As filed with the Securities and Exchange Commission on August 4, 2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF

THE SECURITIES EXCHANGE ACT OF 1934

Or

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2006

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

to

.

Or

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring the shell company report

Commission file number: 001-31609

TELKOM SA LIMITED

(Exact name of Registrant as specified in its charter)

THE REPUBLIC OF SOUTH AFRICA

(Jurisdiction of incorporation or organization)

Telkom Towers North

152 Proes Street

Pretoria 0002

The Republic of South Africa

(27)(12)311-3566

(Address of principal executive offices)

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

Title of each class

Name of each exchange on which registered

_________________________________________________

________________________________________

American Depositary Shares, each representing four (4)

New York Stock Exchange, Inc.

Ordinary Shares, par value R10 per share
Ordinary Shares, par value R10 per share

New York Stock Exchange, Inc.*

*Listed, 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.

Ordinary Shares, par value R10 per share 

521,408,318

Class A Ordinary Share, par value R10 per share 

1

Class B Ordinary Share, par value R10 per share 

1

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

[x] Yes

[ ] No

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

[x] No

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.

[x] Yes

[ ] No

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 Exchange Act. (Check one):

Large accelerated filer [x]

Accelerated filer [ ]

Non-accelerated filer [ ]

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

[ ] Item 17

[x] Item 18

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 Exchange Act).

[ ] Yes

[x] No

X

1

EXPLANATORY NOTE

The consolidated financial statements of the Telkom Group and Vodacom as of and for the years

ended March 31, 2005 and 2004, including the applicable notes thereto, contained in Item 18.
“Financial Statements” of this Annual Report on Form 20-F and the consolidated financial information
of the Telkom Group and Vodacom as of and for the years ended March 31, 2005 and 2004 contained
herein have been restated from those financial statements previously presented to reflect
a change in accounting policy and certain restatements. The consolidated financial statements and
related financial information of the Telkom Group and Vodacom as of and for each of the years ended
March 31, 2003 and 2002 cannot be provided on a restated basis without unreasonable effort or
expense. The Telkom Group has not amended, and does not intend to amend, its previously filed
Annual Reports on Form 20-F for the years affected by the change in accounting policy and
restatements that ended prior to the year ended March 31, 2006. For this reason, those prior Annual
Reports and the consolidated financial statements and applicable notes thereto, auditors’ reports and
related financial information contained in such reports should no longer be relied upon. For a
description of the change in accounting policy and restatements, see Item 5. “Operating and Financial
Review and Prospects,” note 2 of the notes to the audited consolidated financial statements of the
Telkom Group and note 23 of the notes to the audited consolidated financial statements of Vodacom
included herein.

Unless the context requires otherwise, references to “we,” “us,” “our” and the “Telkom Group” in

this annual report refer to Telkom SA Limited and its subsidiaries and its 50% interest in Vodacom,
and references to “Telkom” in this annual report refer only to Telkom SA Limited. References to
“Vodacom” in this annual report refer to Telkom’s 50% owned joint venture, Vodacom Group (Pty)
Limited, and its subsidiaries. We do not control Vodacom, the management of which requires
consensus agreement among its shareholders who are party to Vodacom’s joint venture agreement.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

Many of the statements included in this annual report, as well as oral statements that may be

made by us or by officers, directors or employees acting on behalf of us, constitute or are based on
forward looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of
1995, specifically Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the
U.S. Securities Exchange Act of 1934, as amended. All statements, other than statements of historical
facts, including, among others, statements regarding our future financial position and plans, strategies,
objectives, capital expenditures, projected costs and anticipated cost savings and financing plans, as
well as projected levels of growth in the communications market, are forward looking statements.
Forward looking statements can generally be identified by the use of terminology such as “may,” “will,”
“should,” “expect,” “envisage,” “intend,” “plan,” “project,” “estimate,” “anticipate,” “believe,” “hope,”
“can,” “is designed to” or similar phrases, although the absence of such words does not necessarily
mean that a statement is not forward looking.

These forward looking statements involve a number of known and unknown risks, uncertainties

and other factors that could cause our actual results and outcomes to be materially different from
historical results or from any future results expressed or implied by such forward looking statements.
Among the factors that could cause our actual results or outcomes to differ materially from our
expectations are those risks identified in Item 3. “Key Information–Risk Factors,” including, but not
limited to, increased competition in the South African telecommunications market; developments in the
regulatory environment; continued mobile growth and reductions in Vodacom’s and Telkom’s net
interconnect margins; Vodacom’s and Telkom’s ability to expand their operations and make
investments and acquisitions in other African countries and the general economic, political, social and

2

legal conditions in South Africa and in other countries where Vodacom and Telkom invest; our ability
to attract and retain key personnel; our inability to appoint a majority of Vodacom’s directors and the
consensus approval rights at Vodacom may limit our flexibility and ability to implement our preferred
strategies; Vodacom’s continued payment of dividends or distributions to us; our ability to improve and
maintain our management information and other systems; our negative working capital; changes in
technology and delays in the implementation of new technologies; our ability to reduce theft,
vandalism, network and payphone fraud and lost revenue to non-licensed operators; our ability to
improve our internal control over financial reporting; health risks to related mobile handsets, base
stations and associated equipment; risks related to our control by the Government of the Republic of
South Africa and major shareholders and the South African Government’s other positions in the
telecommunications industry; the outcome of regulatory, legal and arbitration proceedings, including
tariff approvals, and the outcome of Telkom’s hearings before the Competition Commission, its
proceedings with Telcordia Technologies Incorporated and others; our ability to negotiate favorable
terms, rates and conditions for the provision of interconnection services and facilities leasing services;
our ability to implement and recover the substantial capital and operational costs associated with
carrier pre-selection, number portability and the monitoring, interception and customer registration
requirements contained in the South African Regulation of Interception of Communications and
Provisions of Communication-Related Information Act; Telkom’s ability to comply with the South
African Public Finance Management Act and South African Public Audit Act and the impact of the
Municipal Property Rates Act; fluctuations in the value of the Rand; the impact of unemployment,
poverty, crime and HIV infection, labor laws and exchange control restrictions in South Africa; and
other matters not yet known to us or not currently considered material by us.

We caution you not to place undue reliance on these forward looking statements. All written and

oral forward looking statements attributable to us, or persons acting on our behalf, are qualified in
their entirety by these cautionary statements. Moreover, unless we are required by law to update
these statements, we will not necessarily update any of these statements after the date of this annual
report, either to conform them to actual results or to changes in our expectations.

3

TABLE OF CONTENTS

Page

PART I

Item 1.

Identity of Directors, Senior Management and Advisors

4

Item 2.

Offer Statistics and Expected Timetable

4

Item 3.

Key Information

4

Item 4.

Information on the Company

39

Item 5.

Operating and Financial Review and Prospects

120

Item 6.

Directors, Senior Management and Employees

169

Item 7.

Major Shareholders and Related Party Transactions

194

Item 8.

Financial Information

202

Item 9.

The Offer and Listing

205

Item 10.

Additional Information

207

Item 11.

Quantitative and Qualitative Disclosures About Market Risk

237

Item 12.

Description of Securities Other than Equity Securities

243

PART II

Item 13.

Defaults, Dividend Arrearages and Delinquencies

244

Item 14.

Material Modifications to the Rights of Security Holders and
Use of Proceeds

244

Item 15.

Controls and Procedures

244

Item 16A.

Audit Committee Financial Expert

247

Item 16B.

Code of Ethics

247

Item 16C.

Principal Accountant Fees and Services

247

Item 16D.

Exemptions From the Listing Standards for Audit Committees

248

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

248

PART III

Item 17.

Financial Statements

250

Item 18.

Financial Statements

250

Item 19.

Exhibits

251

4

PART I

Item 1.

Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2.

Offer Statistics and Expected Timetable

Not applicable.

Item 3.

Key Information

SELECTED HISTORICAL CONSOLIDATED FINANCIAL

AND OTHER DATA OF THE TELKOM GROUP

The following table sets forth selected historical consolidated financial and other data of the

Telkom Group as of and for each of the periods set forth therein. Information in the following table
includes our 50% interest in the results, assets, liabilities and equity of Vodacom, which we
proportionately consolidate. Unless otherwise indicated, fixed-line statistical data is derived from the
results of operations of our fixed-line segment, which provides fixed-line voice and data
communications services through Telkom; directory services through our 64.9% owned subsidiary,
Telkom Directory Services; and wireless data services through our wholly owned subsidiary, Swiftnet.

The Telkom Group’s consolidated financial information discussed below reflects the following

changes to the basis of preparation:

• the early adoption of revised IAS19, which is applicable for the financial year beginning on or

after January 1, 2006;

• the adoption of revised and new IAS16, IAS17, IAS24, IAS40, IFRS4 and IFRIC1, which are

applicable for financial years beginning on or after January 1, 2005;

• a voluntary change in accounting policy to recognize fixed-line installation and activation

revenues and related costs systematically over the expected duration of customer relationships
in line with other global communications companies, as opposed to the recognition of such
revenues and related costs when the installation and activation of customers occurs, the
method previously used in the Telkom Group’s consolidated financial statements for the 2005
and 2004 financial years (both methods are permitted under IAS18); and

• restatements for changes to the previous accounting methods for certain lease payments and

receipts under operating leases, and accounting disclosures for investment properties,
information technology software items and financial assets and liabilities previously reported in
the Telkom Group’s consolidated financial statements for the 2005 and 2004 financial years.

For a more detailed description of these items, please refer to Item 5. “Operating and Financial

Review and Prospects” and note 2 of the notes to the audited consolidated financial statements of the
Telkom Group and note 23 of the notes to the audited consolidated financial statements of Vodacom
included in this annual report.

The selected financial information presented below as of and for the years ended March 31, 2005

and 2004 has been restated to reflect such change in accounting policy and restatements.
The consolidated financial statements and related financial information of the Telkom Group and
Vodacom as of and for each of the years ended March 31, 2003 and 2002 cannot be provided
on a restated basis without unreasonable effort or expense. The Telkom Group has not amended, and
does not intend to amend, its previously filed Annual Reports on Form 20-F for the years affected by

5

the change in accounting policy and restatements that ended prior to the year ended March 31, 2006.
For this reason, those prior Annual Reports and the consolidated financial statements and applicable
notes thereto, auditors’ reports and related financial information contained in such reports should no
longer be relied upon.

The following selected historical consolidated financial data of the Telkom Group as of and for

each of the three years ended March 31, 2006 was extracted from the Telkom Group’s consolidated
financial statements included in this annual report, which have been audited by Ernst & Young,
Registered Accountants and Auditors, Chartered Accountants (SA).

The consolidated financial statements of the Telkom Group have been prepared in accordance

with International Financial Reporting Standards, or IFRS, which differs in certain respects from
US Generally Accepted Accounting Principles, or US GAAP. For a description of the principal
differences between IFRS and US GAAP relevant to the consolidated financial statements of the
Telkom Group and a reconciliation to US GAAP of net income and shareholders’ equity, see note 44
of the notes to the audited consolidated financial statements of the Telkom Group as of and for each
of the three years ended March 31, 2006 included in this annual report.

EBITDA represents profit for the year before taxation, finance charges, investment income and

depreciation, amortization, impairment and write-offs. We believe that EBITDA provides meaningful
additional information to investors since it is widely accepted by analysts and investors as a basis for
comparing a company’s underlying operating profitability with that of other companies as it is not
influenced by past capital expenditures or business acquisitions, a company’s capital structure or the
relevant tax regime. This is particularly the case in a capital intensive industry such as
communications. It is also a widely accepted indicator of a company’s ability to service its long-term
debt and other fixed obligations and to fund its continued growth. EBITDA is not a US GAAP or IFRS
measure. You should not construe EBITDA as an alternative to operating profit or cash flows from
operating activities determined in accordance with US GAAP or IFRS or as a measure of liquidity.
EBITDA is not defined in the same manner by all companies and may not be comparable to other
similarly titled measures of other companies unless the definition is the same. In addition, the
calculation of EBITDA for the maintenance of our covenants contained in our TL20 bond is based on
accounting policies in use, consistently applied, at the time the indebtedness was incurred. As a
result, EBITDA for purposes of those covenants is not calculated in the same manner as it is
calculated in the table below.

