns of all its products at the end of each reporting period and records necessary adjustments, if any. To date, no significant revision has been determined to be necessary.

Service income

Income from service, which primarily relate to contract research, is recognized as the related services are performed in accordance with the terms of the contract and when all the conditions under SAB 104 are met. Arrangements with customers for contract research and other related services are either on a fixed price or a time and material basis.

License fees

Non-refundable milestone payments are recognized in the consolidated statement of operations when earned, in accordance with the terms of the license agreement, and when the Company has no future obligations or continuing involvement pursuant to such milestone payments. Non-refundable upfront license fees are deferred and recognized when the milestones are earned, in proportion to the amount that each milestone earned bears to the total milestone payments agreed in the license agreement. As the upfront license fees are a composite amount and cannot be attributed to a specific molecule, they are amortized over the development period. The milestone payments increase during the development period as the risk involved decreases. The agreed milestone payments reflect the progress of the development of the molecule and may not be spread evenly over the development period. Accordingly, the milestone payments are a fair representation of the extent of progress made in the development of these underlying molecules. In the event, the development of molecule is discontinued, the corresponding amount of deferred revenue is recognized in the consolidated statement of operations in the period in which the project is terminated.

The Company has entered into certain dossier sales, licensing and supply arrangements that include certain performance obligations. Based on an evaluation of whether or not these obligations are inconsequential or perfunctory, the Company defers the upfront payments received under these arrangements. Such deferred revenue is recognized in the consolidated statement of operations in the period in which the Company completes its remaining performance obligations.

i) Shipping and handling costs

Shipping and handling costs incurred to transport products to customers are included in selling, general and administrative expenses.

j) Inventories

Inventories are stated at the lower of cost or market value. Cost is determined using the first-in-first-out method for all categories of inventories except stores and spares, where cost is determined using the weighted average method. Stores and spares comprise of packing materials, engineering spares (such as machinery spare parts) and consumables (such as lubricants, cotton waste and oils), which are used in operating machines or consumed as indirect materials in the manufacturing process. In the case of raw materials and stores and spares, cost comprises purchase price and attributable direct costs, less trade discounts. In the case of work-in-process and finished goods, cost comprises direct labor, material costs and production overheads.

F-14

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

2. Significant accounting policies (continued)

A write-down of inventory to the lower of cost or market value at the close of a fiscal year creates a new cost basis and is not marked up based on subsequent changes in underlying facts and circumstances. Such write-downs, if any, are included in cost of revenues.

Inventories are reviewed on a monthly basis for identification and write-off of slow-moving, obsolete and impaired inventory. Such write-downs, if any, are included in cost of revenues.

k) Investment securities

Investment securities consist of available for sale debt and equity securities and non-marketable equity securities accounted for by the cost method.

Available for sale securities are carried at fair value based on quoted market prices. For debt securities where quoted market prices are not available, fair value is determined using pricing techniques such as discounted cash flow analysis obtained from external sources. Unrealized holding gains and losses, net of the related tax effect, on available for sale securities are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. Decline in the fair value of any available for sale security below cost that is determined to be other than temporary, results in reduction in the carrying amount to fair value. Such impairment is charged to the consolidated statement of operations. Realized gains and losses from the sale of available for sale securities are determined on a first-in-first-out method and are included in earnings.

Non-marketable equity securities accounted for by the cost method are stated at cost, less provision for any other than temporary decline in value.

l) Derivative and hedge accounting

The Company purchases foreign currency forward contracts/option contracts to mitigate the risk of changes in foreign exchange rates on accounts receivable and forecasted cash flows denominated in certain foreign currencies. The Company also purchases zero-cost collars, which qualify as net purchased options, to hedge the exposure to variability in expected future foreign currency cash inflows due to exchange rate movements beyond a defined range.

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, the Company recognizes all derivatives as assets or liabilities measured at their fair value, regardless of the purpose or intent of holding them. In respect of derivatives designated and effective as cash flow hedges, gains or losses resulting from changes in the fair value are deferred and recorded as a component of accumulated other comprehensive income within stockholder’s equity until the hedged transaction occurs and are then recognized in the consolidated statement of operations together with the hedged item. The Company assesses hedge effectiveness based on overall change in fair value of derivative instrument.

In respect of derivatives designated as hedges, the Company formally documents all relationships between the hedging instrument and the hedged item, as well as its risk management objective and strategy for undertaking the hedge transaction. The Company also formally assesses both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair value or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, the Company, prospectively, discontinues hedge accounting with respect to that derivative.

F-15

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

2. Significant accounting policies (continued)

m) Property, plant and equipment

Property, plant and equipment including assets acquired under capital lease agreements are stated at cost less accumulated depreciation. The Company depreciates property, plant and equipment over the estimated useful life using the straight-line method. The estimated useful lives of assets are as follows:


Buildings

Factory and administrative buildings		25 to 50 years

Ancillary structures		3 to 15 years

Plant and machinery		3 to 15 years

Furniture, fixtures and office equipment		4 to 10 years

Vehicles		4 to 5 years

Computer equipment		3 to 5 years

Advances paid towards the acquisition of property, plant and equipment outstanding at each balance sheet date and the cost of property, plant and equipment not put to use before such date are disclosed under capital work-in-progress. The interest cost incurred for funding an asset during its construction period is capitalized based on the actual investment in the asset and the average cost of funds. The capitalized interest is included in the cost of the relevant asset and is depreciated over the estimated useful life of the asset.

Software for internal use, which is primarily acquired from third-party vendors including consultancy charges for implementing the software are capitalized. Subsequent costs are charged to the consolidated statement of operations as incurred. The capitalized costs are amortized over the estimated useful life of the software.

n) Goodwill

Goodwill represents the cost of acquired businesses in excess of the fair value of the identifiable tangible and intangible net assets purchased. Goodwill is tested for impairment on an annual basis, relying on a number of factors including operating results, business plans and future cash flows. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value.

F-16

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

2. Significant accounting policies (continued)

o) Intangible assets

Intangible assets consist of trademarks, product related intangibles, customer related intangibles, marketing rights, beneficial toll manufacturing contracts and non-competition arrangements. All intangible assets with definite life are amortized over the expected benefit period or the legal life, whichever is shorter. Such amortization periods are as follows:


Trademarks

Trademarks with finite useful life		3 to 10 years

Trademarks with indefinite life		Tested for impairment at least annually

Product related intangibles		12 to 15 years

Beneficial toll manufacturing contract		24 months

Non-competition arrangements		1.5 to 10 years

Marketing rights		3 to 16 years

Customer-related intangibles		2 to 5 years

Other intangibles		5 to 15 years

p) Impairment of long-lived assets

Long-lived assets and intangibles with finite useful life are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of assets may not be fully recoverable. Impairment test is based on a comparison of the undiscounted cash flows expected to be generated from the use of the asset to its recorded value. If impairment is indicated, the asset is written down to its fair value. Long-lived assets to be disposed are reported at the lower of carrying value or fair value, less cost to sell. The fair value of the ‘beta’ brand (trademark with indefinite life) is determined applying the relief from royalty method. The fair value of other intangibles is determined based on discounted cash flow approach.

q) Start-up costs

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

r) Research and development

Research and development cost is expensed as incurred. In-process technologies used in research and development projects and having no alternate future use are expensed upon purchase. Capital expenditure incurred on equipment and facilities acquired or constructed for research and development activities, and having alternative future use, is capitalized as property, plant and equipment when acquired or constructed.

F-17

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

2. Significant accounting policies (continued)

s) Stock-based compensation

Prior to April 1, 2006, the Company accounted for its stock-based compensation plans under SFAS 123 “Accounting for Stock Based Compensation”. On April 1, 2006, the Company adopted SFAS No. 123(R) (revised 2004) “Share Based Payment” (“SFAS No. 123(R)”) under the modified-prospective approach. The modified-prospective-approach under SFAS No. 123(R) applies to new awards and to awards modified, repurchased, or cancelled after adoption.

The Company uses the Black-Scholes option pricing model to determine the fair value of each option grant. Generally, the fair value approach in SFAS No. 123(R) is similar to the fair value approach described in SFAS No. 123. Upon adoption of SFAS 123(R), the Company elected to continue estimating the fair value of stock options using the Black-Scholes option pricing model. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected terms and risk free interest rates. In respect of Par Value Options, the expected term of an option is estimated based on the vesting term, contractual term, as well as expected exercise behavior of the employees receiving the option. In respect of Fair Market Value options, the expected term of an option is estimated based on the simplified method. Expected volatility of the option is based on historical volatility, during a period equivalent to the expected term of the option, of the observed market prices of the Company’s publicly traded equity shares. Dividend yield of the options is based on recent dividend activity. Risk-free interest rates are based on the government securities yield in effect at the time of the grant. These assumptions reflect management’s best estimates, but these assumptions involve inherent market uncertainties based on market conditions generally outside of Company’s control. As a result, if other assumptions had been used in the current period, stock-based compensation expense could have been materially impacted. Further, if management uses different assumptions in future periods, stock based compensation expense could be materially impacted in future years.

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


	Fiscal Year ended March 31,
	2006			2007			2008

Dividend yield		0.5	%		0.5	%		0.75	%
Expected term	12-78 months			12-48 months			12-48 months
Risk free interest rates		5.7-7.5	%		6.5-7.4	%		7.8-8.2	%
Volatility		23.4-36.9	%		30.5-33.6	%		28.4%-32.7	%

At March 31, 2008, the Company has four stock-based employee compensation plans, which are described more fully in Note 21. DRL and ADTL have two stock based employee compensation plans each.

The adoption of SFAS No. 123(R) did not have a material impact on Company’s equity-based compensation expense for the year ended March 31, 2007. Further, the Company believes that the adoption of SFAS No.123(R) will not have a material impact on its future equity-based compensation expense. Under SFAS 123, the Company had a policy of recognizing the effect of forfeitures only as they occurred. Accordingly, as required by SFAS No. 123 (R), on April 1, 2006, the Company estimated the number of outstanding instruments which are not expected to vest and recognized a credit to stock compensation expense of Rs. 14,806 representing reversal of stock compensation expense for such instruments previously recognized in the consolidated statement of operations.

A recent amendment to the Indian tax regulations requires the Company to pay Fringe Benefit Tax (FBT) on exercise of employee stock options. The FBT is computed based on the fair market value of the underlying equity share on the date of vesting of an option as reduced by the amount actually paid by the employee for exercise of the options. The Company’s obligation to pay FBT arises only upon exercise of options and is recorded as compensation expense in the consolidated statement of operations at that time.

In January 2008, ADTL amended its plan to recover FBT from employees for all new grants. Accordingly, the fair value of stock options granted subsequent to the date of this amendment has been determined using the Binomial option pricing model.

F-18

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

2. Significant accounting policies (continued)

The Binomial model includes assumptions regarding dividend yields, expected volatility, expected lives, risk free interest rates and expected FBT recovery. These assumptions reflect management’s best estimates, but these assumptions involve inherent market uncertainties based on market conditions generally outside of Company’s control. As a result, if other assumptions had been used in the current period, stock-based compensation expense could have been materially impacted. Further, if management uses different assumptions in future periods, stock based compensation expense could be materially impacted in future years.

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


	Fiscal year
	ended March
	31, 2008
Dividend yield		—
Expected term	36-72 months
Risk free interest rates		7.42-7.47	%
Volatility		57.38	%

t) Income taxes

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations in the period that includes the enactment date. Valuation allowance is established when necessary to reduce deferred tax assets to the amount considered more likely than not to be realized.

The Company adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, on April 1, 2007. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Accounting and disclosures of tax positions taken or expected to be taken by the Company are based on the recognition threshold and measurement attribute prescribed by FIN 48. The Company recognizes penalties and interest related to unrecognized tax benefits as a component of income taxes.

u) Leases

Leases of property, plant and equipment that transfer substantially all of the benefits or risks and rewards of ownership are classified as capital leases. The amount recorded is the lesser of the present value of the rental and other lease payments during the lease term, excluding that portion of the payments representing executory costs paid to the lessor, or the asset’s fair value. The rental obligations, net of interest charges, are reflected in long term debt.

Leases that do not transfer substantially all of the benefits or risks of ownership are classified as operating leases and recorded as expense on a straight line basis over the lease term, including leases that have rent holidays and / or escalating lease payments.

v) Legal cost

Legal costs incurred in connection with contingencies are expensed as incurred.

F-19

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

2. Significant accounting policies (continued)

w) Earnings per share

In accordance with SFAS No.128, “Earnings per Share”, basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period, using the treasury stock method for options, except where the results would be anti-dilutive. If securities have been issued by a subsidiary that enable their holders to obtain subsidiary’s common stock, the earnings of the subsidiary’s shall be included in the consolidated diluted earnings per share computations based on the Company’s holding of the subsidiary’s securities.

If the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split, the computations of basic and diluted earnings per share are adjusted retroactively for all periods presented to reflect that change in capital structure. If such changes occur after the close of the reporting period but before issuance of the financial statements, the per-share computations for that period and any prior-period financial statements presented are based on the new number of shares.

Reclassifications

Certain amounts in the prior years’ consolidated financial statements and notes have been reclassified to conform to the current year’s presentation.

F-20

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

3. Business combinations

All of the Company’s acquisitions have been accounted for using the purchase method of accounting. Revenues and expenses of the acquired businesses have been included in the accompanying consolidated financial statements beginning on the respective dates of acquisition. Contingent consideration pursuant to earnout agreements is recorded as an additional cost of the acquisition, when the contingency is resolved and the consideration is issued or becomes issuable.

Industrias Quimicas Falcon de Mexico, S.A. de C.V. (“Falcon”)

On December 30, 2005, the Company acquired 100% of the share capital of Industrias Quimicas Falcon de Mexico, S.A.de C.V. (“Falcon”), a Roche group company for a total purchase consideration of Rs. 2,773,126 (U.S.$ 61,233). The Company has accounted for this acquisition under the purchase method as defined in SFAS No. 141, “Business Combinations”. Accordingly, the financial results of Falcon have been included in the consolidated financial statements since that date. Falcon was acquired with intent to add steroid manufacturing capabilities and permit the Company to offer a full range of services in its custom pharmaceutical services business. The operations of Falcon relate to the manufacture and sale of active pharmaceutical ingredients and steroids in accordance with customer specifications.