Fixed access lines are comprised of public switched telecommunications network lines, or PSTN

lines, including integrated services digital network channels, or ISDN channels, and public and private
payphones, but excluding internal lines in service. We calculate fixed-line penetration, or teledensity,
based on the total number of telephone lines in service at the end of the period per 100 persons in the
population of South Africa. Population is the estimated South African population at the mid year in the
periods indicated as published by Statistics South Africa, a South African governmental department.
We calculate fixed-line traffic, other than international outgoing mobile traffic, international
interconnection traffic and international voice over internet protocol traffic, by dividing traffic operating
revenue for the particular category by the weighted average tariff for such category during the relevant
period. Fixed-line international outgoing mobile traffic and international interconnection traffic are
based on the traffic registered through the respective exchanges and reflected in international
interconnection invoices. International voice over internet protocol traffic is based on the traffic
reflected in invoices. We calculate revenue per fixed access line by dividing total fixed-line revenue
during the period, excluding data and directories and other revenue, by the average number of fixed
access lines during the period. We calculate our number of fixed lines per fixed-line employee on the
basis of fixed access lines in service at period end divided by the number of employees of Telkom at
period end.

6

Rand amounts as of and for the year ended March 31, 2006 have been translated into Dollars

solely for your convenience at R6.15 per $1.00, the Rand noon buying rate discussed in Item 3.
“Key Information–Exchange Rates” on March 31, 2006, the date of the Telkom Group’s most recent
consolidated balance sheet included in this annual report. These translations should not be construed
as representations that the Rand amounts could actually be converted into US dollars at these rates
or at all.

You should read the following information together with Item 3. “Key Information–Risk Factors,”

Item 5. “Operating and Financial Review and Prospects” and the consolidated financial statements
and the notes thereto of the Telkom Group and Vodacom Group included in this annual report.

7

THE TELKOM GROUP

Year ended March 31,

2004

2005

2006

2006

ZAR

ZAR

ZAR

USD

RESTATED RESTATED

(in millions, except per share amounts)

Income Statement Data

Amounts in accordance with IFRS

Operating revenue

40,582

43,160

47,625

7,744

Other income

(1)

255

280

480

78

Operating expenses

(31,499) (32,179) (33,428)

(5,435)

Employee expenses

(2)

(7,408)

(8,111)

(7,489)

(1,218)

Payments to other operators

(5,985)

(6,132)

(6,826)

(1,110)

Selling, general and administrative

(3)

(7,665)

(8,824) (10,273)

(1,670)

Services rendered

(2,269)

(2,021)

(2,114)

(344)

Operating leases

(924)

(803)

(850)

(138)

Depreciation, amortization, impairments and write-offs

(4)

(7,248)

(6,288)

(5,876)

(955)

Operating profit

9,338

11,261

14,677

2,387

Investment income

322

350

397

64

Finance charges

(3,264)

(1,695)

(1,233)

(200)

Profit before tax

6,396

9,916

13,841

2,251

Taxation

(1,738)

(3,082)

(4,520)

(735)

Profit for the year

4,658

6,834

9,321

1,516

Attributable to:

Equity holders of Telkom

4,589

6,751

9,182

1,493

Minority Interest

69

83

139

23

Weighted average number of ordinary shares outstanding

Basic

557

541

526

526

Diluted

557

543

529

529

Earnings per share (cents)

Basic

823.9  1,246.7    1,744.7

283.7

Diluted

823.9  1,244.3    1,735.2

282.1

Dividends per share (cents)

90.0

110.0

900.0

146.3

Amounts in accordance with US GAAP

Operating revenue

30,541

30,887

32,035

5,209

Operating income

6,853

8,123

10,278

1,671

Net income

4,215

6,191

8,867

1,442

Earnings per share (cents)

Basic

756.7  1,143.3    1,684.9

273.9

Diluted

756.7  1,141.1    1,675.7

272.5

8

As of March 31,

2004

2005

2006

2006

ZAR

ZAR

ZAR

USD

RESTATED RESTATED

(in millions)

Balance Sheet Data

Amounts in accordance with IFRS

Total assets

53,174

57,597

57,544

9,357

Current assets

11,423

15,045

12,731

2,070

Cash and cash equivalents

3,218

3,210

4,948

805

Other current assets

8,205

11,835

7,783

1,265

Non-current assets

41,751

42,552

44,813

7,287

Total liabilities

(5)

31,346

31,236

28,078

4,566

Current liabilities

(6)

14,639

17,366

15,687

2,551

Short-term debt

(6)

4,473

5,408

4,161

677

Other current liabilities

10,166

11,958

11,526

1,874

Non-current liabilities

(7)

16,707

13,870

12,391

2,015

Long-term debt

(7)

12,703

9,504

7,655

1,245

Other non-current liabilities

4,004

4,366

4,736

770

Total equity

21,828

26,361

29,466

4,791

Attributable to:

Equity holders of Telkom

21,628

26,141

29,165

4,742

Minority interest

200

220

301

49

Amounts in accordance with US GAAP

Total assets

47,940

50,592

49,828

8,102

Total liabilities

27,179

25,930

22,513

3,660

Shareholders’ equity

20,608

24,507

27,156

4,416

9

Year ended March 31,

2004

2005

2006

2006

ZAR

ZAR

ZAR

USD

RESTATED RESTATED

(in millions)

Cash Flow Data

Amounts in accordance with IFRS

Cash flow from operating activities

13,884

15,711

9,506

1,546

Cash flow used in investing activities

(5,423)

(6,306)

(7,286)

(1,185)

Cash flow used in financing activities

(6,481)

(9,897)

(258)

(42)

Other Data

Amounts in accordance with IFRS

EBITDA

(8)

16,586

17,549

20,553

3,342

Total debt (at period end)

(5)(9)

17,176

14,912

11,816

1,921

Capital expenditures excluding intangibles

4,936

4,464

6,310

1,026

Capital expenditures including intangibles

5,368

5,851

7,506

1,220

Year ended March 31,

2002

2003

2004

2005

2006

RESTATED RESTATED RESTATED RESTATED

Fixed-Line Statistical Data

Fixed access lines (thousands) (at period end)

(10)

4,762

4,709

4,680

4,726

4,708

Postpaid

(10)

PSTN

(11)

3,435

3,197

3,048

3,006

2,996

ISDN channels

424

516

601

664

693

Prepaid

708

817

856

887

854

Payphones

(12)

195

179

175

169

165

Fixed-line penetration rate (%) (at period end)

(10)

10.7

10.4

10.1

10.1

10.0

Revenue per fixed access line (ZAR)

(10)

4,882

5,157

5,341

5,250

5,304

Total fixed-line traffic (millions of minutes)

(13)

33,084

32,868

32,942

31,706

31,015

Local

20,538

20,396

20,547

19,314

18,253

Long distance

4,747

4,728

4,616

4,453

4,446

Fixed-to-mobile

4,364

4,135

3,980

3,911

4,064

International outgoing

374

439

427

415

515

International voice over internet protocol

–

–

25

89

83

Interconnection

3,061

3,170

3,347

3,524

3,654

Data Communications Services
(at period end)

Managed network sites

5,684

7,729

9,061

11,961

16,887

Internet dial-up subscribers

48,995

98,690  142,208  202,410  228,930

Internet ADSL subscribers

–

–

8,559

22,870

53,997

Internet satellite subscribers

–

–

192

1,427

1,981

Total ADSL subscribers

(14)

–

2,632

20,145

58,278 143,509

Number of full-time, Telkom employees
(at period end)

(15)

39,444

35,361

32,358

28,972

25,575

Fixed-lines per Telkom employee (at period end)

(10)(15)

121

133

145

163

184

10

(1) Other income includes profit and losses on disposal of investments, property, plant and equipment and intangible assets.

(2) Employee expenses include workforce reduction expenses of R88 million, R961 million and R302 million in the years

ended March 31, 2006, 2005 and 2004, respectively.

(3) In the year ended March 31, 2003, we recorded a R117 million gain related to the R325 million provision for potential

liabilities related to Telkom’s arbitration with Telcordia in terms of IAS21 and IAS39 in finance charges as a result of the
strengthening of the Rand. In addition, we included a provision for interest of R40 million related to Telcordia in finance
charges in the year ended March 31, 2003 and a provision for legal fees of R58 million related to Telcordia is included in
services rendered in the year ended March 31, 2003. In the year ended March 31, 2004, all of these provisions were
reversed.

(4) Depreciation, amortization, impairments and write-offs include costs in respect of write-offs of R188 million, R210 million

and R201 million in the 2006, 2005 and 2004 financial years, respectively.

(5) As of March 31, 2006, R4.3 billion of our debt was guaranteed by the Government of the Republic of South Africa.

(6) Includes short-term portion of finance leases and utilized credit facilities.

(7) Includes long-term portion of finance leases.

(8) EBITDA can be reconciled to profit for the year as follows:

Year ended March 31,

2004

2005

2006

2006

ZAR

ZAR

ZAR

USD

RESTATED RESTATED

(in millions)

EBITDA

16,586

17,549

20,553

3,342

Depreciation, amortization, impairments and write-offs

(7,248)

(6,288)

(5,876)

(955)

Investment income

322

350

397

64

Finance charges

(3,264)

(1,695)

(1,233)

(200)

Taxation

(1,738)

(3,082)

(4,520)

(735)

Profit for the year

4,658

6,834

9,321

1,516

Attributable to:

Equity holders of Telkom

4,589

6,751

9,182

1,493

Minority interest

69

83

139

23

(9) Includes short-term and long-term debt, finance lease obligations and utilized credit facilities.

(10) Fixed access lines are comprised of PSTN lines, including ISDN lines and payphones, but excluding Telkom internal lines

in service. Each analog PSTN line includes one access channel, each basic ISDN line includes two access channels and
each primary ISDN line includes 30 access channels. Fixed-line revenue has been restated in the periods prior to the
2006 financial year to recognize installation and activation revenues over their expected duration of the customer’s
relationship. Restated revenue for the 2002 and 2003 financial years is unaudited.

(11) Excluding ISDN channels. PSTN lines are provided using copper cable, DECT and fiber.

(12) Includes public and private payphones.

(13) Traffic includes internet traffic.

(14) Excludes Telkom internal ADSL services of 249, 254, 168 and 37 as of March 31, 2006, 2005, 2004 and 2003,

respectively.

(15) Includes employees of Telkom only.

11

SELECTED HISTORICAL CONSOLIDATED FINANCIAL

AND OTHER DATA OF VODACOM GROUP

The following table sets forth selected consolidated financial and other data of Vodacom as of and

for each of the periods set forth therein. Information in the Vodacom table reflects 100% of Vodacom’s
results of operations. Unless otherwise indicated, information with respect to Vodacom’s other African
operations in the Vodacom table reflects 100% of the operations of Vodacom’s subsidiaries in
Lesotho, Tanzania and Mozambique. Vodacom Congo was fully consolidated as a subsidiary in
Vodacom’s consolidated financial statements effective April 1, 2004 after certain clauses granting the
outside shareholders participating rights had been removed from the Vodacom Congo shareholders
agreement. As a result, unless otherwise indicated, information with respect to Vodacom Congo in the
table reflects Vodacom’s 51% interest in Vodacom Congo that was proportionately consolidated in
Vodacom’s consolidated financial statements in the year ended March 31, 2004 and 100% of
Vodacom Congo in the years ended March 31, 2006 and 2005. We proportionately consolidate our
50% interest in Vodacom in the Telkom Group’s consolidated financial statements. Vodacom’s other
operating income, direct network operating costs, depreciation, staff expenses, marketing and
advertising expenses, general administration expenses, amortization of intangible assets and
integration costs, disposal of operations and impairments are presented as separate line items in
Vodacom’s consolidated financial statements, but have been combined under the heading “operating
expenses” in the table set forth below.

Vodacom’s consolidated financial information discussed below reflects the following changes to

the basis of preparation:

• the early adoption of revised and new IAS19 and IFRIC4, which are applicable for the financial

year beginning on or after January 1, 2006;

• the adoption of revised and new IAS16, IAS17, IAS40, IFRS4 and IFRIC1, which are applicable

for financial years beginning on or after January 1, 2005;

• restatements for changes to the previous accounting methods for certain lease payments and

receipts under operating leases, and accounting disclosures for investment properties,
information technology software items and financial assets and liabilities previously reported in
Vodacom’s consolidated financial statements for the 2005 and 2004 financial years.

For a more detailed description of these items, please refer to Item 5. “Operating and Financial

Review and Prospects” and note 23 of the notes to the audited consolidated financial statements of
Vodacom included in this annual report.

The selected financial information presented below and the audited consolidated financial

statements as of and for each of the three years ended March 31, 2006 reflect the above described
restatements. The selected financial information and consolidated financial statements as of and for
each of the two years ended March 31, 2003 have not been presented as these cannot be provided
on a restated basis, without unreasonable effort or expense. The Telkom Group has not amended,
and does not intend to amend, its previously filed Annual Reports on Form 20-F for the years affected
by the restatements that ended prior to March 31, 2006. For this reason, those prior Annual Reports
and the consolidated financial statements and applicable notes thereto, and related financial
information contained in such reports should not be relied upon.

The following selected historical consolidated financial data of Vodacom as of and for each of the

three years ended March 31, 2006 have been extracted from Vodacom’s consolidated financial
statements included in this annual report, which were audited by Deloitte & Touche, Registered
Accountants and Auditors, Chartered Accountants (SA).

12

The consolidated financial statements of Vodacom have been prepared in accordance with IFRS,

which differs in certain respects from US GAAP. For a description of the principal differences between
IFRS and US GAAP relevant to the financial statements of Vodacom and a reconciliation to US GAAP
of net income and shareholders’ equity, see note 45 of the notes to the audited consolidated financial
statements of Vodacom as of and for each of the three years ended March 31, 2006 included in this
annual report.

EBITDA represents net profit before taxation, finance charges, investment income and

depreciation, amortization and impairments. We believe that EBITDA provides meaningful additional
information to investors since it is widely accepted by analysts and investors as a basis for comparing
a company’s underlying operating profitability with that of other companies as it is not influenced by
past capital expenditures or business acquisitions, a company’s capital structure or the relevant tax
regime. This is particularly the case in a capital intensive industry such as communications. It is also
a widely accepted indicator of a company’s ability to service its long-term debt and other fixed
obligations and to fund its continued growth. EBITDA is not a US GAAP or IFRS measure. You should
not construe EBITDA as an alternative to operating profit or cash flows from operating activities
determined in accordance with US GAAP or IFRS or as a measure of liquidity. EBITDA is not defined
in the same manner by all companies and may not be comparable to other similarly titled measures
of other companies unless the definition is the same.

Vodacom’s customer totals are based on the total number of customers registered on Vodacom’s

network, which have not been disconnected, including inactive customers, as of the end of the period
indicated. See Item 4. “Information on the Company–Business Overview–Mobile
Communications–South Africa–Customers” for a discussion of Vodacom’s procedures with respect to
disconnections and inactive customers. Vodacom’s churn is calculated by dividing the average
monthly number of disconnections during the period by the average monthly total reported customer
base during the period. Vodacom’s South African market share is derived from Vodacom’s total
customers, MTN’s total estimated mobile customers and Cell C’s total estimated mobile customers.
Vodacom calculates penetration, or teledensity, based on the total number of customers at the end of
the period per 100 persons in the population of South Africa. Population is the estimated South African
population at the mid-year in the periods indicated as published by Statistics South Africa, a South
African governmental department. Vodacom’s traffic comprises total traffic registered on Vodacom’s
network, including bundled minutes, outgoing international roaming calls and calls to free services, but
excluding national and incoming international roaming calls. Vodacom’s average monthly revenue per
customer, or ARPU, is calculated by dividing the average monthly revenue during the period by the
average monthly total reported customer base during the period. ARPU excludes revenue from
equipment sales, other sales and services and revenue from national and international users roaming
on Vodacom’s networks. Vodacom’s average monthly minutes of use per customer, or average MOU,
is calculated by dividing the average monthly minutes during the period by the average monthly total
reported customer base during the period. MOU excludes calls to free services, bundled minutes and
data minutes. Cumulative network capital expenditure per customer is the cumulative network capital
expenditure since the launch of Vodacom’s South African network divided by Vodacom’s average
customers in South Africa for the period.

Rand amounts as of and for the year ended March 31, 2006 have been translated into Dollars

solely for your convenience at R6.15 per $1.00, the Rand noon buying rate discussed in Item 3.
“Key Information–Exchange Rates,” on March 31, 2006, the date of Vodacom’s most recent balance
sheet included in this annual report. These translations should not be construed as representations
that the Rand amounts could actually be converted into US dollars at these rates or at all.

You should read the following information together with Item 3. “Key Information–Risk Factors,”

Item 5. “Operating and Financial Review and Prospects” and the consolidated financial statements
and the notes thereto of the Telkom Group and Vodacom Group included in this annual report.

13

VODACOM GROUP

Year ended March 31,

2004

2005

2006

2006

ZAR

ZAR

ZAR

USD

RESTATED RESTATED

(in millions)

Income Statement Data

Amounts in accordance with IFRS

Revenue

22,855

27,315

34,043

5,535

Operating expenses

(1)

(17,630) (20,837)  (25,177)

(4,094)

Operating profit

(2)

5,225

6,478

8,866

1,441

Interest, dividends and other financial income

657

663

659

107

Finance cost

(1,108)

(642)

(1,318)

(214)

Profit before tax

4,774

6,499

8,207

1,334

Taxation

(1,722)

(2,613)

(3,078)

(500)

Net profit

3,052

3,886

5,129

834

Attributable to:

Equity shareholders

3,026

3,855

5,012

815

Minority interest

26

31

117

19

Amounts in accordance with US GAAP

Net profit for the year

2,990

3,770

4,765

775

14

As of March 31,

2004

2005

2006

2006

ZAR

ZAR

ZAR

USD

RESTATED RESTATED

(in millions)

Balance Sheet Data

Amounts in accordance with IFRS

Total assets

20,174

22,595

24,768

4,027

Current assets

7,323

8,706

8,689

1,413

Cash and cash equivalents

2,370

3,990

3,146

512

Other current assets

4,953

4,716

5,543

901

Non-current assets

12,851

13,889

16,079

2,614

Total liabilities

12,570

14,707

16,096

2,617

Current liabilities

10,252

11,474

13,859

2,253

Short-term debt

(3)

1,617

2,203

3,036

493

Other current liabilities

8,635

9,271

10,823

1,760

Non-current liabilities

2,318

3,233

2,237

364

Long-term debt

(4)

1,217

2,214

819

133

Other non-current liabilities

1,101

1,019

1,418

231

Total equity

7,604

7,888

8,672

1,410

Attributable to:

Equity shareholders of Vodacom

7,511

7,759

8,389

1,364

Minority interest

93

129

283

46

Amounts in accordance with US GAAP

Shareholders’ equity

6,728

6,882

7,257

1,180

15

Year ended March 31,

2004

2005

2006

2006

ZAR

ZAR

ZAR

USD

RESTATED RESTATED

(in millions)

Cash Flow Data

Amounts in accordance with IFRS

Cash flow from operating activities

4,790

4,150

4,501

732

Cash flow used in investing activities

(3,000)

(3,374)

(4,791)

(779)

Cash flow used in financing activities

(798)

(195)

(108)

(18)

Other Data

Amounts in accordance with IFRS

EBITDA

(2) (5)

7,757

9,590

11,809

1,920

Total debt (at period end)

(6)

2,833

4,417

3,855

627

Capital expenditures excluding intangibles

2,891

3,288

4,699

764

South Africa

1,659

2,617

3,977

647

Other African countries

1,232

671

722

117

Capital expenditures including intangibles

3,012

3,494

5,142

836

South Africa

1,666

2,800

4,400

715

Other African countries

1,346

694

742

121

Year ended March 31,

2002

2003

2004

2005

2006

Statistical Data

South Africa

Total mobile customers (thousands)
(at period end)

(7)

6,557

7,874

9,725

12,838

19,162

Contract

1,090

1,181

1,420

1,872

2,362

Prepaid

5,439

6,664

8,282

10,941

16,770

Community services telephones

28

29

23

25

30

Total inactive mobile customers (%)
(at period end)

(8)

n/a

n/a

n/a

7.9

8.7

Contract

n/a

n/a

n/a

1.5

2.4

Prepaid

n/a

n/a

n/a

9.0

9.6

Mobile churn (%)

(9)

27.2

30.4

36.6

27.1

17.7

Contract

14.5

11.9

10.1

9.1

10.0

Prepaid

30.1

34.0

41.3

30.3

18.8

Mobile market share (%) (at period end)

61

57

54

56

58

Mobile penetration (%) (at period end)

24.2

30.2

39.0

49.5

70.6

Total mobile traffic (millions of minutes)

(10)

n/a

n/a

12,172

14,218

17,066

Outgoing

n/a

n/a

7,647

9,231

11,354

Incoming

n/a

n/a

4,525

4,987

5,712

Mobile ARPU (ZAR)

182

183

177

163

139

Contract

560

629

634

624

572

Prepaid

93

90

90

78

69

Community services

1,719

1,861

2,155

2,321

1,796

16

Year ended March 31,

2002

2003

2004

2005

2006

Average MOU

111

101

96

84

74

Contract

264

269

263

226

206

Prepaid

58

54

56

52

49

Community services

3,354

3,162

3,061

3,185

2,327

Cumulative capital expenditure
per customer (ZAR) (at period end)

1,991

1,933

1,720

1,515

1,257

Number of mobile employees (at period end)

(11)

3,859

3,904

3,848

3,919

4,305

Number of mobile customers per mobile
employee (at period end)

(11)

1,699

2,017

2,527

3,276

4,451

Other African countries

(12)

Total mobile customers (thousands)
(at period end)

(7)

306

773

1,492

2,645

4,358

Lesotho

56

78

80

147

206

Tanzania

229

447

684

1,201

2,091

Democratic Republic of the Congo

21

248

670

1,032

1,571

Mozambique

n/a

n/a

58

265

490

Churn (%)

(9)

Lesotho

26.5

70.6

65.1

17.3

22.3

Tanzania

4.8

13.3

30.0

29.6

28.5

Democratic Republic of Congo

n/a

24.2

20.2

23.1

28.1

Mozambique

n/a

n/a

0.3

11.3

32.2

Gross connections (thousands)

Lesotho

45

76

51

70

98

Tanzania

154

262

404

746

1,353

Democratic Republic of the Congo

21

260

513

565

892

Mozambique

n/a

n/a

58

225

342

Penetration (%) (at period end)

(13)

Lesotho

2.6

4.3

5.1

7.4

12.9

Tanzania

1.1

2.2

3.3

5.1

9.2

Democratic Republic of the Congo

0.3

1.0

2.3

3.5

5.5

Mozambique

n/a

n/a

2.6

4.2

8.4

ARPU

Lesotho (ZAR)

144

104

125

92

78

Tanzania (ZAR)

305

217

128

81

67

Democratic Republic of the Congo (ZAR)

n/a

200

150

98

86

Mozambique (ZAR)

n/a

n/a

110

52

36

Number of employees (at period end)

(11)

494

502

761

1,074

1,154

Lesotho

71

74

68

63

67

Tanzania

188

224

316

350

438

Democratic Republic of the Congo

235

204

334

538

479

Mozambique

n/a

n/a

43

123

170

Number of mobile customers per mobile
employee (at period end)

(11)

619

1,540

1,961

2,463

3,776

17

(1)

Includes other income of R125.1 million, R63.8 million and R57.6 million in the years ended March 31, 2006, 2005 and
2004, respectively.

(2)

Operating profit and EBITDA in the 2005 financial year included an impairment of R268 million in respect of assets in
Mozambique and a reversal of the impairment loss of R53 million in the 2006 financial year due to an increase in the fair
value of the assets.

(3)

Includes short-term portion of finance leases, shareholder loans and non-interest bearing debt, as well as utilized credit
facilities.

(4)

Includes long-term portion of finance leases.

(5)

EBITDA can be reconciled to net profit as follows:

Year ended March 31,

2004

2005

2006

2006

ZAR

ZAR

ZAR

USD

RESTATED RESTATED

(in millions)

EBITDA

7,757

9,590

11,809

1,920

Depreciation, amortization and impairments

(2,532)

(3,112)

(2,943)

(479)

Interest, dividends and other financial income

657

663

659

107

Finance costs

(1,108)

(642)

(1,318)

(214)

Taxation

(1,722)

(2,613)

(3,078)

(500)

Net profit

3,052

3,886

5,129

834

Attributable to:

Equity shareholders of Vodacom

3,026

3,855

5,012

815

Minority interest

26

31

117

19

(6)

Includes interest bearing and non-interest bearing debt, shareholder loans and utilized credit facilities.

(7)

Includes inactive customers.

(8)

Vodacom’s inactive customers are defined as all customers registered on Vodacom’s network for which no revenue
generating activity has been recorded for a period of three consecutive months. In the 2005 financial year, a software
error was identified in the calculation of inactive customers. Vodacom has corrected inactive customers as of
March 31, 2005. Information for prior years is unavailable.