The purchase cost of Rs. 2,773,126 has been allocated as follows:

	o		Property, plant and equipment and intangible assets based on appraisals performed by third party valuer; and

	o		Others based on management’s estimates.


Current assets
Cash and cash equivalents	Rs.	217
Accounts receivable		39,736
Inventories		1,150,730
Other current assets		259,465
Property, plant and equipment		1,418,799
Intangible assets
Customer contracts		51,493
Non-competition arrangement		20,242

Total assets		2,940,682
Liabilities assumed		(40,613	)
Deferred tax liability, net		(126,943	)

Purchase cost	Rs.	2,773,126

The weighted average useful lives of intangibles acquired are as follows:-


Customer contracts		2.6 years
Non-competition arrangement		3 years

F-21

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

3. Business combinations (continued)

betapharm

On March 3, 2006, the Company acquired 100% of the outstanding common shares of betapharm. Accordingly, the financial results of betapharm have been included in the consolidated financial statements since that date. betapharm is a leading generics pharmaceuticals company in Germany. Under the ‘beta’ brand, the Company markets a broad and diversified portfolio comprising formulations, primarily solid dose, focused on medical conditions requiring long-term therapy that are typically prescribed by primary care physicians.

The aggregate purchase price of Rs. 26,063,321 (Euro 482,654) includes direct acquisition cost amounting to Rs. 201,548 (Euro 3,732). The acquisition agreement included payment of contingent consideration amounting up to Rs. 518,400 (Euro 9,600), which was paid into an escrow account. This amount is subject to set-off for certain indemnity claims in respect of legal and tax matters that might arise, pertaining to the periods prior to the acquisition. The escrow will lapse and be time barred at the end of 2013. Since the maximum amounts pertaining to such claims are determinable at the date of acquisition, the same has been included as part of the purchase price.

During the year ended March 31, 2007, the Company completed the final allocation of the aggregate purchase price of Rs. 26,063,321 (Euro 482,654) for betapharm based on management’s estimate and independent valuations of intangible assets as follows:


Current assets:
Cash and cash equivalents	Rs.	1,357,395
Inventories		538,860
Other current assets		552,938
Property, plant and equipment		372,377
Intangibles:
Trademarks		5,546,314
Product related intangibles		13,684,867
Beneficial toll manufacturing contract		621,058
Other assets		142,541
Goodwill		12,848,428

Total assets		35,664,778
Deferred tax liability, net		(7,241,686	)
Liabilities assumed		(2,359,771	)

Purchase cost	Rs.	26,063,321

As a result of the final allocation of the aggregate purchase price, there were revisions in useful lives of certain intangibles and the total intangibles increased from Rs. 16,325,598 as at March 31, 2006 to Rs. 19,852,239. In addition, goodwill decreased from Rs 14,958,766 as at March 31, 2006 to Rs 12,848,428 and deferred tax liability, net increased from Rs. 5,825,383 as at March 31, 2006 to Rs 7,241,686.

Trademarks have an indefinite useful life and are therefore not subject to amortization but are tested for impairment annually. The weighted average useful lives of other intangibles acquired are as follows:


Product related intangibles	14.5 years
Beneficial toll manufacturing contract	4.8 years	⁽¹⁾

The adjustments to the values of intangibles, goodwill and deferred tax liability, net and revisions to useful lives did not have any material impact on the results of the fiscal year ended March 31, 2007.


⁽¹⁾		As more fully described in Note 5, in January 2007, the Company revised the estimated useful life of the beneficial toll manufacturing contract intangible from 58 months to 24 months. Consequently, the unamortized balance as on the date of such amendment is being amortized over the remaining revised estimated useful life of this intangible.

F-22

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

3. Business combinations (continued)

All goodwill arising from the acquisition of betapharm was assigned to the Company’s generics segment. Pro forma Information: The table below reflects unaudited pro forma consolidated results of operations as if both the Falcon and beta Holding GmbH acquisitions had been made at the beginning of the period presented below:


	Fiscal year ended March 31, 2006
	(unaudited)
Revenues	Rs.	33,766,668
Net income		1,991,090
Earning per equity share Basic		13.00
Diluted		12.98
Weighted average number of equity shares used in computing earnings per equity share
Basic		153,093,316
Diluted		153,403,846

The unaudited proforma consolidated results of operations is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated at the date indicated, nor it is necessarily indicative of future operating results of the combined companies and should not be construed as representative of these amounts for any future dates or periods.

4. Goodwill

In accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, the Company tests goodwill for impairment, at least annually. The following table presents the change in goodwill balance during the years ended March 31, 2007 and 2008:


	Fiscal Year ended March 31,
	2007			2008
Balance at the beginning of the year⁽¹⁾	Rs.	16,816,452		Rs.	15,722,631
Acquired/adjusted during the year		(2,013,351	)		116,459
Effect of translation adjustments		919,530			1,321,769

Balance at the end of the year⁽¹⁾	Rs.	15,722,631		Rs.	17,160,859

Goodwill acquired/adjusted during the years ended March 31, 2007 and 2008 represents the following:


	Fiscal Year ended March 31,
	2007			2008
Contingent consideration paid/payable in purchase business combinations	Rs.	96,987		Rs.	206,896
Adjustment on completion of final purchase price allocation related to acquisition of betapharm		(2,110,338	)		—
Impairment of goodwill		—			(90,437	)

	Rs.	(2,013,351	)	Rs.	116,459

In March 2000, Dr. Reddy’s Laboratories Inc. (“DRLI”), a consolidated subsidiary, acquired 25% of its own common stock held by a minority shareholder (Pharma, LLC) for cash consideration of Rs. 1,072. This acquisition was accounted for by the purchase method. Additionally, contingent consideration not exceeding U.S.$ 14,000 was payable over a period of ten years based on achievement of sales of certain covered products. Such payments were to be recorded as goodwill in the period in which the contingency is resolved in accordance with the consensus reached by the Emerging Issues Task Force on Issue 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination.

F-23

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

4. Goodwill (continued)

In August 2006, the Company received a letter from Pharma, LLC alleging that sale of certain products were excluded by the Company in its calculation of gross revenue and consequently, the amount payable to Pharma, LLC. The Company, in its response, stated that excluded products were the authorized generic products of the partnering innovator company and not DRLI’s products per the agreement. Subsequently, in October, 2006, Pharma LLC instituted an arbitration proceeding which was settled during the year ended March 31, 2008. Per the settlement, the Company agreed to pay the remaining contingent consideration in installments beginning October 1, 2007 and ending January 1, 2009. As there are no unresolved contingencies, this remaining consideration has been recorded as goodwill in these consolidated financial statements amounting to Rs. 206,896. Accordingly, as of March 31, 2008, the entire Rs. 612,306 (U.S.$ 14,000) has been recorded as goodwill.

Impairment of goodwill amounting to Rs. 90,437 relates to Company’s drug discovery segment.

The following table presents the allocation of Goodwill to the various segments:


	As of March 31,
	2007		2008
Formulations⁽¹⁾	Rs.	349,774	Rs.	349,774
Active pharmaceutical ingredients and intermediates		997,025		997,025
Generics		14,285,395		15,814,060
Drug discovery		90,437		—

	Rs.	15,722,631	Rs.	17,160,859


⁽¹⁾		Includes goodwill arising on investment in an affiliate amounting to Rs. 181,943.

5. Intangible assets, net

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, intangible assets are amortized over the expected benefit period or the legal life, whichever is shorter.

Intangible assets consist of the following:


	As of March 31, 2007
	Gross carrying		Accumulated
	amount		amortization		Net carrying value

Trademarks with finite useful life	Rs	2,597,962	Rs.	2,359,221	Rs.	238,741
Trademarks with indefinite life		5,127,473		—		5,127,473
Product related intangibles		14,078,320		1,078,804		12,999,516
Beneficial toll manufacturing contract		665,505		179,691		485,814
Non-competition arrangements		131,214		120,030		11,184
Marketing rights		8,511		8,511		—
Customer-related intangibles		177,375		153,435		23,940
Other intangibles		10,624		8,879		1,745

	Rs.	22,796,984	Rs	3,908,571	Rs.	18,888,413

F-24

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

5. Intangible assets, net (continued)


	As of March 31, 2008
	Gross carrying		Accumulated
	amount		amortization		Net carrying value

Trademarks with finite useful life	Rs	2,581,217	Rs.	2,522,280	Rs.	58,937
Trademarks with indefinite life		5,620,563		—		5,620,563
Product related intangibles		11,866,772		1,250,261		10,616,511
Beneficial toll manufacturing contract		729,531		482,419		247,112
Non-competition arrangements		128,216		123,776		4,440
Marketing rights		7,982		7,982		—
Customer-related intangibles		236,100		161,032		75,068
Other intangibles		9,962		9,962		—

	Rs.	21,180,343	Rs	4,557,712	Rs.	16,622,631

The amortization expense for the years ended March 31, 2006, 2007 and 2008 was Rs. 419,867, Rs. 1,570,894 and Rs. 1,614,806, respectively.

Estimated amortization expense for the next five years and thereafter with respect to such assets is as follows:


For the fiscal year ended March 31, 2009	Rs.	1,191,471
2010		886,083
2011		885,625
2012		859,347
2013		845,765
Thereafter		6,333,777

Total	Rs.	11,002,068

The intangible assets (net of accumulated amortization) as of March 31, 2007 have been allocated to the following segments:


					Custom
					Pharmaceutical
	Formulations		Generics		Services		Total
Trademark with finite useful life	Rs.	233,108	Rs.	5,633		—	Rs.	238,741
Trademarks with indefinite life		—		5,127,473		—		5,127,473
Product related intangibles		—		12,999,516		—		12,999,516
Beneficial toll manufacturing contract		—		485,814		—		485,814
Non-competition arrangements		—		177		11,007		11,184
Customer related intangibles		—		584		23,356		23,940
Other intangibles		—		1,745		—		1,745

	Rs.	233,108	Rs.	18,620,942	Rs.	34,363	Rs.	18,888,413

The intangible assets (net of amortization) as of March 31, 2008 have been allocated to the following segments:


					Custom
					Pharmaceutical
	Formulations		Generics		Services		Total
Trademarks with finite useful life	Rs.	56,462	Rs.	2,475		—	Rs.	58,937
Trademarks with indefinite life		—		5,620,563		—		5,620,563
Product related intangibles		—		10,616,511		—		10,616,511
Beneficial toll manufacturing contract		—		247,112		—		247,112
Non-competition arrangements		—		—		4,440		4,440
Customer related intangibles		3,572		65,461		6,035		75,068

	Rs.	60,034	Rs.	16,552,122	Rs.	10,475	Rs.	16,622,631

F-25

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

5. Intangible assets, net (continued)

Write-down of intangible assets acquired in Trigenesis acquisition

In 2004, the Company, through the acquisition of Trigenesis Therapeutics Inc. (“Trigenesis”), acquired certain technology platforms and marketing rights for a total consideration of Rs. 496,715 (U.S.$ 11,000) which were accounted as purchase of intangible assets. During the year ended March 31, 2007, the Company completed a detailed review of business opportunities in respect of these core technology platforms and marketing rights. Based on this review, the Company determined that further commercialization of these intangible assets may not be economically viable due to further regulatory approval process requirements and unfeasible partnering prospects, and therefore discontinued its efforts to further develop these assets. Accordingly, the net carrying value of these intangible assets was written down to Rs. Nil, by recording a write-down of Rs. 213,518. This write down, which has been disclosed under “Write-down of intangible assets” in the consolidated statement of operations for the year ended March 31, 2007, relates to the Company’s generics segment.

Change in estimated useful life of beneficial toll manufacturing contract intangible

betapharm primarily sourced its products from Salutas GmbH (“Salutas”) under a long-term supply contract. The contract gave betapharm a benefit by way of a longer commitment period to supply products at favorable purchase price. Accordingly, at the time of betapharm’s purchase price allocation, this contract was identified as a beneficial toll manufacturing contract and recorded as an intangible asset. In January 2007, Salutas served a termination notice to betapharm cancelling its future commitment to supply products under this contract and renegotiated the terms and prices under this contract. This resulted in a reduction in the overall committed supply period from 58 months to 24 months and increased procurement prices. Based on this amendment in January 2007, the Company revised its estimated useful life of this intangible and is amortizing the balance unamortized amount as on the date of such amendment over the remaining useful life of the intangible.

Write-down of intangible assets acquired in betapharm acquisition

During the year ended March 31, 2007, triggered by the above contract amendment with Salutas resulting in supply constraints in the short-term period and increased procurement prices and certain market events comprising continuing decrease in market prices and increased competitive intensity, the Company tested carrying value of betapharm intangibles for impairment. The carrying value of these intangibles included certain product related intangibles and the ‘beta’ brand. ‘beta’ brand was fair valued applying the relief from royalty method. The product related intangibles were fair valued based on discounted cash flow approach. As a result of this review, the Company recorded a write-down of intangible assets amounting to Rs. 1,556,703 and adjusted the carrying value of the ‘beta’ brand and certain product related intangibles as of March 31, 2007. This write-down, which has been disclosed under “Write-down of intangible assets” in the consolidated statement of operations for the year ended March 31, 2007, relates to the Company’s generics segment.

During the year ended March 31, 2008, triggered by certain adverse market conditions such as decrease in market prices and an increasing trend in certain new type of rebates being negotiated with State Healthcare Insurance Fund (“SHI”) companies, and further affected by supply constraints, the Company tested carrying value of betapharm intangibles for impairment. As a result of this review, the Company recorded a write-down of intangible assets amounting to Rs. 2,361,008 and adjusted the carrying value of certain product related intangibles as of March 31, 2008. The fair value of these intangibles was determined based on discounted cash flow approach. This write down, which has been disclosed under “Write-down of intangible assets” in the consolidated statement of operations for the year ended March 31, 2008, relates to the Company’s generics segment.