(9)

Vodacom’s contract customers are disconnected when they terminate their contract, or their service is disconnected due
to non-payment. Prepaid customers in South Africa were disconnected if they did not recharge their vouchers after being
in time window lock for six months for periods prior to November and December 2002, for four months for periods from
November and December 2002 until April 2003 and for three months from April 2003 until December 2003. Time window
lock occurs when a customer’s paid active time window, or access period expires. In December 2003, Vodacom changed
the deactivation rule for prepaid customers in South Africa to align itself with European and industry standards. From
December 2003, prepaid customers in South Africa are disconnected from its network if they record no revenue
generating activity within a period of 215 consecutive days. For other African countries, each subsidiary has its own
disconnection rule to disconnect inactive prepaid customers. Vodacom Lesotho disconnects its prepaid customers at the
expiration of time window lock of 210 days. Vodacom Tanzania, Vodacom DRC and Vodacom Mozambique disconnect
their prepaid customers if they record no revenue generating activity within a period of 215 consecutive days.
See “Item 4.“Information on the Company–Business Overview–Mobile communications” and “Information on the
Company–History and development of the Company–Recent Developments–Vodacom’s change in South African
definition of active customers.”

(10) Vodacom has changed the calculation of traffic in the 2006 financial year to exclude packet switch data traffic. Traffic has

been recalculated for the 2005 and 2004 financial years. Information for prior years is unavailable.

(11) Vodacom had a total of 469,183, 280 and 219 temporary employees as of March 31, 2006, 2005, 2004, and 2003,

respectively. Headcount excludes outsourced employees. Employees seconded to other African countries are included in
the number of employees of other African countries and excluded from Vodacom South Africa’s number of employees.

(12) Includes 100% of Vodacom’s operations in the Democratic Republic of the Congo.

(13) Penetration calculations are Vodacom estimates.

18

DIVIDENDS AND DIVIDEND POLICY

All of Telkom’s issued and outstanding ordinary shares, including the class A ordinary share and

the class B ordinary share, rank equal for dividends. No dividend may be declared to a holder of the
class A ordinary share or class B ordinary share, unless the same dividend is declared to holders of
all ordinary shares. The following table sets forth information with respect to dividends paid by Telkom.
Dividends are expressed in Rands and translated, solely for the convenience of the reader, into
Dollars at the Rand noon buying rate described in Item 3. “Key Information–Exchange Rates” below
on the relevant dividend payment date. The actual rate that cash dividends are converted to Dollars
by the depositary may not equal the Rand noon buying rate on the dividend payment date.

Dividends paid per

Dividends paid

Total dividends

Dividend

Ordinary Share

per ADS

(millions)

cover

(1)

Year ended March 31,

ZAR

USD

ZAR

USD

ZAR

USD

Cover

2006

(2)

9.00

(3)

1.46

(3)

36.00

(3)

5.85

(3)

4,801.2

(3)

780.7

(3)

1.9x

2005

(4)

1.10

(5)

0.18

(5)

4.40

(5)

0.72

(5)

606.7

(5)

100.1

(5)

11.1x

2004

(6)

0.90

(7)

0.14

(7)

3.60

(7)

0.56

(7)

501.3

(7)

79.3

(7)

9.2x

2003

–

–

–

–

–

–

n/a

2002

–

–

–

–

–

–

n/a

(1)

Dividend cover is calculated by dividing profit for the year attributable to equity holders of Telkom by the dividend for the
year.

(2)

Based on 533,465,571 shares outstanding. As of March 31, 2006, 23,536,579 of the 544,944,899 issued shares were
held by Telkom and its subsidiaries.

(3)

Includes a 2005 financial year final ordinary dividend No. 10 of R4.00 per share and a special dividend of R5.00 per share
that was paid on July 8, 2005 to shareholders registered as of July 1, 2005.

(4)

Based on 551,509,083 shares outstanding. As of March 31, 2005, 23,566,248 of the 557,031,819 issued shares were
held by Telkom and its subsidiaries.

(5)

Paid on July 9, 2004.

(6)

Based on 557,031,819 shares outstanding. As of March 31, 2004, 3,185,736 of the 557,031,819 issued shares were held
by Telkom and its subsidiaries.

(7)

Special dividend.

On June 2, 2006, Telkom’s board of directors declared a 2006 financial year final ordinary

dividend No. 11 of R5.00 per share and a special dividend of R4.00 per share to be paid
on July 14, 2006 to shareholders registered as of July 7, 2006, which are not included in the table.

Telkom did not declare any dividends in the two years ended March 31, 2003 prior to its initial

public offering in order to repay debt and reinvest profits in its fixed-line network modernization,
rehabilitation and line-rollout program.

We cannot assure you that any dividend will actually be paid in the future or what the timing or

amount of any future dividends will be. Telkom’s current dividend policy aims to provide shareholders
with a competitive return on their investment, while assuring sufficient reinvestment of profits to enable
us to achieve our strategy. Telkom may revise its dividend policy from time to time. The determination
to pay dividends, and the amount of the dividends, will depend upon, among other things, the
following:

• our earnings;

• our financial condition;

• our capital requirements;

• the availability of cash and sustainability;

19

• the impact of currency exchange rate and inflation fluctuations;

• general business conditions and strategies and other investment opportunities;

• contractual restrictions on the payment of dividends;

• the possible effects on our credit worthiness;

• the pay-out and dividend ratios of other major South African companies and other

communications providers;

• dividends received from Vodacom; and

• other factors our board of directors may deem relevant, including future growth prospects.

Under South African law, a company may make payments to its shareholders if authorized thereto

by its organizational documents. A company may not make any payment, in whatever form, to its
shareholders if there are reasonable grounds for believing that:

• the company is or would, after the payment, be unable to pay its debts as they become due in

the ordinary course of business; or

• the consolidated assets of the company fairly valued, after the payment, would be less than the

consolidated liabilities of the company.

Under South African law, a shareholder is liable to a company for any payments received by the

shareholder from the company in violation of these restrictions.

Pursuant to Telkom’s memorandum and articles of association, for so long as the Government of

the Republic of South Africa is a significant shareholder, Telkom’s dividend policy and all declarations
of dividends and payments to shareholders must be approved by at least two of the directors
appointed by the Government. Pursuant to Telkom’s memorandum and articles of association, the
Government is a significant shareholder for so long as it holds the class A ordinary share and at least
15% of Telkom’s issued ordinary shares. This percentage is to be reduced from time to time to reflect
the dilutive effect of issuances of new ordinary shares, but may not be less than 10%.

Telkom’s ability to make future dividend payments will be determined based upon its financial

position under IFRS. The following table sets forth a reconciliation of retained earnings in accordance
with IFRS to distributable reserves in accordance with IFRS for the periods indicated.

Year ended March 31,

2004

2005

2006

2006

ZAR

ZAR

ZAR

USD

RESTATED RESTATED

(in millions)

Retained earnings of Telkom Group in accordance
with IFRS

13,482

19,231

22,896

3,723

Share of retained earnings of Vodacom

(3,918)

(4,029)

(4,284)

(697)

Distributable reserves in accordance with IFRS

9,564

15,202

18,612

3,026

The distribution of retained earnings of Vodacom is restricted, as Telkom requires the consent of

the other shareholder of Vodacom to declare dividends. As described in Item 10. “Additional
Information–Taxation,” Telkom is required to pay secondary tax on companies at a flat rate of 12.5% in
respect of the amount of certain dividends declared by it net of any dividends received from our joint
venture and certain subsidiaries. As a result of the payment of secondary tax on companies, the
amount of dividends that may actually be paid is less than the amount of distributable reserves.
Distributable reserves are available for distribution based on Telkom’s dividend policy. Telkom’s board

20

of directors decides the amount of distributable reserves to be reinvested in operations and the
amount of any remaining funds that are available for distribution to shareholders or possible share
repurchases.

Telkom expects to pay any cash dividends solely in Rands. Cash dividends payable to holders of

American Depository Shares, or ADSs, listed on the New York Stock Exchange will be paid to the
depositary’s custodian, which will convert the dividends into Dollars, at the rate of exchange
applicable on the date such dividends are paid, for disbursement to holders. Fluctuations in the
exchange rate between Rands and Dollars and expenses of the depositary will affect the Dollar
amounts actually received by holders of ADSs upon conversion by the depositary of such cash
dividends.

Provided that the relevant share certificate is endorsed “non-resident” or an entry is made to such

effect in the relevant electronic register, there is currently a blanket approval under the South African
exchange control regulations for the free transferability of cash dividends to holders of ordinary shares
or ADSs. See Item 10. “Additional Information–Exchange Controls.”

In addition to the corporate tax on taxable income of South African companies at a rate of 30% for

the 2005 financial year and 29% for the 2006 financial year, South African companies pay secondary
tax on companies as described above. Capitalization shares or stock dividends distributed to holders
of ordinary shares do not incur secondary tax on companies. Because of this tax treatment, it has
become common practice in South Africa for companies to offer capitalization shares in lieu of cash
dividends. Capitalization shares are shares issued by a company, the payment for which is allocated
out of the company’s reserves, including share premium, or unappropriated profits.

For a discussion of the material South African and US federal income tax provisions regarding the

taxation of dividends on ordinary shares and ADSs, see Item 10. “Additional Information–Taxation.”

Share Repurchases

As authorized by its shareholders at annual general meetings held on January 27, 2004,

October 14, 2004 and October 21, 2005, Telkom is authorized to purchase up to 20% of its issued
share capital. This authority is valid until Telkom’s next Annual General Meeting, or for 15 months from
the date of the resolution, whichever period is shorter.

As part of Telkom’s commitment to the optimal use of capital, the Telkom board approved

a R2 billion share buyback program on June 2, 2006.

In the year ended March 31, 2006, Telkom repurchased 12,086,920 of its ordinary shares at a

volume weighted average price of R124.31 per share, including costs. These ordinary shares have
been cancelled from the issued share capital by the Registrar of Companies.

Between August 3, 2004 and September 15, 2004 Rossal No 65 (Pty) Limited, or Rossal, a wholly

owned subsidiary of Telkom, repurchased 9,531,454 shares at a volume weighted average price of
R78.49 per share, including costs, which are being held in treasury for purposes of the Telkom
conditional share plan. On June 4, 2004, Telkom purchased Acajou (Pty) Limited, or Acajou, a wholly
owned subsidiary of Telkom, for share repurchase activities other than repurchases for the Telkom
conditional share plan. Between June 7, 2004 and September 30, 2004, Acajou purchased
10,849,058 shares at a volume weighted average price of R76.12 per share, including costs, which
are also being held in treasury.

In the year ended March 31, 2004, Rossal repurchased 3,185,736 shares at a volume weighted

averaged price of R74.58 per share, including costs, which are being held in treasury for purposes of
the Telkom conditional share plan.

21

In terms of the South African Companies Act, 61 of 1973, a subsidiary company may acquire up

to 10% of the shares in its holding company and if the holding company acquires its own shares
directly, such shares must be cancelled.

Telkom plans on continuing its share buy back strategy based on certain criteria. For additional

information regarding Telkom’s share repurchases, see Item 16E. “Purchases of Equity Securities by
the Issuer and Affiliated Purchasers.”

Taxation

A share repurchase and subsequent cancellation of shares by a South African company is

deemed to be a dividend in terms of the South African Income Tax Act, 58 of 1962, on the difference
between the nominal value of the share and the value purchased, unless purchased from the share
premium of the company that does not comprise capitalized profit. The tax on such a deemed
dividend is payable by the company at a rate of 12.5%.

22

EXCHANGE RATES

Unless otherwise specified, as used in this annual report:

• references to “Rand,” “R,” “ZAR” and “SA Cents” are to South African Rand and Cents, the

currency of the Republic of South Africa;

• references to “Dollars,” “$,” “USD” and “US Cents” are to the United States Dollar and Cents,

the currency of the United States; and

• references to the “Rand noon buying rate” are to the noon buying rates in New York City for

cable transfers in Rands as certified for customs purposes by the US Federal Reserve Bank of
New York expressed in Rands per $1.00.

For your convenience, this annual report contains translations of certain Rand amounts into

Dollars. You should not assume, however, that Rands could have been exchanged into Dollars at any
particular rate or at all. Unless otherwise stated, translations of Rand amounts into Dollars have been
made at R6.15 per $1.00, the Rand noon buying rate on March 31, 2006, the date of the Telkom
Group’s most recent balance sheet included in this annual report. These translations should not be
construed as representations that the Rand amounts could actually be converted into US dollars at
these rates or at all.