Write-down of intangible assets acquired in Iberia acquisition

In May 2006, the Company acquired marketing authorizations and marketing authorization applications (“MAAs”) for certain specialty pharmaceutical products, along with the related trademark rights and physical inventories of the products, from Laboratorios Litaphar, S.A. (“Litaphar”) for a total consideration of Rs. 218,920 (Euro 3,740). Litaphar, a Spanish company was engaged in the promotion, distribution and commercialization of pharmaceutical products and chemical-pharmaceutical specialties. As a result of this acquisition, the Company acquired an opportunity to sell those products using their existing brand names through its generics sales and marketing network. During the year ended March 31, 2008, triggered by certain adverse market conditions such as decrease in sales and increase in cost of procurement, the Company tested carrying value of litaphar intangibles for impairment. The fair values of these intangibles were determined based on discounted cash flow approach. As a result of this review, the Company recorded a write-down of intangible assets amounting to Rs. 127,506 and adjusted the carrying value of product related intangibles as

F-26

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

of March 31, 2008. The above write down, which has been disclosed under “Write-down of intangible assets” in the consolidated statement of operations, relates to the Company’s generics segment.

6. Formation of Perlecan Pharma Private Limited

In September 2005, the Company announced the formation of an integrated drug development company, Perlecan Pharma Private Limited (“Perlecan Pharma”), with Citigroup Venture Capital International Growth Partnership Mauritius Limited (“Citigroup Venture”) and ICICI Venture Funds Management Company (“ICICI Venture”). Perlecan Pharma is engaged in the clinical development and out-licensing of New Chemical Entity (“NCE”) assets. Citigroup Venture and ICICI Venture each committed to contribute Rs. 1,003,725 (U.S.$ 22,500) and the Company committed to contribute Rs. 340,000 (U.S.$ 7,500) towards equity in Perlecan Pharma. The arrangement was subject to certain closing conditions, which were completed on March 27, 2006 resulting in an amendment of certain terms of the investment agreement.

As a result, the Company owned approximately 14.28% of the equity of Perlecan Pharma as of March 31, 2006. In addition, Perlecan Pharma is to issue to the Company warrants to purchase 45 million equity shares of Perlecan Pharma, at an exercise price of Re.1.00 per equity share, the exercise of which is contingent upon the success of certain research and development milestones. If the warrants are fully exercised, then the Company will own approximately 62.5% of the equity of Perlecan Pharma. Further, three out of seven directors on the Board of Directors of Perlecan Pharma will be designated by the Company. In addition, as per the terms of the arrangement, the Company will have the first right to conduct product development and clinical trials on behalf of Perlecan Pharma on an arms length basis subject to the final decision by the board of directors of Perlecan Pharma. Considering these factors the Company has accounted for its investment in Perlecan Pharma in accordance with APB 18, “The Equity Method of Accounting for Investments in Common Stock”.

As of March 31, 2006, the three investors had invested Rs. 705,700 (U.S.$ 15,818) in Perlecan Pharma. The Company’s share of equity investment was Rs. 100,800 (U.S.$ 2,259). The Company was also committed to invest an additional amount of Rs. 239,200 (U.S.$ 5,241) as its proportionate equity contribution in the future. As per the terms of the amended agreement, the Company was to be reimbursed by Perlecan Pharma for research and development costs of Rs. 231,023 that were incurred by the Company prior to closing.

The Company’s equity in the loss of Perlecan Pharma for the period March 28, 2006 through March 31, 2006 amounted to Rs. 40,000. The reimbursement for research and development costs incurred by the Company prior to the closing has been applied to reduce the carrying value of the equity investment in Perlecan Pharma as of March 31, 2006 to zero, with the remaining balance of Rs. 170,223 reflected as other liability as of March 31, 2006.

During the year ended March 31, 2007, the Company and the other two investors invested additional amounts of Rs. 69,200 and Rs. 412,700, respectively, in Perlecan Pharma. As a result, as of March 31, 2007, the Company owned approximately 14.31% of the equity of Perlecan Pharma. The Company’s equity in the loss of Perlecan Pharma for the year ended March 31, 2007 amounted to Rs. 63,339. Further as of March 31, 2007, the carrying value of Company’s investment in Perlecan Pharma was Rs. 3,309 and the other liability balance was Rs.170,223.

The Company’s equity in the loss of Perlecan Pharma for the year ended March 31, 2008 amounted to Rs. 12,675. Further, as of March 31, 2008, the carrying value of Company’s investment in Perlecan Pharma was Rs. Nil, the other liability balance was Rs. 179,589 and the Company is committed to make additional equity investment of Rs. 170,000 in Perlecan Pharma.

The Company will continue to reflect its equity in losses of Perlecan Pharma to the extent of its net investment and future funding commitments.

F-27

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

7. Cash, cash equivalents and restricted cash

Cash and cash equivalents as of March 31, 2007 and 2008 amounted to Rs. 17,981,447 and Rs. 7,398,284, respectively. These amounts primarily consisted of current and time deposits with banks. This excludes restricted cash included in current assets of Rs. 606,159 and Rs. 23,156 as of March 31, 2007 and 2008, respectively, in respect of following obligations or commitments of the Company:


	As of March 31,
	2007		2008
Performance guarantees issued by the Company	Rs.	1,080	Rs.	1,268
Long term debt from Citibank		584,517		—
Unclaimed dividend		13,140		14,372
Other obligations		7,422		7,516

Total restricted cash	Rs.	606,159	Rs.	23,156

The fair value of cash and cash equivalents approximate their carrying values. During the year ended March 31, 2008, restriction on cash deposits amounting to Rs. 584,517 that were pledged against long-term debt taken from Citibank, was released and these cash deposits were liquidated.

8. Accounts receivable, net

Accounts receivable as of March 31, 2007 and 2008 are stated net of allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts based on financial condition of the customer, ageing of the accounts receivable, historical experience of collections from customers and the current economic environment.

The activity in the allowance for doubtful accounts receivable is given below:


	Fiscal Year ended March 31,
	2006			2007			2008
Balance at the beginning of the year	Rs.	171,154		Rs.	188,001		Rs.	293,618
Additional provision		33,629			151,620			226,932
Bad debts charged to provision		(16,782	)		(46,003	)		(59,429	)

Balance at the end of the year	Rs.	188,001		Rs.	293,618		Rs.	461,121

9. Inventories

Inventories consist of the following:


	As of March 31,
	2007		2008
Raw materials	Rs.	2,147,896	Rs.	3,226,016
Packing materials, stores and spares		560,629		773,433
Work-in-process		1,674,235		2,345,849
Finished goods		3,162,820		4,787,532

	Rs.	7,545,580	Rs.	11,132,830

During the years ended March 31, 2006, 2007 and 2008, the Company recorded inventory write-down of Rs. 100,783, Rs. 306,235 and Rs. 327,997, respectively, resulting from decline in the market value of certain finished goods and write-down of certain raw materials. These write-down adjustments are included in cost of revenues.

During the year ended March 31, 2008, the Company recorded a loss on firm purchase commitment on certain finished products under its long-term supply contract with Salutas amounting to Rs. 268,227, which is included in cost of revenues.

F-28

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

10. Other assets

Other assets consist of the following:


	As of March 31,
	2007		2008
Prepaid expenses	Rs.	479,141	Rs.	365,879
Advances to suppliers		297,993		499,567
Balances with statutory authorities		1,066,559		946,243
Deposits		240,968		210,772
Export benefits receivable		347,814		464,139
Others		938,751		1,555,924

		3,371,226		4,042,524
Less: Current assets		3,096,129		3,828,714

	Rs.	275,097	Rs.	213,810

Balances with statutory authorities represent amounts deposited with the excise authorities and the unutilized excise input credits on purchases. These are regularly utilized to offset the excise liability on goods produced by the Company. Accordingly, these balances have been classified as current assets.

Deposits mainly comprise telephone, electricity, premises and other deposits. Others mainly represent advance income taxes, interest receivable on fixed deposits, receivables from banks on derivative contracts etc.

11. Property, plant and equipment, net

Property, plant and equipment consist of the following:


	As of March 31,
	2007			2008
Land	Rs.	875,662		Rs.	1,456,439
Buildings		3,063,872			4,147,041
Plant and machinery		9,974,476			12,687,624
Furniture, fixtures and office equipment		936,504			866,810
Vehicles		383,024			437,908
Computer equipment		679,076			888,747
Capital work-in-progress		2,805,221			4,000,647

		18,717,835			24,485,216
Accumulated depreciation		(6,290,037	)		(7,719,784	)

	Rs.	12,427,798		Rs.	16,765,432

Depreciation expense for the years ended March 31, 2006, 2007 and 2008 was Rs. 1,147,223, Rs. 1,439,298 and Rs. 1,773,498, respectively.

During the year ended March 31, 2008, the Company capitalized interest cost of Rs. 85,484.

F-29

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

12. Investment securities

Investment securities consist of the following:


	As of March 31, 2007									As of March 31, 2008
			Gross		Gross							Gross
			unrealized		unrealized							unrealized		Gross
	Carrying		holding		holding					Carrying		holding		unrealized
	value		gains		losses			Fair value		value		gains		holding losses			Fair value
Available for sale:
Mutual fund units	Rs.	5,315	Rs.	10	Rs.	—		Rs.	15,325	Rs.	3,507,663	Rs.	8,300	Rs.	—		Rs.	3,515,963
Equity securities		3,096		8,837		—			11,933		3,096		16,106		—			19,202
Debt securities		1,250,020		—		(174,731	)		1,075,289		1,250,020		—		(31,605	)		1,218,415


		1,268,431		8,847		(174,731	)		1,102,547		4,760,779		24,406		(31,605	)		4,753,580

Less: Current portion		—		—		—			15,325		—		—		—			4,753,580

Non-current portion		—		—		—		Rs.	1,087,222		—		—		—			—

Carrying value of non-marketable equity securities amounted to Rs. 2,728 as of March 31, 2007 and 2008.

Realized gains / (losses) on sale of investment securities during the years ended March 31, 2006, 2007 and 2008 was Rs. (3,924), Rs. 869 and Rs. 110,269, respectively.

Investments in debt securities, classified as available for sale, mature in April, July and October 2008. The following table shows the gross unrealized losses and fair value of the Company’s investment with unrealized losses that are not deemed to be other-than-temporarily impaired and duration for which the securities have been in a continuous unrealized loss position for a period of more than twelve months as of March 31, 2008.

As of March 31, 2007

As of March 31, 2008

Fair value

Unrealized losses

Fair value

Unrealized losses

Debt securities

Rs.1,075,289

Rs.174,731

Rs.1,218,415

Rs.31,605

The unrealized losses on the Company’s investment in debt securities were caused by interest rate changes. The Company had purchased those investments at a discount relative to their face amount, which is guaranteed by the issuer upon maturity. Since the decline in market value is attributable to changes in interest rates and not credit quality of the issuer, and the Company has the ability and intent to hold these investments until maturity, the Company does not consider the decline in fair value of these investments below cost to be other-than-temporary as at March 31, 2008.

F-30

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

13. Leases

Capital leases

Property, plant and equipment include Rs. 239,365 and Rs. 291,650 (accumulated depreciation of Rs. 9,420 and Rs. 24,880) in respect of assets acquired under capital leases and as of March 31, 2007 and 2008, respectively.

The depreciation expense related to these assets was Rs. 678, Rs. 8,804 and Rs. 13,582 during the years ended March 31, 2006, 2007 and 2008, respectively. The financial obligations arising from these contractual arrangements are reflected in long-term debt.

Operating leases

The Company leases office and residential facilities under operating lease agreements that are renewable on a periodic basis at the option of the lessee. Rental expense under these leases was Rs. 229,956, Rs. 219,631 and Rs. 264,028 for the years ended March 31, 2006, 2007 and 2008, respectively.

The schedule of future minimum rentals payments in respect of non-cancellable operating leases is set out below:


Fiscal Year ended March 31,
2009	Rs.	161,543
2010		116,699
2011		92,976
2012		73,437
2013		52,847
Thereafter		30,979

	Rs.	528,481

14. Investment in affiliates

Reddy Kunshan: Reddy Kunshan is engaged in manufacturing and marketing of active pharmaceutical ingredients and intermediates and formulations in China. During the year ended March 31, 2007, the Company further invested Rs. 89,274 along with one of its other joint venture partners in Reddy Kunshan. Consequently, the Company’s interest in Reddy Kunshan increased from 51.2% as of March 31, 2006 to 51.3% as of March 31, 2007.

Three directors of the Company are on the Board of directors of Reddy Kunshan, which comprises seven directors. Under the terms of the agreement, all decisions with respect to operating activities, significant financing and other activities are taken by the approval of at least five of the seven directors of Reddy Kunshan Board. As the Company does not control Reddy Kunshan’s board and the other partners have significant participating rights, Company’s interest in Reddy Kunshan has been accounted under the equity method of accounting.

The Company’s equity in the loss of Reddy Kunshan for the year ended March 31, 2006 was Rs. 48,235, and it’s equity in the income of Reddy Kunshan for the years ended March 31, 2007 and 2008 was Rs. 663 and Rs. 14,458, respectively. The carrying value of Company’s investment in Reddy Kunshan as of March 31, 2007 and 2008 was Rs. 222,596 and Rs. 237,054 respectively.

Perlecan Pharma: As described in Note 6, the Company’s equity in loss of Perlecan Pharma for the year ended March 31, 2006, 2007 and 2008 was Rs. 40,000, Rs. 63,339 and Rs. 12,675 respectively. The carrying value of Company’s investment in Perlecan Pharma as of March 31, 2007 and 2008 was Rs. 3,309 and Rs. Nil, respectively.

F-31

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

15. Variable interest entities

On January 30, 2004, the Company along with two individuals formed APR LLC, a Delaware limited liability company. APR LLC is a development stage enterprise, which is in the process of developing an active pharmaceutical ingredient (“API”). Equity capital of APR LLC consists of Class A equity interests held by two individuals and Class B equity interests held by DRL. The initial contribution for the Class A interests was U.S.$ 400 (Rs. 17,487) in cash. Class A interests carry voting rights and participate in the profits and losses of APR LLC in proportion to the voting interests. DRL contributed U.S.$ 500 (Rs. 21,859) in cash for Class B non-voting interests, which carry certain protective rights only.

Further, DRL has entered into a development and supply agreement under which DRL and APR LLC will collaborate in the development, marketing and sale of API and generic dosages. Under the terms of this agreement, DRL is committed to fund the entire research and development of API, which is repayable by APR LLC upon successful commercialization of the product. DRL has paid US $ Nil (Rs. Nil), US $ 501 (Rs. 21,774) and US $ 99 (Rs. 4,195) during the years ended March 31, 2006, 2007 and 2008, respectively to fund ongoing research and development of APR LLC. These amounts have been recorded as research and development expenses in the consolidated statement of operations.

The Company has evaluated this arrangement and concluded that APR LLC is a variable interest entity and the Company is the primary beneficiary. Accordingly, the Company has consolidated APR LLC under the requirements of FIN 46R.

The creditors of APR LLC do not have any recourse to the general credit of the Company. Further, there are no consolidated assets that are collateral for APR LLC’s obligations.

16. Financial instruments

Concentration of risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, accounts receivable and investment securities. The Company’s cash resources are invested with financial institutions with high investment grade credit ratings. Limits have been established by the Company as to the maximum amount of cash that may be invested with any such single entity. To reduce credit risk in respect of accounts receivable, the Company performs ongoing credit evaluations of customers.

Fair value of financial instruments: The fair value of the Company’s current assets and current liabilities approximate their carrying value because of their short term maturity. Such financial instruments are classified as current and are expected to be liquidated within the next twelve months. For details of fair value the Company’s investment securities and long-term debt refer Notes 12 and 19, respectively.

Derivative financial instruments. The Company enters into certain foreign currency forward contracts and option contracts where the counterparty is generally a bank. The Company does not consider the risk of non-performance by the counterparty to be significant.

The following table presents the aggregate contracted principal amounts of the Company’s derivative financial instruments outstanding:


	As of March 31,
	2007		2008
Forward exchange contracts (US $- Rs.) (sell)	US $	397,500	US $	137,500
Forward exchange contracts (US $- Rs.) (buy)		—		77,200
Net Purchased Options (US $- Rs.) (sell)		—	US $	270,000
Cross currency option contracts (EUR/US $)	EUR	30,000	EUR	5,000
Forward exchange contracts (EUR/US $) (sell)	EUR	11,000	EUR	—

These foreign currency derivative contracts mature between one to twelve months.

In respect of foreign currency derivative contracts designated as cash flow hedges, the Company has recorded Rs. 35,554 of net loss as a component of accumulated other comprehensive income within stockholder’s equity as at March 31, 2008. As of March 31, 2008, there were no significant gains or losses on derivative hedged transactions or portions thereof that have become ineffective as hedges.

F-32

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

16. Financial instruments (continued)

In respect of foreign currency derivative contracts not designated as hedges, the Company recorded mark-to-market (gains)/loss of Rs. (196,918) and Rs. 60,493, as of March 31, 2007 and 2008, respectively, which are included under other current assets/liabilities.

During the years ended March 31, 2006, 2007 and 2008, the Company recorded realized and unrealized losses/(gains) on such derivative contracts amounting to Rs. 29,230, Rs. (549,522), and Rs. (1,446,472), respectively which are included under foreign exchange (gain)/loss in the consolidated statement of operations.

17. Research and development arrangements

During the year ended March 31, 2005, the Company entered into an agreement with I-VEN Pharma Capital Limited (“I-VEN”) for the joint development and commercialization of generic drug products. As per the terms of the agreement, I-VEN has a right to fund up to fifty percent of the project costs (development, registration and legal costs) related to these products and the related U.S. Abbreviated New Drug Applications (“ANDA”) filed or to be filed subject to a maximum contribution of U.S.$ 56,000. The terms of the agreement do not require the Company to repay the funds or purchase I-VEN’s interest in the event the Company is not able to develop or commercialize one or more of the products under this agreement. However, upon successful commercialization of these products, the Company will pay I-VEN a royalty on net sales at agreed rates for a period of 5 years from the date of commercialization of each product.

The first tranche of Rs. 985,388 (U.S.$ 22,500) was advanced by I-VEN on March 28, 2005. The amount received from I-VEN has been treated as an advance and is being recorded in the statement of operation as a reduction from research and development expenses upon completion of specific milestones as detailed in the agreement. A milestone (i.e. a product filing as per the terms of the agreement) is considered to be completed once the appropriate ANDA has been submitted by the Company to the U.S. FDA. Achievement of a milestone entitles the Company to reduce the advance and credit research and development expenses in a fixed amount equal to I-VEN’s share of the research and development costs of the product (which share varies depending on whether the ANDA is a Paragraph III or Paragraph IV filing).

During the year ended March 31, 2007, the Company signed an amendment agreement with I-VEN to reflect a change in the product portfolio and the royalty rate. The Company has credited research and development expenses by Rs. 384,488, Rs. 452,763 and Rs. Nil during the years ended March 31, 2006, 2007 and 2008, respectively, upon completion of specified milestones.

18. Borrowings from banks

The Company had lines of credit of Rs. 14,723,000 and Rs. 17,659,000 as of March 31, 2007 and 2008, respectively, from its bankers for working capital requirements. The line of credit is renewable annually. The Company has an option to draw down these lines of credit based on its requirements.

An interest rate profile of borrowings from banks is given below:


	Fiscal Year ended
	March 31, 2006			March 31, 2007			March 31, 2008

Rupee borrowings		10.5	%		9	%		9	%
Foreign currency borrowings	Libor + 65 bps			Libor + 60 bps			Libor + 50-100 bps

F-33

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

19 Long-term debt

Long-term debt consists of the following:


	As of March 31,
	2007		2008
Rupee term loan	Rs.	19,225	Rs.	13,305
Foreign currency loan		21,269,514		14,374,342
Obligation under capital lease		252,510		291,322

		21,541,249		14,678,969

Less: Current portion
- Rupee term loan		5,920		5,920
- Foreign currency loan		3,658,691		1,796,792
- Obligation under capital lease		5,655		12,094

		3,670,266		1,814,806


Non Current Portion
- Rupee term loan		13,305		7,385
- Foreign currency Loan		17,610,823		12,577,550
- Obligation under capital lease		246,855		279,228

	Rs.	17,870,983	Rs.	12,864,163

Rupee term loan represents a loan from Indian Renewable Energy Development Agency Limited which is secured by way of hypothecation of specific movable assets pertaining to the Company’s solar grid interactive power plant located in Bachupally, Hyderabad.

Foreign currency loan represents Euro 400 Million loan originally received from Citibank, N.A., Hong Kong to fund the acquisition of betapharm.

During year ended March 31, 2007, the Rs. 21,602,000 (Euro 400 million) loan initially funded by Citibank N.A., Hong Kong was subsequently syndicated into a non-recourse loan of Rs. 5,787,000 (Euro 100 million) borrowed by Reddy Holding GmbH and a recourse loan of Rs. 15,482,514 (Euro 268 million) borrowed by Lacock Holding Limited, which was guaranteed by DRL and its wholly owned subsidiaries, OOO DRL, DRLI and DRL U.K. As part of the syndication process, an amount of Rs. 1,882,620 (Euro 32 million) was repaid to Citibank N.A. The maturity period of the loan ranges from December 2007 till December 2011.

The Company incurred an amount of Rs 429,808 as debt issuance costs, which is being amortized over the debt period.

During year ended March 31, 2008, the Company repaid Rs. 5,482,868 (Euro 100 Million) of non-recourse loan and Rs. 2,250,433 (Euro component of 39.49 million and USD component of 0.51 million) of recourse loan.

The Company is required to comply with certain financial covenants under the recourse loan, which includes limits on capital expenditure and maintenance of financial ratios (computed based on local GAAP financial statements) as defined in the loan agreement. Such financial ratio requirements include: (a) Consolidated Net Debt to Consolidated Earnings Before Interest, Tax, Depreciation and Amortization (“EBITDA”) not to exceed 3.5:1, (b) Consolidated EBITDA to Consolidated Interest Expenses shall not be less than 3.75:1,

F-34

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

19. Long-term debt (Continued)

(c) Total Debt shall not exceed Consolidated Net worth. As of March 31, 2008, the Company was in compliance with such financial covenants.

An interest rate profile of long-term debt is given below:


	Fiscal Year ended March 31,
	2006	2007		2008
Rupee term loan	2.0%		2.0%		2.0%
Foreign currency loan:	EURIBOR + 150 bps-	EURIBOR + 70 bps-200 bps and LIBOR+70 bps		EURIBOR + 70 bps-200 bps and LIBOR+70 bps

A maturity profile of the long-term debt outstanding as of March 31, 2008 is as follows:


Maturing in the year ending March 31,	Rupee loan		Foreign currency loan		Capital lease		Total
2009		5,920		1,796,792		12,094		1,814,806
2010		5,920		3,294,121		15,660		3,315,701
2011		1,465		3,893,051		14,077		3,908,593
2012		—		5,390,378		7,970		5,398,348
2013		—		—		8,485		8,485
Thereafter		—		—		233,036		233,036

		13,305		14,374,342		291,322		14,678,969

The fair value of outstanding payments on the Rupee term loan was Rs. 16,562 and Rs. 11,008 as of March 31, 2007 and 2008, respectively. The fair value of the foreign currency loan and the capital lease obligation approximate their carrying value as of March 31, 2007 and 2008, respectively.

20. Stockholders’ equity

Equity shares and dividend

The Company presently has only one class of equity shares. For all matters submitted to vote in the shareholders meeting, every holder of equity share, as reflected in the records of the Company on the date of the shareholders meeting shall have one vote in respect of each share held.

Indian law mandates that the dividends shall be declared out of the distributable profits only after the transfer of up to 10% of net income computed in accordance with current regulations to a general reserve. Should the Company declare and pay dividends, such dividends will be paid in Indian rupees to each holder of equity shares in proportion to the number of shares held to the total equity shares outstanding as on that date. Indian law on foreign exchange governs the remittance of dividend outside India.

In the event of liquidation of the Company, all preferential amounts, if any, shall be discharged by the Company. The remaining assets of the Company, shall be distributed to the holders of equity shares in proportion to the number of shares held to the total equity shares outstanding as on that date.

Final dividends on common stock are recorded as a liability on the date of their approval by the shareholders and interim dividends are recorded as a liability on the date of declaration by the Board of directors. The Company paid dividends (including dividend tax) of Rs. 436,368, Rs. 437,497 and Rs. 737,287 during the years ended March 31, 2006, 2007 and 2008, respectively. The dividend per share was Rs. 2.50, Rs. 2.50 and Rs. 3.75 during the years ended March 31, 2006, 2007 and 2008, respectively.

During the year ended March 31, 2007, the shareholders of the Company approved a one-for-one stock split effected in the form of a stock dividend. Consequently, the authorized share capital of the Company was increased from Rs. 500,000 as of March 31, 2006 to Rs. 1,000,000 as of March 31, 2007 and 2008, respectively.

F-35

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

The information pertaining to number of shares, number of options, exercise price, earnings per share and dividend per share has been retroactively adjusted for all the periods presented in the consolidated financial statements, except for options earmarked under Category B of the DRL 2002 plan where the exercise price is equal to the par value of the underlying equity shares (i.e. Rs. 5 per option).

21. Employee stock incentive plans

Dr. Reddy’s Employees Stock Option Plan-2002 (the “DRL 2002 Plan”):

The Company instituted the DRL 2002 Plan for all eligible employees in pursuance of the special resolution approved by the shareholders in the Annual General Meeting held on September 24, 2001. The DRL 2002 Plan covers all employees of DRL and all employees and directors of its subsidiaries. The Compensation Committee of the Board (the “Compensation Committee”) shall administer the DRL 2002 Plan and grant stock options to eligible employees of the Company and its subsidiaries. The Compensation Committee shall determine the employees eligible for receiving the options, the number of options to be granted, the exercise price, the vesting period and the exercise period. The vesting period is determined for all options issued on the date of grant. The maximum contractual term for aforementioned stock option plan is generally five years. The options issued under the DRL 2002 Plan vest in periods ranging between one and four years.

The DRL 2002 Plan was amended on July 28, 2004 at the annual general meeting of shareholders to provide for stock option grants in two categories:

Category B: 573,778 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the par value of the underlying equity share (i.e. Rs. 5 per option).

The DRL 2002 Plan was further amended on July 27, 2005 at the annual general meeting of shareholders to provide for stock option grants in two categories:

Category A: 300,000 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the fair market value of the underlying equity share on the date of grant; and

Category B: 1,995,478 stock options out of the total of 2,295,478 options reserved for grant having an exercise price equal to the par value of the underlying equity share (i.e. Rs. 5 per option).

After the stock split effected in the form of stock dividend issued by the Company in August 2006, the DRL 2002 Plan provides for stock options granted in the above two categories as follows:


	Number of		Number of Options
	Options granted		granted Under
Particulars	Under category A		category B		Total
Options reserved under original Plan		300,000		1,995,478		2,295,478
Options exercised prior to stock dividend date (A)		94,061		147,793		241,854
Balance of shares that can be allotted on exercise of options (B)		205,939		1,847,685		2,053,624
Options arising from stock dividend (C)		205,939		1,847,685		2,053,624
Options reserved after stock dividend (A+B+C)		505,939		3,843,163		4,349,102

F-36

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

21. Employee stock incentive plans (continued)

The Compensation Committee at its meeting held in October 2007, proposed that the Company should absorb the full liability of FBT on exercise of all stock options granted till the date of this resolution. Further, in respect of new grants to be made by the Company subsequent to the date of this resolution, FBT will be recovered from employees upon exercise of stock options.

The above amendment would be proposed at the ensuing Annual General Meeting of the shareholders proposed to be held in July 2008.