The table below shows the high, low, average and end of period Rand noon buying rates for the

periods indicated. The end of period Rand noon buying rate is computed on the last business day of
the relevant period and the average Rand noon buying rate is computed using the Rand noon buying
rate on the last business day of each month during the period indicated.

Year ended March 31,

High

Low

Average

End of period

2002

13.60

7.91

9.64

11.38

2003

11.36

7.90

9.74

7.90

2004

8.24

6.26

7.17

6.32

2005

7.05

5.62

6.20

6.22

2006

6.90

5.96

6.43

6.15

December

6.46

6.28

January

6.23

5.99

February

6.22

6.02

March

6.34

6.14

2007

April

6.17

5.99

May

6.71

6.00

June

7.43

6.63

July

7.23

6.83

On July 31, 2006, the Rand noon buying rate was R6.92 per $1.00.

Fluctuations in the exchange rate between the Rand and the Dollar will affect the Dollar amounts

received by holders of American Depositary Shares, or ADSs, each representing four ordinary shares
of Telkom, on conversion of dividends, if any, paid in Rands on the ordinary shares and may affect the
Dollar trading price of the ADSs on the New York Stock Exchange.

23

RISK FACTORS

You should carefully consider the risks described below in conjunction with the other information

and the consolidated financial statements of the Telkom Group and Vodacom and the related notes
thereto included elsewhere in this annual report before making an investment decision with respect
to Telkom’s ordinary shares or ADSs.

Risks Related to our Business

Increased competition in the South African telecommunications market may result in a
reduction in overall average tariffs and market share and an increase in costs in our fixed-line
business, which could cause our growth rates, operating revenue and net profit to decline and
our churn rates to increase.

Telkom had the exclusive right to provide public switched telecommunications services, including

international telephone services, in the Republic of South Africa until May 7, 2002 and is currently the
only provider of public switched telecommunications services in South Africa, but for a number of
years has competed with mobile operators, value added network service operators, or VANS
operators, Sentech Limited, formerly known as Sentech (Pty) Limited and referred to herein as
Sentech, which was issued an international carrier of carriers license and a multi media license in May
2002, and with service providers who use least cost routing technology. In September 2004, the South
African Minister of Communications granted an additional license to provide public switched
telecommunications services to a second national operator, SNO Telecommunications (Pty) Limited,
SNO-T, that is 30% owned by Transtel Limited, or Transtel, and Eskom Enterprises (Pty) Limited, or
Esitel, which are beneficially owned by the South African Government, and other strategic equity
investors, including 26% beneficially owned by TATA Africa Holdings (Pty) Limited, a member of the
TATA Group, a large Indian conglomerate with information and communications operations. ICASA
issued this license on December 9, 2005, however, SNO-T is not expected to commence business
activities until the second half of the 2006 calendar year. A process has also commenced to issue
additional licenses to small business operators to provide telecommunications services in
underserviced areas with a teledensity of less than 5%. These are referred to as underserviced areas
licensees, or USALs. The Minister of Communications has identified 27 of these underserviced areas.
ICASA has issued licenses to successful bidders in seven of them and has issued invitations to apply
for licenses in the remaining 20. It is expected that further licenses will be issued in the 2006 calendar
year.

In September 2004, the Minister of Communications issued determinations pursuant to which,

since February 1, 2005:

• mobile cellular operators have been permitted to obtain fixed telecommunications links from

parties other than Telkom;

• VANS operators and private network operators have been permitted to resell the

telecommunications facilities that they obtain from Telkom;

• VANS operators have been permitted to allow their services for the carrying of voice, including

voice over internet protocol;

• Telkom is no longer the sole provider of facilities to VANS operators; and

• licensing for the provision of payphone services has been expanded.

These determinations are incorporated in the Electronic Communications Act.

24

In March 2005, the Minister of Communications tabled a Convergence Bill in Parliament to

promote convergence and establish the legal framework for convergence in the broadcasting,
broadcasting signal distribution and telecommunications sectors that repealed the
Telecommunications Act, 103 of 1996, however, all existing licenses are to remain valid until
converted to new licenses in accordance with the new licensing regime and regulations made under
the Telecommunications Act are also to remain in force until new regulations required are made to
fully implement the provisions of the Electronic Communications Act. The bill, renamed the Electronic
Communications Bill, was passed by the Parliament of South Africa in December 2005 and signed by
the President of South Africa on April 18, 2006. The Electronic Communications Act, No. 36 of 2005,
came into effect on July 19, 2006. We expect that the new licensing framework included in the
Electronic Communications Act will result in the market becoming more horizontally integrated with a
number of separate licenses being issued for electronic communications network services, electronic
communications services, broadcasting services and the radio frequency spectrum and will
substantially increase competition in our fixed-line business. In addition, the process of converting our
licenses to the new licensing framework may be lengthy and complex and could result in the
imposition of additional obligations and limitations in connection with the converted licenses, which
could disrupt our business operations and decrease our net profit.

We expect that the introduction of number portability and carrier pre-selection could further

enhance competition and increase our churn rates. As competition intensifies, the main challenges our
fixed-line business faces are continuing to improve customer loyalty through improved services and
maintaining our leadership in the South African communications market. As a result of increasing
competition, we anticipate a reduction in overall average tariffs and market share and an increase in
costs in our fixed-line business, which could cause our growth rates, operating revenue and net profit
to decline.

Competition from the three existing mobile communications network operators in South Africa
has resulted in significant customer migration and call substitution from fixed-line to mobile
services. If this customer migration and call substitution continues, our growth rates,
operating revenue and net profit could decline.

Telkom competes for telephone customers with the three existing mobile communications network

operators, Vodacom, Mobile Telephone Network Holdings (Pty) Limited, a wholly owned subsidiary of
the MTN Group Limited, or MTN, a public company listed on the JSE Limited, or JSE, and Cell C (Pty)
Limited, or Cell C, which recently announced that it would be entering into a joint venture with Virgin
Mobile. Telkom also competes with service providers who use least cost routing technology that
enables fixed-to-mobile calls from corporate private branch exchanges to bypass our fixed-line
network by being transferred directly to mobile networks. Following the launch of Vodacom’s and
MTN’s 3G networks, Vodacom and MTN customers are also now able to browse the internet on a
high speed platform, which provides increased competition for our data services. Telkom has
experienced significant customer migration in recent years from fixed-line services to mobile services,
as well as substitution of calls placed using mobile services rather than our fixed-line service, with the
increase in mobile penetration in South Africa. If this migration continues, our growth rates, operating
revenue and net profit could decline.

The rapid growth in the mobile market in South Africa has resulted in a significant increase in
the number of Vodacom and Telkom calls terminating on mobile networks as opposed to our
fixed-line network. Vodacom’s and Telkom’s margins and net profit could decline if this trend
continues.

Vodacom and Telkom have experienced a significant change in the traffic mix as mobile

customers have increased relative to fixed-line customers. This resulted in an increasing percentage
of calls from Vodacom’s network terminating on other mobile networks rather than our fixed-line

25

network. Vodacom’s interconnection payments have increased and its margins have decreased
because the cost of terminating calls on other mobile networks is higher than the cost of terminating
calls on Telkom’s fixed-line network. As a result, Vodacom’s South African net interconnect revenue
has been declining in recent years. Similarly, Telkom has incurred increased payments to other
operators as a result of the growth in interconnection traffic for fixed-line calls terminating
on mobile networks. If mobile customers continue to increase and there is little or no growth in fixed-
line customers, this trend could continue and Vodacom’s and Telkom’s margins and net profit
could decline.

Increased competition in the mobile communications markets in South Africa and other
African countries may result in a reduction of Vodacom’s average tariffs and Vodacom’s
market share and increased customer acquisition and retention costs, which could cause
Vodacom’s growth rates, revenue and net profit to decline and its churn rates to increase.

Vodacom faces intense competition in the mobile communications markets in South Africa and

other African countries. At March 31, 2006, Vodacom estimates that it held approximately 58%,
MTN held approximately 33% and Cell C held approximately 9% of the South African mobile
communications market, based on total estimated customers. Increasing competition, together with
the further liberalization of the South African telecommunications industry, may result in a reduction
in Vodacom’s overall average tariffs, loss of market share and increased customer acquisition and
retention costs, which could cause Vodacom’s growth rates, revenue and net profit to decline.
In addition, the expected implementation of mobile number portability in the 2007 financial year and
the commencement of the Electronic Communications Act could further increase competition and
cause Vodacom’s churn rates to increase.

The value of Vodacom’s investments outside of South Africa and its revenue and net profit
may decline as a result of political, economic, regulatory and legal developments in the
countries where Vodacom has invested.

Vodacom currently has investments in mobile communications network operators in Lesotho,

Tanzania, the Democratic Republic of the Congo and Mozambique. These countries have political,
economic, regulatory and legal systems that are still in the process of transformation and are less
developed than those in the Republic of South Africa. Political or economic upheaval or changes in
laws and regulations or in their application may harm the operations of the companies in which
Vodacom invests and impact the value of these investments. The regulatory environments in these
countries often lack clarity in a number of areas and are subject to varying interpretations. In addition,
many of these countries suffer from extreme poverty, civil strife, political conflict and political
mismanagement, all of which could cause the value of Vodacom’s investments in these countries and
Vodacom’s revenue and net profit to decline. In particular, the first democratic elections in the
Democratic Republic of the Congo took place on July 30, 2006, the outcome of which could determine
whether there will be future political stability and economic growth.

Most of the fixed-line operators in these countries are state controlled. As a result, the mobile

communications network operators in which Vodacom has invested may encounter difficulties in
negotiating commercially acceptable interconnection agreements and collecting amounts due under
interconnection agreements as Vodacom has experienced in the Democratic Republic of the Congo
and is experiencing in Tanzania. In addition, Vodacom’s other African operations have local minority
shareholders and accordingly, Vodacom is subject to risks in its dealings with local shareholders that
their interests may not always be aligned with those of Vodacom. In addition, a number of jurisdictions
in which Vodacom invests have imposed price controls, particularly for interconnection, which could
reduce Vodacom’s net profit and cause the value of Vodacom’s investments in these other African
countries to decline. There are also foreign exchange control restrictions in South Africa, which may
restrict Vodacom’s ability to fund its investments in these countries, and there are foreign exchange
controls in a majority of these countries, which may restrict Vodacom’s ability to extract value from
these investments.

26

The number of available mobile operators and mobile licenses and other acquisition and
investment opportunities for our fixed-line business in other African countries and elsewhere
is limited. Moreover, the acquisition of mobile operators and licenses and the consummation
of other acquisitions and investments may be unsuccessful, which could have a material
adverse effect on Vodacom’s and Telkom’s future growth.

Vodacom is seeking future growth opportunities from acquisitions of mobile operators or licenses

in other sub-Saharan African countries. In addition, Telkom is pursuing other acquisitions and
investments in countries throughout the African continent and elsewhere. There are significant risks
associated with Vodacom’s and Telkom’s ability to identify and successfully acquire mobile operators
and licenses or make other acquisitions and investments. There are a limited number of available
mobile operators and licenses and acquisition and investment opportunities and there is substantial
competition for the types of mobile operators and licenses Vodacom targets and acquisition and
investment opportunities that would meet the criteria of Telkom and the shareholders of Vodacom.
As described in the previous risk factor, many countries in Africa have political, economic, regulatory
and legal systems that are still in the process of transformation and are less developed than those in
the Republic of South Africa and many of these countries suffer from extreme poverty, civil strife,
political conflict and political mismanagement and are subject to less developed corporate
governance, business practices and more bureaucratic and regulatory delays. In addition,
South African foreign exchange control limitations could delay or prevent investments by Vodacom
and Telkom in other countries. There are also a limited number of partners that are able to arrange
their own funding to invest in ventures in other African countries with Telkom and Vodacom and
Telkom does not have prior experience investing outside of South Africa. To the extent that Vodacom
and Telkom are not able to grow through other acquisitions and investments, our stock price could
decline. Moreover, Vodacom and Telkom could expend a substantial amount of time and capital
pursuing acquisitions they do not consummate, which could adversely affect their business, financial
condition, results of operations and growth.

The expansion of Vodacom’s and Telkom’s operations may place a significant strain on their

management, financial and other resources. Their ability to manage future growth through acquisitions
and investments will depend upon their ability to monitor operations, maintain effective quality,
corporate governance and financial controls and significantly expand their internal management,
technical and accounting systems, all of which will result in higher operating expenses.
The integration of acquired mobile operators or licenses and other businesses and investments may
involve, among other things, integration of switching, transmission, technical, sales, marketing, billing,
accounting, quality control, management, personnel, payroll, regulatory compliance and other systems
and operating hardware and software, some of which may be incompatible with their existing systems
and therefore may need to be replaced. In addition, telecommunications operators generally
experience higher customer and employee turnover rates during and after an acquisition or launch of
service. We cannot assure that Vodacom and Telkom will be able to integrate successfully the mobile
operators, mobile licenses or other operations they may acquire.

If we lose key personnel or if we are unable to hire and retain highly qualified employees, our
business operations could be disrupted and could impact on our ability to compete
successfully.

Our success, including the success of Vodacom, depends in large part on our ability to hire and

retain highly qualified employees who possess the requisite qualifications and technical skills.
Telkom and Vodacom do not have long term employment agreements with a majority of their senior
management, any of whom may terminate their employment. The loss of key personnel could disrupt
our business operations if we are unable to replace them with similarly qualified individuals. We
expect that competition for employees in the South African communications industry will increase as
new competitors enter the market, including SNO-T. If we lose a number of our key employees to our
competitors or are not able to continue to attract and retain highly qualified employees, our business
operations could be disrupted and our ability to compete could be harmed.

27

We do not have the right to appoint the majority of Vodacom’s directors or members of its
directing committee and the Vodacom joint venture agreement contains approval rights that
may limit our flexibility and ability to implement our preferred strategies.

Although we are a 50% shareholder in Vodacom, Vodafone Group Plc, or Vodafone, beneficially

owns the remaining 50% interest in Vodacom. As a result, our flexibility and ability to implement our
preferred strategies may be limited by the fact that we do not have the right to appoint the majority of
Vodacom’s directors or members of its directing committee. In addition, under our memorandum and
articles of association, the Government is entitled to nominate the directors we appoint to the
Vodacom board. The Vodacom joint venture agreement, which governs the relationship between
Telkom and Vodafone, requires each of Vodacom’s shareholders who own 10% or more of Vodacom’s
shares, which are currently Telkom and Vodafone, to approve certain material transactions. As a result
of these factors, we may not be able to impose strategies on Vodacom that we believe to be beneficial
to us without the approval of Vodafone.

If Vodacom does not continue to pay dividends or make other distributions to Telkom,
Telkom may not be able to pay dividends and service its debt and could be required
to lower or defer capital expenditures, dividends and debt reduction, which could cause
the trading prices of Telkom’s ordinary shares and ADSs to decline.

Telkom receives dividends from Vodacom which Telkom uses to fund a portion of its capital and

operating expenditures and service its debt and other financial obligations. Vodacom is legally distinct
from Telkom and has no obligation to pay dividends or make other distributions to Telkom. Vodacom’s
ability to pay dividends and make other distributions to Telkom may be restricted by, among other
things, its operations and the availability of funds and the terms of credit and debt arrangements
entered into by it, as well as statutory and other legal restrictions. In addition, Vodacom’s ability to pay
dividends or make distributions to Telkom and its other shareholder requires the approval of
Vodacom’s shareholders who own 10% or more of Vodacom’s shares, which are currently Telkom and
Vodafone. To the extent that Vodacom is unable to, or otherwise does not, pay dividends or make
other distributions to Telkom in the future, Telkom may not be able to pay dividends and service its
debt and could be required to lower or defer capital expenditures, dividends and debt reduction, which
could cause the trading prices of Telkom’s ordinary shares and ADSs to decline.

If we are not able to continue to improve and maintain our management information and other
systems, our ability to provide accurate and comprehensive operating information and to
compete may be harmed.

Our management information systems do not provide management with certain operating data

and financial information on a real-time basis that at times has made our budgeting and planning
processes difficult. In addition, our customer and other management information systems and product
catalogue are not yet fully integrated and therefore are not capable of providing us with
comprehensive and detailed operating information, and we are not able to provide a single bill for
customers with multiple locations and products or configure products and services across voice and
data domains. To address these problems, we are in the process of developing and implementing a
unified customer management system capable of generating a single view of the customer. The full
integration between our various operational support systems is not expected to be complete until the
2008 financial year. Since November 2003, we have renewed our focus on information risk
management and have identified several requirements for improved security of Telkom’s information
technology systems. Completion and compliance verification is expected during the 2007 financial
year. To the extent we are not able to improve our systems and fully address these vulnerabilities, our
ability to provide accurate and comprehensive operating information and to compete effectively in the

28

increasingly liberalized South African communications market may be harmed. In addition, some of
the information systems in Vodacom’s other African operations are new and are not capable of
providing management on a real-time basis with operating data and financial information.

We have negative working capital, which may impair our operating and financial flexibility and
require us to defer capital expenditures and we may not be able to pay dividends and our
operations and financial condition could be adversely affected.

We had negative consolidated working capital of approximately R3.0 billion as of March 31, 2006,

compared to negative consolidated working capital of approximately R2.3 billion as of March 31, 2005
and approximately R3.2 billion as of March 31, 2004. Negative working capital arises when current
liabilities are greater than current assets. We intend to fund current liabilities through a combination of
operating cash flows, new borrowings and borrowings available under existing credit facilities. We had
R9.5 billion available under existing credit facilities as of March 31, 2006. If we are unable to generate
sufficient operating cash flows or borrowings to fund our current liabilities, our operating and financial
flexibility could be impaired and we may be required to defer capital expenditures and may not be
able to pay dividends and our business operations and financial condition could be negatively
impacted.

Continuing rapid changes in technologies could increase competition or require us to make
substantial additional investments in technologies, which could reduce our return on
investment and net profit.

The services we offer are technology intensive. The development of new technologies, such as

fixed wireless services and packet radio services, could increase competition and make our
technology obsolete. We may have to make substantial additional investments in new technologies
to remain competitive. New technologies we choose may prove not to be commercially successful.
As a result, we could lose customers, fail to attract new customers or incur substantial costs in order
to maintain our customer bases, which could reduce our return on investments and net profit.

Delays in the development and supply of communications equipment may hinder the
deployment of new technologies and services and cause our growth rates and net profit to
decline.

Our operations, including the operations of Vodacom, depend in part upon the successful and

timely supply of evolving fixed and mobile communications technologies. We use technologies from a
number of suppliers and make significant capital investments in connection with communications
technologies. If technologies are not developed or delivered by our suppliers on time or do not
perform according to expectations or achieve commercial acceptance, we may be required to delay
service introductions and make additional capital expenditures and we could be required to write-off
investments in technology, which could cause our growth rates and net profit to decline.

If we continue to experience high rates of theft, vandalism, network fraud, payphone fraud and
lost revenue due to non-licensed operators in our fixed-line business, our fixed-line fault rates
could increase and our operating revenue and net profit could decline.

We have historically experienced significant cable theft, theft of solar panels and wireless

communications equipment, vandalism of payphones, network fraud, such as non-licensed calls, and
payphone fraud in our fixed-line business. Theft and vandalism have caused our fixed-line fault rates
to increase and the repair time on our network and the network downtime associated with such faults
and network fraud and payphone fraud have resulted in lost operating revenue and significant costs.
We have also lost operating revenue to non-licensed operators providing telecommunications services

29

in South Africa. If we are unable to continue to minimize theft, vandalism, network fraud and payphone
fraud or if we continue to lose operating revenue to non-licensed operators in our fixed-line business,
our fixed-line fault rates could increase and our operating revenue and net profit could decline.

We need to improve our internal control over financial reporting and our independent auditors
may not be able to attest to the effectiveness of our internal control over financial reporting,
which could have a significant adverse effect on our business operations, reputation and net
profit.

We are in the process of making improvements to our internal control over financial reporting in

order to allow management to report on, and our independent auditors to attest to, our internal control
over financial reporting, as required by Section 404 of the U.S. Sarbanes-Oxley Act of 2002 and the
rules and regulations of the SEC thereunder, which we refer to as Section 404. The management
certification and auditor attestation requirements of Section 404 will initially apply to Telkom for its
annual report on Form 20-F for the year ended March 31, 2007. In addition, as discussed in Item 15.
“Controls and Procedures,” Telkom has identified errors in its consolidated financial statements and
determined that it was necessary to restate its previously issued consolidated financial statements
and its auditors, Ernst & Young, have notified Telkom that they had identified two significant
deficiencies under standards established by the Public Company Accounting Oversight Board and
Vodacom’s auditors, Deloitte & Touche, have advised that they have identified two significant
deficiencies at Vodacom that were reported to Telkom’s and Vodocom’s audit committees. We may
identify other conditions that may result in significant deficiencies or material weaknesses in the
future, which could impact our ability to comply with Section 404 in a timely manner. If we are not able
to implement the requirements of Section 404 in a timely manner or with adequate compliance, our
independent auditors may not be able to attest to the effectiveness of our internal control over
financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such
as the SEC. In addition, we may be required to incur costs in improving our internal control system.
Any such action could negatively affect our results and have a significant adverse effect on our
business operations, reputation and net profit.

Actual or perceived health risks relating to mobile handsets, base stations and associated
equipment and any related publicity or litigation could make it difficult to find attractive sites
for base stations and reduce Vodacom’s growth rates, customer base, average usage per
customer and net profit.

Concern has been expressed that the electromagnetic signals from mobile handsets, base

stations and associated equipment may pose health risks. Actual or perceived risks of mobile
handsets or base stations and related publicity or litigation, could make it difficult to find attractive
sites for base stations and reduce Vodacom’s growth rates, customer base, average usage per
customer and net profit.

Risks Related to Telkom’s Ownership by the Government of South Africa and Major
Shareholders

Telkom’s major shareholders are entitled to appoint the majority of Telkom’s directors and
exercise control over Telkom’s strategic direction and major corporate actions.

The Government of the Republic of South Africa owned 38.0% of Telkom’s issued and 39.8% of

Telkom’s outstanding ordinary shares plus the class A ordinary share as of June 30, 2006.
Through its ownership and voting arrangements provided for in Telkom’s articles of association, the
Government is entitled to appoint five of Telkom’s directors, and is able to exert considerable influence
over Telkom’s corporate governance, strategic direction and major corporate actions and to appoint
directors of Telkom’s subsidiaries and the Vodacom joint venture. In addition, as of June 30, 2006, the
Public Investment Corporation, an investment management company wholly owned by the South
African Government, held 16.1% of Telkom’s issued and 16.9% of Telkom’s outstanding ordinary

30

shares, which includes 7.5% of Telkom’s issued and 7.9% of Telkom’s outstanding shares acquired in
the market, and, through its ownership of Telkom’s class B ordinary share, is entitled to appoint one of
Telkom’s directors.

Telkom’s articles of association require Telkom to obtain written consent from the Government

before taking actions that would limit Telkom’s ability to provide public switched telecommunication
services. Telkom’s articles of association also require the approval of directors appointed by the
Government in order for Telkom or any of its subsidiaries, including Vodacom, to enter into major
corporate actions and transactions, including amendments to Telkom’s management structure
and the powers of Telkom’s operating committee (which was terminated by the Telkom board at which
time certain powers were delegated to the chief executive officer assisted by an executive committee),
the approval of Telkom’s dividend policy and payment of dividends, increases in Telkom’s
indebtedness beyond certain limits and changes of control. As a result, without the approval and
participation of the Government, Telkom is not able to consummate transactions involving an actual or
potential change of control, including transactions in which you might otherwise receive a premium for
your ordinary shares or ADSs over market prices. Because the Government exercises control over
Telkom, holders of ordinary shares and ADSs lack meaningful power to approve decisions of Telkom’s
board of directors or to influence our strategic direction and major corporate actions.

The Government of the Republic of South Africa may use its position as shareholder of
Telkom and policymaker for, and customer of, the telecommunications industry in a manner
that may be favorable to our competitors and unfavorable to us.

The Government of the Republic of South Africa owned 38.0% of Telkom’s issued and 39.8% of

Telkom’s outstanding ordinary shares as of June 30, 2006. The Government also holds significant
equity stakes in other industry participants, including Sentech, and has an indirect 30% equity interest
in SNO-T. To further its policy of liberalization of the telecommunications industry, the Government
may adopt and implement policies and exercise its right to approve regulations that benefit our
competitors but are not beneficial to us. In addition, to further other political or social objectives, the
Government may be required to act in a manner that may be detrimental to our business but
advantageous to our competitors.