Stock option activity under the DRL 2002 Plan for the two categories of options was as follows:

Category A — Fair Market Value Options


	Fiscal Year ended March 31, 2006
								Weighted-
						Weighted-		average
						average		remaining
	Shares arising			Range of		exercise		contractual
	out of options			exercise prices		price		life (months)
Outstanding at the beginning of the year		597,900		Rs.	373.5-574.5	Rs.	488.66		50
Granted during the year		65,000			362.5		362.5		81
Expired / forfeited during the year		(273,400	)		362.5-574.5		472.18		—
Exercised during the year		(155,000	)		441.5-488.65		471.92		—

Outstanding at the end of the year		234,500			362.5-531.51		439.43		64

Exercisable at the end of the year		75,764		Rs.	362.5-531.51	Rs.	471.93		45

Category A — Fair Market Value Options


	Fiscal Year ended March 31, 2007
								Weighted-
						Weighted-		average
						average		remaining
	Shares arising			Range of		exercise		contractual
	out of options			exercise prices		price		life (months)
Outstanding at the beginning of the year		234,500			362.5-531.51		439.43		64
Expired / forfeited during the year		(11,600	)		441.5-574.5		527.8		—
Exercised during the year		(31,320	)		441.5-531.51		477.4		—

Outstanding at the end of the year		191,580			362.5-531.51		427.9		54

Exercisable at the end of the year		103,680		Rs.	362.5-531.51	Rs.	447.58		38

Category A — Fair Market Value Options


	Fiscal Year ended March 31, 2008
								Weighted-
						Weighted-		average
						average		remaining
	Shares arising			Range of		exercise		contractual
	out of options			exercise prices		price		life (months)
Outstanding at the beginning of the year		191,580		Rs.	362.5-531.51	Rs.	427.9		54
Expired / forfeited during the year		(2,100	)		442.5		442.5		—
Exercised during the year		(30,700	)		441.5-531.51		458.32		—

Outstanding at the end of the year		158,780			362.5-531.51		421.79		44

Exercisable / vested at the end of the year		119,830		Rs.	362.5-531.51	Rs.	433.05		36

Expected to vest at the end of the year		33,030		Rs.	362.5-442.50		387.20		67

F-37

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

21. Employee stock incentive plans (continued)

Category B — Par Value Options


	Fiscal Year ended March 31, 2006
								Weighted-
						Weighted-		average
						average		remaining
	Shares arising					exercise		contractual life
	out of options			Exercise price		price		(months)
Outstanding at the beginning of the year		759,098		Rs.	5	Rs.	5		84
Granted during the year		433,720			5		5		81
Forfeited during the year		(266,608	)		5		5		—
Exercised during the year		(196,242	)		5		5		—

Outstanding at the end of the year		729,968			5		5		81

Exercisable at the end of the year		36,272		Rs.	5	Rs.	5		59

Category B — Par Value Options


	Fiscal Year ended March 31, 2007
								Weighted-
						Weighted-		average
						average		remaining
	Shares arising					exercise		contractual life
	out of options			Exercise price		price		(months)
Outstanding at the beginning of the year		729,968		Rs.	5	Rs.	5		81
Granted during the year		427,060			5		5		81
Forfeited during the year		(76,056	)		5		5		—
Exercised during the year		(191,720	)		5		5		—

Outstanding at the end of the year		889,252			5		5		77

Exercisable at the end of the year		43,256		Rs.	5	Rs.	5		51

Category B — Par Value Options


	Fiscal Year ended March 31, 2008
								Weighted-
						Weighted-		average
						average		remaining
	Shares arising					exercise		contractual life
	out of options			Exercise price		price		(months)
Outstanding at the beginning of the period		889,252		Rs.	5	Rs.	5		77
Granted during the period		386,060			5		5		91
Forfeited during the period		(133,240	)		5		5		—
Surrendered by employees during the period		(138,418	)		5		5		—
Exercised during the period		(229,866	)		5		5		—

Outstanding at the end of the period		773,788			5		5		74

Exercisable / vested at the end of the period		72,364		Rs.	5	Rs.	5		50

Expected to vest at the end of the year		594,808		Rs.	5	Rs.	5		76

The weighted average grant date fair value of options granted during the year ended March 31, 2006 under category A — Fair market value options was Rs. 293.42. The weighted average grant date fair value of options granted during the years ended March 31, 2006, 2007 and 2008 under category B par value options was Rs. 705.88, Rs. 575.36 and Rs. 549.57, respectively. The aggregate intrinsic value of options exercised under the DRL 2002 Plan (both category A and B) during the years ended March 31, 2006, 2007 and 2008 was Rs. 142 million, Rs. 145 million and Rs. 151 million, respectively. As of March 31, 2008, options outstanding and exercisable (vested) under the DRL 2002 Plan (both category A and B) had an aggregate intrinsic value of Rs. 481 million and Rs. 61 million, respectively. As of March 31, 2008 the intrinsic value of options expected to vest under the DRL 2002 Plan (both category A and B) had an aggregate intrinsic value of Rs. 355 million.

F-38

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

21. Employee stock incentive plans (continued)

Dr. Reddy’s Employees ADR Stock Option Plan-2007 (the “DRL 2007 Plan”):

The DRL 2007 Plan provides for grant of stock options in two categories:

Stock option activity under the DRL 2007 Plan during the year ended March 31, 2008 was as follows:

Category B — Par Value Options


	Fiscal Year ended March 31, 2008
								Weighted-
						Weighted-		average
						average		remaining
	Shares arising					exercise		contractual life
	out of options			Exercise price		price		(months)
Granted during the year		206,818		Rs.	5	Rs.	5		84
Forfeited during the year		(24,040	)		5		5		—

Outstanding at the end of the year		182,778		Rs.	5	Rs.	5		73

Exercisable / vested at the end of the year		—			—		—		—

Expected to vest at the end of the year		154,996		Rs.	5	Rs.	5		73

The weighted average grant date fair value of options granted during the year ended March 31, 2008 under category-B par value options was Rs. 550.95. As of March 31, 2008, options outstanding under the DRL 2007 Plan had an aggregate intrinsic value of Rs. 107 million. As of March 31, 2008 the intrinsic value of options expected to vest under the DRL 2007 Plan (both category A and B) had an aggregate intrinsic value of Rs. 91 million.

F-39

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

21. Employee stock incentive plans (continued)

Aurigene Discovery Technologies Ltd. Employee Stock Option Plan 2003 (the “Aurigene ESOP Plan”):

During the year ended March 31, 2008, the plan was amended to increase the total number of options reserved for issuance to 7,500,000 and recovery of FBT from employees.

As of March 31, 2008, there were 2,961,116 stock options outstanding under the Aurigene Employee Plan.

Stock option activity under the Aurigene ESOP Plan was as follows:


	Fiscal Year ended March 31, 2006
						Weighted-		Weighted- average
	Shares arising			Exercise		average exercise		remaining contractual life
	out of options			price		price		(months)
Outstanding at the beginning of the year		197,178		Rs.	10	Rs.	10		59
Granted during the year		500,000			10		10		70
Expired / forfeited during the year		(168,271	)		10		10		—

Outstanding at the end of the year		528,907		Rs.	10	Rs.	10		67

Exercisable at the end of the year		—			—		—		—


	Fiscal Year ended March 31, 2007
						Weighted-		Weighted- average
	Shares arising			Exercise		average exercise		remaining contractual life
	out of options			price		price		(months)
Outstanding at the beginning of the year		528,907		Rs.	10	Rs.	10		67
Granted during the year		910,786			10		10		66
Expired / forfeited during the year		(256,110	)		10		10		—

Outstanding at the end of the year		1,183,583			10		10		62

Exercisable at the end of the year		7,470		Rs.	10	Rs.	10		28


	Fiscal Year ended March 31, 2008
				Range of		Weighted-		Weighted- average
	Shares arising			exercise		average exercise		remaining contractual life
	out of options			prices		price		(months)
Outstanding at the beginning of the year		1,183,583		Rs.	10.00	Rs.	10.00		62
Granted during the year		1,877,369			14.99		14.99		42
Expired / forfeited during the year		(99,836	)		10.00		10.00		—

Outstanding at the end of the year		2,961,116			10-14.99		13.16		45

Exercisable/vested at the end of the year		1,260,815			10-14.99		14.75		33
Expected to vest at the end of the year		1,441,855		Rs.	10-14.99		12.18		54

F-40

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

21. Employee stock incentive plans (continued)

The option weighted average grant date fair value of options granted under the Aurigene ESOP Plan during the years ended March 31, 2006, 2007 and 2008 was Rs. 4.01, Rs. 3.11 and Rs. 18.35, respectively. As of March 31, 2008, options outstanding and exercisable under Aurigene ESOP Plan had an aggregate intrinsic value of Rs. 47 million and Rs. 18 million, respectively. As of March 31, 2008 the intrinsic value of options expected to vest under the Aurigene ESOP Plan had an aggregate intrinsic value of Rs. 26 million.

Aurigene Discovery Technologies Limited, Management Group Stock Grant Plan.

In fiscal 2004, Aurigene adopted the Aurigene Discovery Technologies Limited Management Group Stock Grant Plan (the “Aurigene Management Plan”) to provide for issuance of stock options to management employees of Aurigene and its subsidiary Aurigene Discovery Technologies Inc. Aurigene has reserved 2,950,000 of its ordinary shares for issuance under this plan. Under the Aurigene Management Plan, stock options may be granted at an exercise price as determined by Aurigene’s Compensation Committee. As of March 31, 2008, there were no stock options outstanding under the Aurigene Management Plan. The plan was closed by a resolution of the shareholders in January 2008.

For the years ended March 31, 2006, 2007 and 2008 an amount of Rs. 162,249, Rs. 190,186 and Rs. 257,788 respectively, has been recorded as total employee stock based compensation expense under all the plans. As of March 31, 2008, there is approximately Rs. 228,868 of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of 3.03 years. The FBT expense incurred during the year ended March 31, 2008 was Rs. 34,957.

22. Allowances for sales returns

Product sales are net of allowances for sales returns. The activity in allowances for sales returns is given below:


	Fiscal Year ended March 31,
	2006			2007			2008
Balance at the beginning of the year	Rs.	95,123		Rs.	168,356		Rs.	747,018
Acquired during the year		51,251			—			—
Additional provision, net		239,462			1,325,981			164,295
Sales returns charged to the provision		(217,480	)		(747,319	)		(284,314	)

Balance at the end of the year	Rs.	168,356		Rs.	747,018		Rs.	626,999

23. Other operating (income)/ expense, net

Other operating (income)/ expense, net consist of the following:


	Fiscal Year ended March 31,
	2006			2007			2008
Loss /(gain) on sale of property, plant and equipment, net	Rs.	(320,361	)	Rs.	(67,039	)	Rs.	7,629
Others		(7,327	)		(107,019	)		(114,256	)

	Rs.	(327,688	)	Rs.	(174,058	)	Rs.	(106,627	)

The above gain on sale of property, plant and equipment for the year ended March 31, 2006 includes an amount of Rs. 387,337 on sale of one of the manufacturing facilities of the Company in Goa, India.

F-41

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

24. Other income/(expense) net

Other income/(expense) consists of the following:


	Fiscal Year ended March 31,
	2006			2007			2008
Interest expense	Rs.	(298,603	)	Rs.	(1,575,408	)	Rs.	(1,079,521	)
Interest income		717,410			520,709			751,100
Gain / (loss) on sale of available for sale securities, net		(3,924	)		869			110,269
Other		111,396			285,329			296,808

	Rs.	526,279		Rs.	(768,501	)	Rs.	78,656

25. Profit share arrangements

In January 2006, the Company entered into an agreement with Merck & Co., Inc. (“Merck”), allowing the Company to distribute and sell generic versions of finasteride tablets 5 mg and simvastatin tablets 10 mg, 20mg, 40mg and 80mg (sold by Merck under the brand names Proscar^® and Zocor^®), upon the expiration of Merck’s patents covering these products, provided that another company obtains 180-day exclusivity after the expiration of the patents of these products. Subsequent to the Company’s entering into this agreement, the patents for both of these products expired and other companies obtained 180-day exclusivity, thereby allowing the Company to launch the authorized generics products. Accordingly, the Company launched these products in June 2006. Under the agreement, during the exclusivity period, the Company procured the products from Merck at specified rates and sold to its customers. Further, as per the terms of the agreement, the Company pays Merck an additional profit share computed based on a pre-determined formula. During the years ended March 31, 2007, and 2008, the Company recorded net revenues of Rs. 15,812,830 and Rs. 1,939,536, respectively, from sale of authorized generic versions of Proscar^® and Zocor^®.

26. Shipping costs

Selling, general and administrative expenses include shipping and handling costs of Rs. 823,883, Rs. 1,233,308 and Rs. 1,308,632 for the years ended March 31, 2006, 2007 and 2008, respectively.

F-42

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

27. Income taxes (continued)

The reported income tax (expense) / benefit differed from amounts computed by applying the enacted tax rate to income before income taxes as a result of the following


	Fiscal Year ended March 31,
	2006			2007			2008
Income before income taxes and minority interest	Rs.	1,887,323		Rs.	10,500,275		Rs.	3,438,140
Enacted tax rate in India		33.66	%		33.66	%		33.99	%

Computed expected tax expense	Rs.	(635,272	)	Rs.	(3,534,393	)		(1,168,624	)

Effect of:
Differences between Indian and foreign tax rates		(8,546	)		79,056			(13,554	)
Valuation allowance		(142,206	)		99,564			(176,019	)
Impairment of goodwill		—			—			(30,740	)
Expenses not deductible for tax purposes		(67,403	)		(70,951	)		(143,694	)
Employee stock based compensation not deductible for tax purpose		(54,614	)		(22,391	)		(64,421	)
Interest expense not deductible for tax purpose		—			(293,205	)		(269,567	)
Income exempt from income taxes		538,151			2,100,801			1,108,156
Foreign exchange differences		8,335			10,871			(43,765	)
Incremental deduction allowed for research and development costs		166,308			390,097			544,844
Indexation benefit on capital assets		1,413			1,828			5,916
Effect of changes in tax laws and rates		12,534			55,755			1,505,205
Minimum alternate tax		(3,019	)		(2,108	)		—
Resolution of prior period tax matters		(73,970	)		—			—
Others		(101	)		8,140			(24,308	)

Income tax benefit / (expense)	Rs.	(258,390	)	Rs.	(1,176,936	)	Rs.	1,229,429

The effect of changes in tax laws and rates primarily includes deferred tax benefit on account of reduction in income tax rates in Germany.