The Government of the Republic of South Africa is also one of our customers. We estimate that

Government customers, excluding certain Government owned parastatal companies, accounted for at
least 9% of our total fixed-line operating revenue, excluding directory services and other revenue, in
the year ended March 31, 2006. The Government could transfer some or all of its business to SNO-T
or other operators when they commence operations. Legislation has been enacted to centralize all
procurement of telecommunications and information technology services by the Government, through
one agency. If the Government transfers some or all of its business to other operators, our operating
revenue and net profit could decline.

Risks Related to Regulatory and Legal Matters

The regulatory environment for the telecommunications industry in South Africa is evolving
and regulations addressing a number of significant matters have not yet been made.
The interpretation of existing regulations, the adoption of new policies or regulations
that are unfavorable to us, or the imposition of additional license obligations on us, could
disrupt our business operations and could cause our net profit and the trading prices of
Telkom’s ordinary shares and ADSs to decline.

The licensing and provision of telecommunications services in the Republic of South Africa is

subject to the Telecommunications Act and the extensive regulations made under the
Telecommunications Act. The Telecommunication Act was repealed by the Electronic Communications
Act when the Electronic Communications Act came into effect on July 19, 2006. While a new licensing

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regime was created by the Electronic Communications Act, all existing licenses are to remain valid
until converted to new licenses in accordance with the new licensing regime. Regulations made under
the Telecommunications Act are also to remain in force until new regulations required are made to
fully implement the provisions of the Electronic Communications Act. As a result, the regulatory
environment is evolving, lacks clarity in a number of areas and is subject to interpretation, review and
amendment as the telecommunications industry is further developed and liberalized. In addition, the
regulatory process entails a public comment process, which, in light of the politicized issue of
privatization of industries such as telecommunications in South Africa, makes the outcome of the
regulations uncertain and may cause delays in the regulatory process. A number of significant matters
have not been addressed or clarified, including:

• the process of converting our licenses to the new legal framework provided by the Electronic

Communications Act and the extent of additional obligations that may be imposed on our
converted licenses as a result of proposals by ICASA to reintroduce quality of service
obligations that lapsed in 2002;

• whether and the extent to which our licenses may be amended as a result of the licensing of

SNO-T and whether any additional obligations may be imposed on us at that time or thereafter;

• the extent to which our fixed-line business will be required to make its facilities or access lines

available to SNO-T or other competitors to provide services, other than public switched
telecommunications services, on a resale basis;

• the extent to which our fixed-line business may be required to unbundle its local loop;

• the legal and regulatory framework that will ultimately be established to implement the

provisions of the Electronic Communications Act; and

• the additional obligations that may be imposed on us in terms of the Electronic Communications

Act if we are found to be dominant in a market in which we operate.

A bill amending the ICASA Act, No.13 of 2000, was passed by the Parliament of South Africa

in December 2005 and signed by the President of South Africa and came into effect on July 19, 2006.
The amendment to the ICASA Act redefines and expands the powers of ICASA to control, in
conjunction with the Electronic Communications Act, the communications market. The main provisions
of the ICASA Act amendments are the removal of the power of the Minister to approve regulations
made by ICASA, increased power of ICASA to conduct enquiries and to enforce its rulings and the
establishment of a Complaints and Compliance Committee to assist ICASA in hearings and making
findings on complaints and allegations of non-compliance with the Electronic Communications Act.

It has been reported that ICASA may currently lack adequate resources to effectively fulfill its

regulatory and licensing functions and to deal with regulatory challenges that continue to change
given the rapidly evolving telecommunications environment. ICASA’s capacity may be further strained
by the workload that will be imposed on it by the Electronic Communications Act. This combination of
factors creates further uncertainties in the regulatory arena and the ability of ICASA to effectively fulfill
its functions. In addition, while we believe our relationship with ICASA has improved in recent years,
we had disagreements with, and cases against, ICASA in the past. We cannot predict the outcome or
timing of any amendments to applicable regulations or the interpretation thereof, the release of new
regulations or their impact on us. However, changes in the regulation of telecommunications services
in South Africa, the imposition of unfavorable terms in our licenses or the loss or unfavorable
amendment of any license could disrupt our business operations and could cause our net profit and
the trading prices of Telkom’s ordinary shares and ADSs to decline.

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In addition, new laws and regulations that may require our business customers to make use of

suppliers complying with black economic empowerment requirements may affect us. If Telkom is not
able to meet the minimum requirements of these black economic empowerment initiatives or
restrictions, some of our business customers may be required or elect to obtain all or some of their
telecommunications services from our competitors who may fulfill such requirements.

Our tariffs are subject to approval by the regulatory authorities, which may limit our flexibility
in pricing and could reduce our revenues and net profit. Vodacom’s revenue and net profit
could also decline if wholesale price controls are imposed on it.

Regulations made under the Telecommunications Act impose a price cap on a basket of Telkom’s

services and a sub-basket of those services provided to residential customers, including leased lines
up to and including lines of 2 Mbps of capacity and the rental and installation of business exchange
lines. Approximately 80% of Telkom’s operating revenue in the year ended March 31, 2005 was
included in this basket, compared to approximately 66% of Telkom’s operating revenue in the year
ended March 31, 2006. The reason for the decrease was due to a change in methodology of the
amount included in the basket for purposes of our filing with ICASA in the 2006 financial year to
exclude the mobile termination fees for fixed-to-mobile calls. Our tariffs for these services are filed
with ICASA for approval. Revenue generated from services for which we had exclusivity may not be
used to subsidize competitive services. Effective from August 1, 2005 through July 31, 2008, the
annual permitted increase in revenues from both the whole basket and the residential sub-basket was
lowered from 1.5% to 3.5% below inflation and ADSL products and services have been added to the
basket. In addition, the price of no individual service within the residential sub-basket can be
increased by more than 5% above inflation except where specific approval has been received from
ICASA. Draft regulations have also been published for comment on the pricing and provision of ADSL
services, which would, among other things, prohibit Telkom from charging a monthly rental for
providing ADSL service and limit Telkom to charging only an installation fee for such service. These
limitations on our customer tariffs limit our pricing flexibility and could reduce our net profit.
Furthermore, Telkom’s revenue and net profit could decline substantially if the pricing aspects of the
regulations are not amended to allow full cost recovery and reasonable profit on the provision of ADSL
services. Similarly, Vodacom’s revenue and net profit could decline if price controls are imposed on it.

We are parties to a number of legal and arbitration proceedings, including complaints before
the South African Competition Commission. If we lose these legal and arbitration proceedings,
we could be prohibited from engaging in certain business activities and could be required to
pay substantial penalties and damages, which could cause our revenue and net profit to
decline and have a material adverse impact on our business and financial condition.

We are parties to a number of legal and arbitration proceedings, including complaints filed by the

South African Value Added Network Services Association and the South African Internet Service
Providers Association with the South African Competition Commission, alleging anti-competitive
practices. If we were to lose these legal and arbitration proceedings, we could be required to cease
these practices, divest these businesses and fined a penalty of up to 10% of Telkom’s annual
turnover, excluding the turnover of subsidiaries and joint ventures, for the financial year prior to the
dates of the complaints. In addition, Telcordia Technologies Incorporated, a New Jersey corporation,
instituted arbitration proceedings against Telkom in March 2001 seeking to recover approximately
$130 million for monies outstanding and damages, plus costs and interest at a rate of 15.5% per year,
relating to the supply of a customer assurance and activation system by Telcordia. As competition
continues to increase, we expect that we will become involved in an increasing number of disputes
regarding the legality of services and products provided by us and third parties. These disputes may
range from court lawsuits to complaints lodged by or against us with various regulatory bodies such
as the complaint launched by ORION against Telkom with the South African competition authorities

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relating to certain discount plans that Telkom offers. See “Item 8. Financial Information–Legal
Proceedings.” We are not currently able to predict when these disputes may be resolved or the
amount that we may eventually be required to pay, however, we have not included provisions for any
of these claims in our financial statements. In addition, we may need to spend substantial amounts
defending or prosecuting these claims even if we are ultimately successful. If we were to lose these or
future legal and arbitration proceedings, we could be prohibited from engaging in certain business
activities and could be required to pay substantial penalties and damages, which could cause our
revenue and net profit to decline and have a material adverse impact on our business and financial
condition. We may be required to fund any penalties or damages from cash flows or drawings on our
credit facilities, which could cause our indebtedness to increase.

If we are unable to negotiate favorable terms, rates and conditions for the provision of
interconnection services and facilities leasing services, our business operations could be
disrupted and our net profit could decline.

Telkom is required to provide interconnection services to the mobile operators, SNO-T and all

other entities that lawfully provide telecommunications services in South Africa and to lease or
otherwise make its telecommunications facilities available to any entity lawfully providing or utilizing
telecommunications services in South Africa. Telkom will also be required to allow SNO-T to use all of
its telecommunications facilities for the provision of public switched telecommunications services on a
resale basis and to provide shared access to the local loop for the first two years of its license. Telkom
may also be required to lease or otherwise make its telecommunications facilities available to SNO-T
beyond the first two years. The Electronic Communications Act provides that ICASA may prescribe a
framework for the unbundling of Telkom’s local loop. The Minister of Communications has announced
that she planned to issue policy directives with respect to the time period for the unbundling of Telkom’s
local loop and the sharing of access to Telkom’s undersea cables and has formed a committee to
evaluate the unbundling of Telkom’s local loop. The terms and conditions for the provision of these
services and facilities are, or will be, set out in interconnection agreements and facilities leasing
agreements negotiated and agreed to by Telkom with these other entities.

ICASA is entitled to issue, and has issued, regulations relating to interconnection and facilities

leasing. Telkom has been declared a Major Operator, and consequently is required to provide
Essential Services and Essential Facilities at the Long Run Incremental Cost, or LRIC, of these
services, including a reasonable allocation of common costs and cost of capital, to Public Operators,
such as MTN, Vodacom, Cell C, Sentech, USALs and SNO-T. None of these operators have been
declared to be Major Operators to date. However, in May 2005 ICASA initiated an enquiry into
whether MTN and Vodacom should be declared Major Operators. If any of them is found to be a
Major Operator, they would be required, like Telkom, to provide interconnection and facilities leasing
services at cost based prices to other operators. New draft interconnection and facilities leasing
regulations have been proposed by ICASA and published for comment that would extend the right to
cost based prices to all licensees. To the extent that a Major Operator, such as Telkom, is unable to
reach agreement with these entities for the provision of these services, including the applicable tariffs,
or to the extent that the terms and conditions of a Major Operator’s agreements are found to be
inconsistent with the relevant legislation or regulations, such terms and conditions may be determined
and imposed on the Major Operator by ICASA. The Electronic Communications Act replaced the
concept of Major Operator status with that of significant market power in a market segment and
empowers ICASA to impose pro-competitive conditions on operators found to have significant market
power, which may affect the manner in which facilities are leased and interconnection is to be
provided by such operators, and the charges thereof. If we are unable to negotiate favorable terms
and conditions for the provision of the services and facilities covered by the guidelines or ICASA finds
Vodacom to be a Major Operator or Telkom or Vodacom to have significant market power or otherwise
imposes terms and conditions that are unfavorable to us, our business operations could be disrupted
and our net profit could decline.

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If we are unable to recover the substantial capital and operational costs associated with the
implementation of carrier pre-selection and number portability or are unable to implement
these requirements in a timely manner, our business operations could be disrupted and our
net profit could decline. The implementation of carrier pre-selection and number portability
will also likely further increase competition and cause our churn rates to increase.

The Telecommunications Act mandated that fixed-line operators were required to implement

carrier pre-selection, which will enable customers to choose and vary their fixed-line
telecommunications carrier for long distance and international calls. Call-by-call carrier pre-selection
must be implemented and must be provided by an operator within two months of it being requested by
another operator and fully automatic pre-selection must be implemented and must be provided by an
operator within ten months of it being requested by another operator. Telkom will not be able to fully
implement carrier pre-selection until the SNO-T’s interconnection systems and the inter-operator
process and systems to support carrier pre-selection become available, however, Telkom does not
believe that it will be able to implement automatic carrier pre selection within ten months of it being
requested. The Telecommunications Act also mandated that number portability to enable customers to
retain their fixed-line and mobile telephone numbers if they switch between fixed-line operators or
between mobile operators be introduced. It is currently expected that Telkom will be required to
provide “block” number portability in the 2006 calendar year and individual number portability later,
but within 12 months from being requested by an operator. The full set of regulations for the
implementation of fixed number portability, however, have not yet been published. Telkom has
received a request from SNO-T to implement both “block” and individual number portability and
discussions on the implementation of the required inter operator systems are under way. Telkom will
not be able to determine the time required to implement number portability until the functional
specification regulations are published. On September 30, 2005, ICASA published the number
portability regulations and functional specifications for mobile number portability which requires that
mobile number portability must be implemented by June 30, 2006. ICASA and the cellular operators
have been in consultation over the last ten months to agree to the functional and technical
specifications to ensure compliance with the Telecommunications Act. As a result, mobile number
portability is expected to be implemented in the 2007 financial year. We will incur substantial set-up
and maintenance costs in connection with the implementation of these requirements, which could
disrupt our business operations. The extent of recoverability of these costs have not yet been
determined and finalized by ICASA. We may not be able to implement these requirements in a timely
manner, which could result in our business being disrupted and cause our net profit to decline. In
addition, the implementation of these requirements will likely further increase competition and cause
our churn rates to increase.