Income exempt from taxes above represents benefits from certain significant tax incentives provided to export oriented units (i.e., a unit that exports its production to customers outside India) and units located in certain specified less developed geographical areas under the Indian tax laws. These incentives presently pertain to an exemption from payment of Indian corporate income taxes for certain units of the Company for a period of ten consecutive years, beginning from the financial year when that particular unit commenced its operations (referred to as the ‘tax holiday’ period). These tax holiday periods for the Company’s units expire in various years ranging from the year ended March 31, 2008 through the year ending March 31, 2016. The per share (basic) effect of the tax holiday was Rs. 3.52, Rs. 13.25 and Rs. 6.59 for the years ended March 31, 2006, 2007 and 2008, respectively.

Incremental deduction allowed for research and development costs represents tax incentive provided by the Government of India for carrying out such activities.

F-44

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

27. Income taxes (continued)

The tax effects of significant temporary differences that resulted in deferred tax assets and liabilities and a description of the items that created these differences is given below:


	As of March 31,
	2007			2008
Deferred tax assets:
Inventory		154,735			170,095
Minimum alternate tax carry-forward		—			24,760
Accounts payable		47,445			50,458
Investments		179,064			145,924
Accounts receivable		140,875			218,347
Operating loss carry-forward		985,753			1,075,962
Capital loss carry-forward		44,622			45,060
Expenses deferred for tax purposes		109,243			115,944
Others		287,964			282,602

		1,949,701			2,129,152
Less: Valuation allowance		(824,034	)		(1,000,053	)
Deferred tax assets		1,125,667			1,129,099


Deferred tax liabilities
Property, plant and equipment		(792,732	)		(1,044,338	)
Intangible assets		(7,233,314	)		(5,048,528	)
Others		(254,750	)		(198,178	)


Deferred tax liabilities		(8,280,796	)		(6,291,044	)


Net deferred tax assets / (liabilities)		(7,155,129	)		(5,161,945	)
Deferred charges		156,693			106,908

	Rs.	(6,998,436	)	Rs.	(5,055,037	)

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets and tax loss carry forwards is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategy in making this assessment. Based on the level of historical taxable income and projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes that it is more likely than not the Company will realize the benefits of those deductible differences and tax loss carry forwards, net of the existing valuation allowance. The amount of deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.

Operating loss carry forward comprises business losses and unabsorbed depreciation. The period for which such losses can be carried forward differs from five years to indefinite.

During the year ended March 31, 2008, the Company established a valuation allowance in respect of net deferred tax assets of RNBV, RANV, RBL, RCSA, DRFBL, RPISA, RPISPA, APRLLC amounting to Rs. 155,383, as based on future profit projections, management believes that the recorded deferred tax assets are required to be reduced to amounts that will more likely than not be realized.

F-45

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

27. Income taxes (continued)

During the year ended March 31, 2008, the Company has established valuation allowance in respect of initial operating losses pertaining to DRLA and AHL amounting to Rs. 12,867 and Rs. 1,741, respectively, as based on future profit projections, management believes that the recorded deferred tax assets are required to be reduced to amounts that will more likely than not be realized.

During the year ended March 31, 2008, the Company has reversed the beginning of the year valuation allowance established in respect of net deferred tax assets of ADTL, ADTI, RBSL, Lacock and DRSA amounting to Rs. 27,554 to the extent of current year profits only, as based on future profit projections, management believes that the recorded deferred tax assets are required to be reduced to amounts that will more likely than not be realized.

As of March 31, 2008 the Company had operating and capital loss carry-forward of Rs. 3,399,765 that expires as follows:


Operating loss carry forward expiring in the year ending March 31,
2009	Rs.	14,576
2010		—
2011		—
2012		—
2013		—
2014		62,102
Thereafter (2014 – 2025)		479,349
Indefinite		2,644,886

	Rs.	3,200,913

Further, capital loss carry forwards of Rs. 176,422 expires on March 31, 2013 and Rs. 22,430 expires on March 31, 2014. Valuation allowance has been created for these carry forwards.

Undistributed earnings of Company’s foreign subsidiaries and unrecognized deferred tax liability in respect of such earnings amounted to approximately Rs. 1,204,443 and Rs. 409,390, respectively as of March 31, 2008. Such earnings are considered to be indefinitely reinvested and, accordingly no provision for income taxes has been recorded on the undistributed earnings.

Effective April 1, 2007 the Company adopted the provisions of FIN 48. The adoption of FIN 48 did not have a material impact on the retained earnings or provision for taxation as of April 1, 2007. Upon adoption of FIN 48, the Company’s policy to include interest and penalties relating unrecognized tax benefits within the provision for income taxes did not change. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows.


	Year ended March 31, 2008

Balance as of April 1, 2007		1,325,233
Increases related to current year tax positions		78,369
Decreases related to prior year tax positions		(8,352	)
Balance as of March 31, 2008		1,395,250

The Company’s total unrecognized tax benefits, if recognized, would reduce the tax provision by Rs. 1,325,233 and Rs. 1,395,250 as of April 1, 2007, and March 31, 2008, respectively, and thereby would affect the Company’s effective tax rate.

F-46

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

27. Income taxes (continued)

As of April 1, 2007 the Company did not have any significant accrual towards interest and penalties. During the year ended March 31, 2008, the Company has accrued an amount of Rs. 50,000 towards interest and penalties relating to certain withholding tax payments.

The Company’s major tax jurisdictions are India, U.S. and Germany, though the Company also files tax returns in other foreign jurisdictions. In India, the assessment is not yet completed for fiscal year 2005 and onwards. Additionally, certain uncertain tax positions relate to fiscal years prior to 2005, which are currently under dispute with the tax authorities. In the U.S., federal and state tax returns pertaining to fiscal year 2004 onwards are open to examination within the statute of limitation prescribed by the relevant authorities. In Germany, tax returns pertaining to fiscal year 2004 onwards are open to examination within the statute of limitation prescribed by the relevant authorities.

Significant changes in the amount of unrecognized tax benefits within the next 12 months cannot be reasonably estimated as the changes would depend upon the progress of tax examinations with various tax authorities.

28. Earnings per share

A reconciliation of the equity shares used in the computation of basic and diluted earnings per equity share is set out below:


	Fiscal Year ended March 31,
	2006		2007		2008

Basic earnings per equity share — weighted average number of equity shares outstanding		153,093,316		158,552,422		168,075,840
Effect of dilutive equivalent shares-stock options outstanding		310,530		704,054		614,934
Diluted earnings per equity share — weighted average number of equity shares outstanding		153,403,846		159,256,476		168,690,774

F-47

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

29. Employee benefit plans

Gratuity benefits: In accordance with applicable Indian laws, the Company provides gratuity, a defined benefit retirement plan (the “Gratuity Plan”) covering certain categories of employees. The Gratuity Plan provides a lump sum payment to vested employees at retirement or termination of employment. The amount of payment is based on the respective employee’s last drawn salary and the years of employment with the Company. Effective September 1, 1999, the Company established Dr. Reddy’s Laboratories Gratuity Fund (the “Gratuity Fund”). Liabilities in respect of the Gratuity Plan are determined by an actuarial valuation, based on which the Company makes contributions to the Gratuity Fund. Trustees administer the contributions made to the Gratuity Fund. Amounts contributed to the Gratuity Fund are invested in specific securities as mandated by law and generally consist of federal and state government bonds and debt instruments of government-owned corporations.

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


	As of March 31,
	2007			2008
Change in the benefit obligation
Projected benefit obligation (PBO) at the beginning of the year	Rs.	208,036			227,652
Service cost		27,097			28,945
Interest cost		15,890			20,538
Actuarial (gain)/ loss		(1,151	)		47,547
Benefits paid		(22,220	)		(31,579	)

PBO at the end of the year	Rs.	227,652		Rs.	293,103

Change in plan assets
Fair value of plan assets at the beginning of the year	Rs.	220,270			236,325
Actual return on plan assets		16,796			31,132
Employer contributions		21,479			53,198
Benefits paid		(22,220	)		(31,579	)

Plan assets at the end of the year	Rs.	236,325		Rs.	289,076

Funded status		8,673			(4,027	)

Net amount recognized	Rs.	8,673		Rs.	(4,027	)

Amounts recognized in the statement of financial position consist of:


	As of March 31,
	2007			2008
Non current asset	Rs.	11,131		Rs.	—
Current liability		(120	)		(123	)
Non current liability		(2,338	)		(3,904	)

Net amount recognized	Rs.	8,673		Rs.	(4,027	)

The accumulated benefit obligation for the Gratuity Plan was Rs. 140,883 and Rs. 181,204 as at March 31, 2007 and 2008, respectively.

Components of net periodic benefit cost:


	Fiscal Year ended March 31,
	2006			2007			2008
Service cost	Rs.	26,926		Rs.	27,097		Rs.	28,945
Interest cost		15,255			15,890			20,538
Expected return on plan assets		(9,211	)		(16,193	)		(16,022	)
Amortization of transition obligation		12,146			—			—
Recognized net actuarial loss		7,215			4,725			5,861

Net amount recognized	Rs.	52,331		Rs.	31,519		Rs.	39,322

F-48

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

29. Employee benefit plans (continued)

Summary of the actuarial assumptions: The actuarial assumptions used in accounting for the Gratuity Plan are as follows:

The weighted-average assumptions used to determine benefit obligations:


	As of March 31,
	2007		2008
Discount rate		9.75%		9.00%
Rate of compensation increase	8% to 10% per annum for first 5 years and 6% per annum thereafter		8% to 10% per annum for first 4 years and 6% per annum thereafter

Weighted-average assumptions used to determine net periodic benefit cost:

Fiscal Year ended March 31,

2006

2007

2008

Discount rate

8.0%

9.75%

Rate of compensation increase

8% to 10% per annum for first 5 years and 6.0% per annum thereafter

8% to 10% per annum for first 5 years and 6% per annum thereafter

Expected long-term return on plan assets

7.5%

The expected long-term return on plan assets is based on the expectation of the average long-term rate of return expected to prevail over the projected pay out period for the types of investments prescribed as per the statutory pattern of investment.

Plan assets: The Gratuity plan’s weighted-average asset allocation at March 31, 2007 and 2008, by asset category is as follows:


	As of March 31,
	2007			2008
Debt securities		8	%		7	%
Funds managed by insurers		91	%		92	%
Others		1	%		1	%

Contributions: The Company expects to contribute Rs. 30,123 to its Gratuity Plan during the year ending March 31, 2009.

Amounts recognized in accumulated other comprehensive income consist of the following:


	Fiscal Year ended
	March 31, 2008
Net actuarial (gain)/ loss at the beginning of the year	Rs.	62,080
Actuarial (gain)/ loss on plan assets and obligation during the year		35,911
Actuarial gain/(loss) recognized as component of net periodic benefit cost during the year		(5,861	)

Net actuarial (gain)/ loss at the end of the year	Rs.	92,130

Amount of actuarial (gain)/loss expected to be recognized as components of net periodic benefit cost during fiscal 2009 is Rs. 8,686.

F-49

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

29. Employee benefit plans (continued)

Estimated future benefit payments: The following benefit payments are expected to be paid:


Fiscal year ending March 31,
2009			42,006
2010			36,581
2011			38,175
2012			50,665
2013			52,813
2014 to 2018			301,569

Superannuation benefits: Apart from being covered under the Gratuity Plan described above, the senior officers of the Company also participate in superannuation, a defined contribution plan administered by the Life Insurance Corporation (“LIC”). The Company makes annual contributions based on a specified percentage of each covered employee’s salary. The Company has no further obligations under the plan beyond its annual contributions. The Company contributed Rs. 24,832, Rs. 27,965 and Rs. 39,887 to the superannuation plan during the years ended March 31, 2006, 2007 and 2008, respectively.

Provident fund benefits: In addition to the above benefits, all employees of the Company receive benefits from a provident fund, a defined contribution plan. Both the employee and employer each make monthly contributions to a government administered fund equal to 12% of the covered employee’s salary. The Company has no further obligations under the plan beyond its monthly contributions. The Company contributed Rs. 64,443, Rs. 113,533 and Rs. 144,531 to the provident fund plan during the years ended March 31, 2006, 2007 and 2008, respectively.

Pension plan: All employees of Falcon are governed by a defined benefit pension plan. The pension plan provides a payment to vested employees at retirement or termination of employment. This payment is based on the employee’s integrated salary and is paid in the form of a monthly pension over a period of 20 years computed based on a predefined formula. Liabilities in respect of the pension plan are determined by an actuarial valuation, based on which the Company makes contributions to the pension plan fund. This fund is administered by a third party who is provided guidance by a technical committee formed by senior employees of Falcon.

The following table sets out the funded status of the Falcon pension plan and the amounts recognized in the Company’s financial statements:


	As of March 31,			As of March 31,
	2007			2008

Change in the benefit obligation
Projected benefit obligation (PBO) at the beginning of year	Rs.	285,939		Rs.	280,721
Service cost (adjusted by CPI)		17,718			15,882
Interest cost (adjusted by CPI)		15,120			12,962
Curtailment effect		17,677			14,830
Actuarial loss		6,880			7,452
Benefits paid		(66,355	)		(76,505	)
Inflationary effect on opening PBO		3,742			(5,748	)

PBO at the end of the year	Rs.	280,721		Rs.	249,594

Change in plan assets
Fair value of plan assets at the beginning of the year		251,254			275,879
Actual return on plan assets		51,054			(10,361	)
Employer contributions		12,203			9,412
Benefits paid		(40,812	)		(56,012	)
Inflationary effect on opening plan assets		2,180			(6,083	)

Plan assets at the end of the year	Rs.	275,879		Rs.	212,835

Funded status		(4,842	)		(36,759	)

Net amount recognized	Rs.	(4,842	)	Rs.	(36,759	)

F-50

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

29. Employee benefit plans (continued)

Amounts recognized in the statement of financial position consist of:


	As of March 31, 2007			As of March 31, 2008
Other liabilities non-current	Rs.	(4,842	)		(36,759	)

The accumulated benefit obligation for the Falcon pension plan was Rs. 260,823 and Rs. 229,886 as at March 31, 2007 and 2008, respectively.

Components of net periodic benefit cost:


	For the year ended			For the year ended
	March 31, 2007			March 31, 2008
Service cost	Rs.	16,382		Rs.	15,344
Interest cost		13,979			12,524
Expected return on plan assets		(14,755	)		(15,563	)
Amortization of transition obligation		4,169			3,789
Recognized net actuarial gain		(150	)		—
CPI adjustment on net periodic benefit cost		826			563

Net periodic pension cost adjusted by cost price inflation index	Rs.	20,451		Rs.	16,657
Curtailment cost adjusted by CPI		16,118			14,576

Net amount recognized	Rs.	36,569		Rs.	31,233

Summary of the actuarial assumptions: The actuarial assumptions used in accounting for the Falcon pension plan are as follows:

Weighted-average assumptions used to determine benefit obligations:


	As at March 31, 2007			As at March 31, 2008
Discount rate		5.00	%		4.50	%
Rate of compensation increase		1.00	%		1.00	%
Expected long-term return on plan assets		6.25	%		6.25	%
Cost Price Inflation (CPI) rate of fiscal year		3.50	%		3.50	%

Weighted-average assumptions used to determine net periodic benefit cost:


	For the year ended			For the year ended			For the year ended
	March 31, 2006			March 31, 2007			March 31, 2008
Discount rate		5.25	%		5.25	%		5.00	%
Rate of compensation increase		2.00	%		0.75	%		1.00	%
Expected long-term return on plan assets		7.75	%		6.25	%		6.25	%
Cost Price Inflation (CPI) rate of fiscal year		0.87	%		4.21	%		3.50	%

Plan assets: The Falcon pension plan’s weighted-average asset allocation as at March 31, 2007 and 2008, by asset category is as follows:


	As at			As at
	March 31, 2007			March 31, 2008
Equity		24	%		47	%
Debt		76	%		53	%

F-51

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

29. Employee benefit plans (continued)

Amounts recognized in accumulated other comprehensive income consist of the following:


	Fiscal Year ended
	March 31, 2008
Net actuarial (gain)/ loss at the beginning of the year		(3,025	)
Actuarial (gain)/ loss on plan assets and obligations during the year		34,379
Actuarial gain/(loss) recognized as component of net periodic benefit cost during the year		(3,817	)

Net actuarial (gain)/ loss at the end of the year		27,537

The above amount of net actuarial (gain)/ loss at the end of the year includes an amount of Rs. 17,614 as unamortized net transitional obligation. Amount expected to be recognized as components of net periodic benefit cost during fiscal 2009 is Rs. 3,932.

Estimated future benefit payments: The following benefit payments are expected to be paid:


Fiscal year ending March 31,
2009	Rs.	16,368
2010		16,596
2011		17,969
2012		18,289
2013		21,486
2014 to 2018		127,608

30 Related party transactions

The Company has entered into transactions with the following related parties:

	•		Diana Hotels Limited for availing hotel services;

	•		A.R. Life Sciences Private Limited for availing processing services of raw materials and intermediates;

	•		Dr. Reddy’s Holdings Private Limited for purchase and sale of active pharmaceutical ingredients and intermediates and purchase of land;

	•		Dr. Reddy’s Foundation for Human and Social development towards contribution for social development;

	•		K.K Enterprises for availing packaging services for formulation products; and

	•		SR Enterprises for transportation services.

The directors of the Company have either a significant ownership interest, controlling interest or exercise significant influence over the above entities (“significant interest entities”).

The Company has entered into transactions with its two affiliates, Perlecan Pharma and Reddy Kunshan. These transactions are in the nature of reimbursement of research and development expenses incurred by the Company on behalf of Perlecan Pharma, revenue from research services performed by the Company for Perlecan Pharma and purchase of active pharmaceutical ingredients by the Company from Reddy Kunshan.

The Company has also entered into cancellable operating lease transactions with directors of the Company and their relatives. Further, the Company has also provided certain short term interest free loans to its employees which are recovered on a regular basis through salary deductions.

F-52

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

30. Related party transactions (continued)

One of the Company’s former executive and U.S. general counsel (resigned effective July 31, 2006), is a partner of a law firm that the Company engaged for provision of legal services. Legal fees paid by the Company to this law firm during the period this former executive was in employment of the Company were Rs. 466,567, Rs. 153,620 (till the date of his resignation) and Rs. Nil during the years ended March 31, 2006, 2007 and 2008, respectively.

The following is a summary of significant related party transactions:


	Fiscal Year ended March 31,
	2006		2007		2008
Purchases from:
Significant interest entities	Rs.	129,320	Rs.	260,673	Rs.	219,044
Affiliates		5,410		—		—

Contribution to a significant interest entity towards social development		53,550		34,100		113,621

Revenue from:
Significant interest entities		32,255		—		88,531
Affiliates		—		139,335		40,071

Reimbursement of research and development expenses from:
Affiliates		—		372,643		89,505

Lease rental paid under cancellable operating leases to:
Directors and their relatives		18,927		21,884		22,635

General and administrative expenses paid to:
Significant interest entities		7,401		9,227		12,596

Advance paid to a significant interest entity towards purchase of land:		—		—		680,000

The Company has the following amounts due from related parties:


	As of March 31,
	2007		2008
Significant interest entities	Rs.	—	Rs.	26,396
Directors and their relatives		4,380		4,280
Employee loans (interest free)		2,426		19,457
Affiliates		143,136		26,964

	Rs.	149,942	Rs.	77,097
Less: Current portion		145,086		72,817

	Rs.	4,856	Rs.	4,280

The above table does not include an amount of Rs. 680,000 paid as advance towards purchase of land from a significant interest entity, which has been disclosed under capital work-in-progress.

Employee loans outstanding as of March 31, 2008, are repayable within the year ending March 31, 2009.

The Company has the following amounts due to related parties (current):


	As of March 31,
	2007		2008
Significant interest entities	Rs.	871	Rs.	16,750

F-53

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTED TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

31. Commitments and contingencies

Capital Commitments: As of March 31, 2007 and 2008, the Company was committed to spend approximately Rs. 1,186,049 and Rs. 1,552,426, respectively, under agreements to purchase property, plant and equipment. This amount is net of capital advances paid in respect of such purchases.

Guarantees: In accordance with the provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others”, the Company recognizes the fair value of guarantee and indemnification arrangements issued or modified by the Company, if these arrangements are within the scope of FIN 45. In addition, the Company continues to monitor the conditions that are subject to these guarantee and indemnification agreements to identify whether any loss is probable and recognizes such loss, if any when estimable.

The Company’s affiliate, Reddy Kunshan secured a credit facility of Rs. 26,988 from Agricultural Bank of China (“Agricultural Bank”). During the year ended March 31, 2008, the Company issued a corporate guarantee amounting to Rs. 27,196 in favor of Agricultural Bank to enhance the credit standing of Reddy Kunshan. The guarantee is required to be renewed every year and Company’s liability may arise in case of non-payment by Reddy Kunshan of amounts drawn under its credit facility. As of March 31, 2008, the fair value of such liability is not material.

Litigations / Contingencies: The Company manufactures and distributes Norfloxacin, a formulations product. Under the Drugs Prices Control Order (the “DPCO”), the Government of India has the authority to designate a pharmaceutical product as a “specified product” and fix the maximum selling price for such product. In 1995, the Government of India notified Norfloxacin as a “specified product” and fixed the maximum selling price. In 1996, the Company filed a statutory Form III before the Government of India for the upward revision of the price and a legal suit in the Andhra Pradesh High Court (the “High Court”) challenging the validity of the notification on the grounds that the applicable rules of the DPCO were not complied with while fixing the ceiling price. The High Court had previously granted an interim order in favor of the Company; however it subsequently dismissed the case in April 2004. The Company filed a review petition in the High Court in April 2004 which was also dismissed by the High Court in October 2004. Subsequently, the Company appealed to the Supreme Court of India by filing a Special Leave Petition, which is currently pending.

During the year ended March 31, 2006, the Company received a notice from the Government of India demanding the recovery of the price charged by the Company for sale of Norfloxacin in excess of the maximum selling price fixed by the Government of India, amounting to Rs. 284,984, including interest thereon. The Company filed a writ petition in the High Court challenging this demand order. The High Court admitted the writ petition and granted an interim order, directing the Company to deposit 50% of the principal amount claimed by the Government of India, which amounted to Rs. 77,149. The Company deposited this amount with the Government of India in November 2005 and is awaiting the outcome of its appeal with the Supreme Court. In February 2008, the High Court directed the Company to deposit an additional amount of Rs. 30,000, which was deposited by the Company in March 2008.

The Company has fully provided the potential liability related to the principal amount demanded by the Government of India (which is included under other current liabilities) and believes that the liability on account of interest and penalty is remote. In the event the Company is unsuccessful in its litigation in the Supreme Court, it will be required to remit the sale proceeds in excess of the maximum selling price to the Government of India including penalties or interest, if any, which amounts are not readily ascertainable.

During the fiscal year ended March 31, 2003, the Central Excise Authorities of India (the “Authorities”) issued a demand notice to a vendor of the Company regarding the assessable value of products supplied by this vendor to the Company. The Company has been named as a co-defendant in this demand notice. The Authorities demanded payment of Rs. 175,718 from the vendor, including penalty of Rs. 90,359. Through the same notice, the Authorities, issued a penalty claim of Rs. 70,000 to the Company. During the year ended March 31, 2005, the Authorities issued an additional notice to this vendor demanding Rs. 225,999 from the vendor, including penalty of Rs. 51,152. Through the same notice, the Authorities, issued a penalty claim of Rs. 6,500 to the Company. Further, during the year ended March 31, 2006, the Authorities issued an additional notice to this vendor demanding Rs. 33,549. The Company has filed appeals against these notices. In August and September 2006, the Company attended the hearings conducted by the Customs, Excise and Service Tax Appellate Tribunal (the “CESTAT”) on this matter. In October 2006, the CESTAT passed an order in favor of the Company setting aside all of the above demand notices. In July 2007, the Authorities appealed against CESTAT’s order in the Supreme Court. The Company believes that the ultimate outcome of this matter is not expected to have any material adverse effect on its financial position, results of operations or cash flows in any given accounting period.

F-54

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTED TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

31. Commitments and Contingencies (continued)

In April 2006, the Company launched its fexofenadine hydrochloride 30 mg, 60 mg and 180 mg tablet products, which are generic versions of Sanofi-Aventis’ (“Aventis”) Allegra^® tablets. The Company is presently defending patent infringement actions brought by Aventis in the United States District Court for the District of New Jersey. There are three formulation patents, three use patents, and two active pharmaceutical ingredients (“API”) patents which are under litigation. The Company has obtained summary judgment in respect of each of the formulation patents.

The issues presented during Teva’s hearing are likely to be substantially similar to those which will be presented with respect to Company’s tablet products. A trial has not been scheduled. If Aventis is ultimately successful in its allegation of patent infringement, the Company could be required to pay damages related to fexofenadine hydrochloride tablet sales made by the Company, including be prohibited from selling these products in the future. The Company believes that the ultimate outcome of this matter is not expected to have any material adverse effect on its financial position, results of operation or cash flows in any given accounting period.

In April 2007, the Company terminated its Over The Counter (“OTC”) agreement with Leiner Health Products, LLC (“Leiner”). This action was taken by the Company after receiving notice that, Leiner had been served with a list of Inspection Observations on a Form 483 from the United States Food and Drug Administration (“U.S. FDA”) inspectors. In response thereto, Leiner suspended all of its packaging, production and distribution of OTC Products manufactured, packaged or tested at its facilities in the United States. Under the terminated agreements, the Company had supplied to Leiner API to produce OTC products, finished dose tablets, and access to certain OTC products under development. Subsequently, in March 2008, Leiner filed for bankruptcy. The Company believes that termination of this OTC agreement and Leiner’s filing for bankruptcy is not expected to have any material adverse effect on its financial position, results of operations or cash flows in any given accounting period.

In March 2007, the patent for Fosamax (Merck & Co.’s brand name for alendronate sodium, sold by the Company and other companies in generics versions) in Germany was reinstated in favor of Merck & Co. The Company has filed protective writs to prevent a preliminary injunction without hearing. As of March 31, 2008, no injunction had been granted to Merck & Co. Based on a legal evaluation, the Company continues selling its generic version of this product and believes that European patent reinstatement does not affect its ability to sell this product. The Company believes that the ultimate outcome of this patent reinstatement matter is not expected to have any material adverse effect on its financial position, results of operations or cash flows in any given accounting period.

The Indian Council for Environmental Legal Action filed a writ in 1989 under Article 32 of the Constitution of India against the Union of India and others in the Supreme Court of India for the safety of people living in the Patancheru and Bollarum areas of Medak district of Andhra Pradesh. The Company has been named in the list of polluting industries. In 1996, the Andhra Pradesh District Judge proposed that the polluting industries compensate farmers in the Patancheru, Bollarum and Jeedimetla areas for discharging effluents which damaged the farmers’ agricultural land. The compensation was fixed at Rs. 1.30 per acre for dry land and Rs. 1.70 per acre for wet land. Accordingly, the Company has paid a total compensation of Rs. 2,013. The matter is pending in the courts and the possibility of additional liability is remote. The Company would not be able to recover the compensation paid, even if the decision of the court is in favor of the Company.

The Company is aware of litigation with respect to one of its supplier for Oxycodon, which is sold by the Company and other companies in Germany. The innovator company has claimed an infringement of formulation patents against the Company’s supplier. In April 2007, the court rejected an application for an interim order by the innovator company against the Company’s supplier. As of March 31, 2008, based on a legal evaluation, the Company continues to sell this product and believes that the patent infringement case does not affect its ability to sell the product. The Company believes that the ultimate outcome of this patent infringement matter is not expected to have any material adverse effect on its financial position, results of operations or cash flows in any given accounting period.

F-55

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTED TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

31. Commitments and Contingencies (continued)

In April 2008, the Company received a Civil Investigative Demand (“CID”) from the United States Federal Trade Commission (“FTC”). A CID is a request for information in the course of a civil investigation and does not constitute the commencement of legal proceedings. The Company has been informed that the focus of this civil antitrust investigation relates to the settlement arrangement entered into between the Company and UCB Pharma Inc. resolving patent litigation concerning levetiracetam. The Company believes that the terms of its settlement arrangement with UCB Pharma Inc. are consistent with all applicable antitrust laws. The Company is co-operating fully with the FTC regarding this investigation. The Company believes that the ultimate outcome of this investigation is not expected to have any material adverse effect on its financial position, results of operations or cash flows in any given accounting period.

Additionally, the Company and its affiliates are involved in other disputes, lawsuits, claims, governmental and/or regulatory inspections, inquiries, investigations and proceedings, including patent and commercial matters that arise from time to time in the ordinary course of business. The Company believes that there are no such pending matters that are expected to have any material adverse effect on its financial position, results of operations or cash flows in any given accounting period.

32. Segment reporting and related information

a) Segment information

The Chief Operating Decision Maker (“CODM”) evaluates the Company’s performance and allocates resources based on an analysis of various performance indicators by product segments. The product segments and the respective performance indicators reviewed by the CODM are as follows:

	•		Formulations — Revenues by therapeutic product category; Gross profit

	•		Active pharmaceutical ingredients and intermediates — Gross profit, revenues by geography and key products;

	•		Generics — Gross profit;

	•		Drug discovery — Revenues and expenses; and

	•		Custom pharmaceutical services — Gross profit.

The CODM of the Company does not review the total assets for each reportable segment. The property, plant and equipment used in the Company’s business, depreciation and amortization expenses, are not fully identifiable with/ allocable to individual reportable segments, as certain assets are used interchangeably between segments. The other assets are not specifically allocable to the reportable segments. Consequently, management believes that it is not practicable to provide segment disclosures relating to total assets since allocation among the various reportable segments is not possible.

F-56

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTED TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

32. Segment reporting and related information (continued)

Formulations

Formulations, also referred to as finished dosages, consist of finished pharmaceutical products ready for consumption by the patient. Effective April 1, 2007, the Company’s critical care and biotechnology segment was merged into its formulations segment. Accordingly, disclosures relating to the previous year have been restated to conform to current year presentation. An analysis of revenues by therapeutic category of the formulations segment is given below:


	Fiscal Year ended March 31,
	2006		2007		2008
Gastro-intestinal	Rs.	2,284,254	Rs.	3,141,341	Rs.	3,744,575
Pain control		1,901,814		2,607,817		3,049,402
Cardiovascular		1,708,205		1,874,297		2,132,853
Anti-infectives		1,117,760		1,333,226		1,476,826
Dermatology		539,072		627,153		655,641
Others		3,036,469		3,502,773		4,181,777


Total revenues from external customers	Rs.	10,587,574	Rs.	13,086,607	Rs.	15,241,074



Cost of revenues	Rs.	3,290,552	Rs.	3,923,519	Rs.	4,038,940


Gross profit	Rs.	7,297,022	Rs.	9,163,088	Rs.	11,202,134

Inter-segment revenues relating to transfers to the active pharmaceutical ingredients and intermediates segment which is accounted for at cost amounting to Rs. 40,246, Rs. 32,755 and Rs. 47,229 for the years ended March 31, 2006, 2007 and 2008, respectively.

Active pharmaceutical ingredients and intermediates

Active pharmaceutical ingredients and intermediates, also known as active pharmaceutical products or bulk drugs, are the principal ingredients for formulations. Active pharmaceutical ingredients and intermediates become formulations when the dosage is fixed in a form ready for human consumption such as a tablet, capsule or liquid using additional inactive ingredients.

An analysis of gross profit for the segment is given below.

Fiscal Year ended March 31,

2006

2007

2008

Revenues from external customers

Rs.

8,267,512

Rs.

11,882,959

Rs.

11,804,752

Cost of revenues

Rs.

5,946,055

Rs.

7,242,272

Rs.

7,825,217

Gross profit

Rs.

2,321,457

Rs.

4,640,687

Rs.

3,979,535

Inter-segment revenues relating to transfers to the formulations, generics and custom pharmaceutical services segment which is accounted for at cost amounting to Rs. 1,064,816, Rs. 1,764,589 and Rs. 3,280,949 for the years ended March 31, 2006, 2007 and 2008, respectively.

F-57

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTED TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

32. Segment reporting and related information (continued)

An analysis of revenue by geography is given below:


	Fiscal Year ended March 31,
	2006		2007		2008
North America	Rs.	1,654,953	Rs.	2,029,748	Rs.	2,288,570
India		2,300,390		2,077,317		2,351,724
Europe		1,420,930		2,116,842		2,520,753
Others		2,891,239		5,659,052		4,643,705


	Rs.	8,267,512	Rs.	11,882,959	Rs.	11,804,752

An analysis of revenues by key products is given below:


	Fiscal Year ended March 31
	2006		2007		2008
Sertraline Hydrochloride	Rs.	494,101	Rs.	2,461,494	Rs.	600,902
Ramipril		642,538		760,661		933,248
Ciprofloxacin Hydrochloride		778,458		739,625		818,253
Finasteride		98,339		580,775		952,287
Naproxen Sodium		380,409		521,214		268,052
Terbinafine Hydrochloride		537,155		483,896		457,385
Ranitidine Hydrochloride Form 2		404,022		420,334		364,098
Naproxen		374,997		408,004		636,654
Clopidogrel		139,941		384,238		681,529
Ibuprofen		502,263		328,927		304,831
Montelukast		241,090		285,218		319,058
Losartan potassium		172,682		234,432		315,763
Nizatidine		160,857		223,593		380,952
Olanzapine		82,518		156,578		721,335
Amlodipine Besylate		40,876		82,954		403,830
Others		3,217,266		3,811,016		3,646,575


Total	Rs.	8,267,512	Rs.	11,882,959	Rs.	11,804,752

Generics

Generics are generic finished dosages with therapeutic equivalence to branded formulations.

An analysis of gross profit for the segment is given below:


	Fiscal Year ended March 31,
	2006		2007		2008
Revenues from external customers	Rs.	4,055,764	Rs.	33,224,185	Rs.	17,781,508

Cost of revenues		2,168,800		18,098,552		9,311,074


Gross Profit	Rs.	1,886,964	Rs.	15,125,633	Rs.	8,470,434

F-58

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTED TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

32. Segment reporting and related information (continued)

Drug discovery

The Company is involved in drug discovery through its research facilities located in the United States and India. The Company commercializes drugs discovered with other products and also licenses these discoveries to other companies. An analysis of the revenues and expenses of the drug discovery segment is given below:


	Fiscal Year ended March 31,
	2006		2007		2008
Revenues from external customers	Rs.	—	Rs	136,783	Rs.	39,211
Cost of revenues		—		121,498		36,154


Gross profit	Rs.	—		15,285	Rs.	3,057


Research and development expenses	Rs.	814,485	Rs.	774,614	Rs.	901,121

Custom pharmaceutical services (“CPS”)

Custom pharmaceutical services operations relate to contract research services and manufacture and sale of active pharmaceutical ingredients and steroids in accordance with the customer’s requirements.


	Fiscal Year ended March 31,
	2006		2007		2008
Revenues from external customers	Rs.	1,326,828	Rs.	6,599,763	Rs.	4,817,606

Cost of revenues		999,434		4,662,542		3,152,107

Gross Profit	Rs.	327,394	Rs.	1,937,221	Rs.	1,665,499

Inter-segment revenues relating to transfers to the active pharmaceutical ingredients and intermediates segment which are accounted for at cost amounting to Rs. 151,446 for the year ended March 31, 2008.

a) Reconciliation of segment information to entity total


	For the year ended March 31, 2006				For the year ended March 31, 2007					For the year ended March 31, 2008
	Revenues		Gross profit		Revenues		Gross profit			Revenues		Gross profit
Formulations	Rs.	10,587,574	Rs.	7,297,022	Rs.	13,086,607	Rs.	9,163,088		Rs.	15,241,074	Rs.	11,202,134
Active pharmaceutical ingredients and intermediates		8,267,512		2,321,457		11,882,959		4,640,687			11,804,752		3,979,535
Generics		4,055,764		1,886,964		33,224,185		15,125,633			17,781,508		8,470,434
Drug discovery		—		—		136,783		15,285			39,211		3,057
Custom pharmaceutical services		1,326,828		327,394		6,599,763		1,937,221			4,817,606		1,665,499
Others		29,369		16,797		164,795		(6,361	)		321,475		87,378

	Rs.	24,267,047	Rs.	11,849,634	Rs.	65,095,092	Rs.	30,875,553		Rs.	50,005,626	Rs.	25,408,037

F-59

DR. REDDY’S LABORATORIES LIMITED AND SUBSIDIARIES
NOTED TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data and where otherwise stated)

32. Segment reporting and related information (continued)

b) Analysis of revenue by geography

The Company’s business is organized into five key geographies. Revenues are attributable to individual geography based on the location of the customer.


	Fiscal Year ended March 31,
	2006		2007		2008
India	Rs.	8,272,468	Rs.	9,178,590	Rs.	10,450,580
North America		3,983,860		28,336,547		11,374,353
Russia and other countries of the former Soviet Union		3,559,477		4,751,981		5,525,828
Europe		4,326,366		14,839,117		15,863,459
Others		4,124,876		7,988,857		6,791,406


	Rs.	24,267,047	Rs.	65,095,092	Rs.	50,005,626

c) Analysis of property, plant and equipment by geography

Property, plant and equipment (net) attributable to individual geography are given below:


	As of March 31,
	2007		2008
India	Rs.	10,061,138	Rs.	14,284,786
North America		1,701,157		1,752,449
Russia and other countries of the former Soviet Union		26,618		190,768
Europe		629,330		516,128
Others		9,555		21,301


	Rs.	12,427,798	Rs.	16,765,432

33. Subsequent events

In April 2008, the Company acquired a unit of The Dow Chemical Company associated with its United Kingdom sites in Mirfield and Cambridge for a total cash consideration (subject to adjustments for working capital, etc.) of Rs. 1,354,307 (U.S.$ 33.5 million). The acquisition includes customer contracts, associated products, process technology, intellectual property, trademarks and the Dowpharma Small Molecules facilities located in Mirfield and Cambridge, United Kingdom.

In April 2008, the Company acquired Jet Generici Srl, a company engaged in the sale of generic finished dosages in Italy for a total cash consideration (subject to adjustments for working capital, etc.) of Rs. 145,520 (Euro 2.3 million).

In April 2008, the Company has acquired BASF’s pharmaceutical contract manufacturing business and its manufacturing facility in Shreveport, Louisiana, USA for a total consideration (subject to adjustments for working capital, etc.) of Rs. 1,606,565 (U.S.$ 39.8 million). The business involves contract manufacturing of generic prescription and OTC products for branded and generic companies in the United States. This business includes customer contracts, related ANDAs and NDAs, and trademarks, as well as the Shreveport manufacturing facility.

F-60

Item 19. EXHIBITS


Exhibit Number		Description of Exhibits

1.1.//***		Memorandum and Articles of Association of the Registrant dated February 4, 1984.

1.2./**		Certificate of Incorporation of the Registrant dated February 24, 1984.

1.3./**		Amended Certificate of Incorporation of the Registrant dated December 6, 1985.

2.1.*		Form of Deposit Agreement, including the form of American Depositary Receipt, among Registrant, Morgan Guaranty Trust Company as Depositary, and holders from time to time of American Depositary Receipts Issued there under, including the form of American Depositary.

4.1.*		Agreement by and between Dr. Reddy’s Laboratories Limited and Dr. Reddy’s Research Foundation regarding the undertaking of research dated February 27, 1997.

4.2.**		Dr. Reddy’s Laboratories Limited Employee Stock Option Scheme, 2002.

4.3****		Sale and Purchase Agreement Regarding the Entire Share Capital of Beta Holding GmbH dated February 15^th/16^th 2006

8.		List of subsidiaries of the Registrant.

23.1		Consent of Independent Registered Public Accounting Firm

99.1		Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

99.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

99.3		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.4		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Previously filed on March 26, 2001 with the SEC along with Form F-1

**		Previously filed on October 31, 2002 with the SEC along with Form S-8.

***		Previously filed with the Company’s Form 20-F for the fiscal year ended March 31, 2003.

****		Previously filed with the Company’s Form 20-F/A for the fiscal year ended March 31, 2006 pursuant to a request for confidential treatment.

*****		Previously filed with the Company’s Form 20-F for the fiscal year ended March 31, 2006.

F-61


PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
ITEM 4. INFORMATION ON THE COMPANY
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8. FINANCIAL INFORMATION
ITEM 9. THE OFFER AND LISTING
ITEM 10. ADDITIONAL INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16. [RESERVED]
ITEM 16.A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16.B. CODE OF ETHICS
ITEM 16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16.D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16.E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
PART III
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
SIGNATURES
EX-8: SUBSIDIARIES
EX-23.1: CONSENT OF KPMG
EX-99.1: CERTIFICATION
EX-99.2: CERTIFICATION
EX-99.3: CERTIFICATION
EX-99.4: CERTIFICATION
EX-8: LIST OF SUBSIDIARIES
EX-23.1: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EX-99.1: CERTIFICATION
EX-99.2: CERTIFICATION
EX-99.3: CERTIFICATION
EX-99.4: CERTIFICATION


	DR. REDDY’S LABORATORIES LIMITED
	By:	/s/ G.V. Prasad
		G.V. Prasad
		Vice Chairman & CEO


	By:	/s/ Saumen Chakraborty
		Saumen Chakraborty
		Chief Financial Officer