The implementation of the Regulation of Interception of Communications and Provisions of
Communication-Related Information Act, or RICA, could be costly and may negatively impact the
ability of Telkom and Vodacom to register customers and may require them to disconnect existing
customers, causing their penetration rates, growth rates, revenue and net profit to decline.

RICA is a South African law that regulates the authorization for and actual lawful interception of

communications. The Act came into effect on September 30, 2005, with the exception of certain
sections requiring the collection of customer details and identity verification prior to providing mobile
cellular telecommunications services. The compliance date for these sections has not been
determined and will come into effect by presidential proclamation. RICA obligates service providers to
obtain and store customer details, including names, identity numbers, residential and business or
postal addresses and requires verification of customers’ details with reference to a certified copy of a
customer’s identity document and his or her actual identity document. Telkom has not completed the
implementation of all of these requirements and Vodacom may not be able to implement these
requirements by the time period, which has not yet been determined, in which it is required to implement them. Furthermore, the implementation of RICA is expected to require significant costs resulting from its paper verification and storage requirements and negatively impact the ability of Telkom and Vodacom to register customers

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due to its burdensome registration process, which may not be practical and may require the
disconnection of customers for whom such information is unavailable. As a result, Telkom’s and
Vodacom’s business operations could be disrupted and their net profit could decline and they may be
liable for penalties to the extent they are not able to comply with RICA’s requirements.

In addition, commencing in June 2006, all licensees, including Telkom and Vodacom, were

required to install equipment and implement procedures to allow lawful interception by law
enforcement agencies in South Africa, including the interception of communications and the
provisioning of call-related (billing) information. Telkom was not able to comply with all of these requirements by June 2006, and is in consultation with the Office for Interception Centres and the Department of Communication to adopt a phased approach for compliance in the first quarter of the 2007 calendar year.  To the extent that we are unable to comply with all the requirements of RICA or are unable to substantially recover these costs of compliance, our business operations could be disrupted and our net profit could decline and we may be liable for penalties.

If Telkom is required to comply with the provisions of the South African Public Finance
Management Act, 1 of 1999, or PFMA, and the provisions of the South African Public Audit Act
of 2004, or PAA, Telkom could incur increased expenses and its net profit could decline and
compliance with the PFMA and PAA could result in the delisting of Telkom’s ordinary shares
and ADSs from the JSE and New York Stock Exchange.

Telkom is required to comply with the provisions of the PFMA and PAA. Telkom applied for and

obtained a temporary exemption from many of the provisions of the PFMA until November 2007 and
has been informed by the South African Auditor-General that it will not be required to comply with the
PAA until such date. If Telkom does not obtain a further exemption from the PFMA or if it is required to
comply with the PAA or its existing exemption from the PFMA is revoked for any reason or it is
otherwise required to comply with the PFMA or PAA, Telkom may be compelled to prepare financial
statements in accordance with accounting principles and practices prescribed by the Government of
the Republic of South Africa which may not correlate with IFRS or US GAAP and would require
Telkom to incur additional costs. Telkom would also be required to comply with, what it believes to be,
extremely prescriptive treasury regulations issued pursuant to the PFMA and PAA, to provide the
Government with advance access to proprietary and potentially price sensitive information and to seek
the prior approval of South African governmental authorities to enter into certain material agreements,
to maintain certain bank accounts, to formulate and implement certain investment strategies or to
discharge its auditors, which would preclude Telkom from acting in the same manner as its
competitors and other listed companies. If Telkom is required to comply with the PFMA and PAA,
Telkom may not be able to comply with the Listings Requirements of the JSE or the listing rules of the
NYSE and Telkom’s ordinary shares and ADSs could be delisted.

Our total property tax expense could increase significantly and our net profit could decline
as a result of the enactment of the South African Municipal Property Rates Act, 6 of 2004.

On May 11, 2004, the South African Municipal Property Rates Act, 6 of 2004, was enacted.

Pursuant to this new Act, municipalities are required to levy property tax in accordance with a rates
policy that must be adopted and regularly reviewed by municipalities with community participation
facilitated through the municipalities annual budget process. Due in part to the fact that no rate has
to date been prescribed, it is too early to assess exactly how the new Act would affect us. As a
substantial landowner in South Africa, our total property tax expense could increase significantly and
our net profit could decline as a result of the implementation of this Act.

Risks Related to the Republic of South Africa

Fluctuations in the value of the Rand and inflation rates in South Africa could have a
significant impact on the amount of Telkom’s dividends, the trading prices of Telkom’s
ordinary shares and ADSs, our operating revenue, operating expenses, net profit, capital
expenditures and on the comparability of our results between financial periods.

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The value of the Rand as measured against the Dollar has historically fluctuated significantly.

The value of the Rand as measured against the Dollar has increased from R11.38 per $1.00 as of
March 29, 2002 to R7.90 per $1.00 as of March 31, 2003 and R6.32 per $1.00 as of March 31, 2004.
The value of the Rand as measured against the Dollar was R6.22 per $1.00 as of March 31, 2005
and R6.15 per $1.00 as of March 31, 2006.

Fluctuations in the exchange rate between the Rand and the Dollar could have an adverse

impact on:

• the Dollar equivalent of any dividends and distributions on Telkom’s ordinary shares and ADSs

payable in Rands;

• the Dollar equivalent of the Rand denominated prices of Telkom’s ordinary shares; and

• the market value of Telkom’s ADSs in the United States.

These fluctuations could also impact the amount in Rand terms of our non-Rand denominated

debt, impact our non-Rand denominated financing costs and operating and capital expenditures and
cause our net profit to fluctuate. In addition, the volatility of the Rand as measured against the Dollar
and the Euro resulted in net foreign exchange losses of R9 million and R776 million in the years
ended March 31, 2005 and March 31, 2004, respectively, and a profit of R113 million in the year
ended March 31, 2006, in terms of IAS39. In addition, fluctuations in currency exchange rates
between the South African Rand and the currencies in African countries where Vodacom has
investments could decrease the value of these businesses and Vodacom’s and our net profit. See
Item 5. “Operating and Financial Review and Prospects–Operating Results–Principal Factors that
affect our Results of Operations Volatility of the Rand.”

The levels of unemployment, poverty and crime in South Africa may cause the size of the
South African communications market and our growth rates, operating revenue and net profit,
as well as the trading prices of Telkom’s ordinary shares and ADSs, to decline.

While South Africa features a highly developed financial and legal infrastructure at the core of its

economy, levels of unemployment, poverty and crime exist. These issues may hinder investment into
South Africa, prompt emigration of skilled workers and may have an impact on economic growth.
Although it is difficult to predict the effect of these issues on South African businesses or the
Government of the Republic of South Africa, they may cause the size of the communications market
and our growth rates, operating revenue and net profit, as well as the trading prices of Telkom’s
ordinary shares and ADSs, to decline.

The high rates of HIV infection in South Africa could cause the size of the South African
communications market and our growth rates, operating revenue and net profit to decline.

South Africa has a high rate of HIV infection. The exact impact of increased mortality rates due to

AIDS deaths on the cost of doing business in South Africa and the potential growth in the economy is
unclear at this time although employee related costs in South Africa are expected to increase as a
result of the AIDS epidemic and the size of the South African population and the communications
market could decline. Our growth rates, operating revenue and net profit could decline if employee
related expenses increase or our labor supply or the size of the South African population and
communications market decline.

Significant labor disputes, work stoppages, increased employee expenses as a result of
collective bargaining and the cost of compliance with South African labor laws could limit our
operating flexibility and disrupt our fixed-line business operations and reduce our net profit.

Trade unions represented approximately 74% of our total Telkom employees and approximately

10% of Vodacom’s employees as of March 31, 2006. Trade unions have resisted workforce reductions

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and publicly opposed our privatization and have instituted and in the future could institute work
stoppages to oppose changes in our shareholding structure or gain leverage in negotiating collective
bargaining agreements. Approximately 23% of Telkom’s employees participated in a work stoppage in
March 2006 and approximately 31% of Telkom’s employees participated in an additional work
stoppage in April 2006 with respect to compensation issues, during which period Telkom received
increased reports of sabotage, vandalism and other incidents. In addition, a number of South African
trade unions, including the trade unions of our employees, have close links to various political parties
and have had a significant influence in South Africa as vehicles for social and political reform and in
the collective bargaining process. Since 1995 South Africa has enacted various labor laws that
enhance the rights of employees, which have imposed costs on us and have limited our flexibility and
ability to implement workforce reductions. If we are unable to implement workforce reductions as
necessary, particularly as a result of increased competition, or experience significant labor disputes,
work stoppages, increased employee expenses as a result of collective bargaining or compliance with
labor laws, our fixed-line business operations could be disrupted and our net profit could be reduced.

South African exchange control restrictions could hinder our ability to make foreign
investments and procure foreign denominated financings.

South Africa’s exchange control regulations restrict transactions between residents of the

Common Monetary Area, which consists of South Africa, the Republic of Namibia, and the
Kingdoms of Lesotho and Swaziland, and non-residents of the Common Monetary Area.
In particular, South African companies are generally not permitted, without the prior approval of the
Exchange Control authorities, to export capital from South Africa or to hold foreign currency in excess
of certain prescribed limits.

These restrictions could hinder our ability to make foreign investments and obtain foreign

denominated financing. While the South African Government has relaxed exchange controls in recent
years, it is difficult to predict whether or how it will further relax or abolish exchange control measures
in the future. See Item 10. “Additional Information–Exchange Controls.”

Risks Related to Ownership of Telkom’s Ordinary Shares and ADSs

The future sale of a substantial number of Telkom’s ordinary shares or ADSs could cause the
trading prices of Telkom’s ordinary shares and ADSs to decline.

As of June 30, 2006, Government of the Republic of South Africa owned 38.0% of Telkom’s

issued and 39.8% of Telkom’s outstanding ordinary shares, plus the class A ordinary share, the Public
Investment Corporation owned 16.1% of Telkom’s issued and 16.9% of Telkom’s outstanding ordinary
shares, which includes 7.5% of Telkom’s issued and 7.9% of Telkom’s outstanding shares acquired in
the market, plus the class B ordinary share, and the Elephant Consortium owned 6.9%
of Telkom’s issued and 7.2% of Telkom’s outstanding ordinary shares. Telkom has adopted a
management and employee incentive plan that provides for the issue or grant of up to 22,281,272
ordinary shares, of which 4,344,894 have been granted as of March 31, 2006. Sales of substantial
amounts of shares by Telkom’s shareholders, or by Telkom, or the appearance that a large number of
shares are available for sale, could cause the trading prices of Telkom’s ordinary shares and ADSs to
decline. Telkom has entered into a registration rights agreement with the Government of the Republic
of South Africa. Pursuant to the agreement, the Government has the right to cause Telkom to either
effect a JSE public offering in South Africa, or register with the Securities and Exchange Commission
all or part of their ordinary shares, or both.

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Telkom is a public limited liability company incorporated under the laws of the Republic of South

Africa. The rights of holders of Telkom’s ordinary shares and therefore many of the rights of Telkom’s
ADS holders are governed by Telkom’s articles of association and by South African law. These rights
differ in material respects from the rights of shareholders in companies incorporated elsewhere, such
as in the United States. In particular, South African law significantly limits the circumstances under
which shareholders of South African companies may institute litigation on behalf of a company.
For a description of the differences between shareholders’ rights under South African law and
Delaware law, see Item 10. “Additional Information–Memorandum and Articles of
Incorporation–Comparison of Shareholders’ Rights under South African and Delaware Law.”

It may not be possible for you to effect service of legal process, enforce judgments of courts
outside of South Africa or bring actions based on securities laws of jurisdictions other than
South Africa against Telkom or against members of its board.

Telkom and all of the members of its board of directors and executive officers are residents of

South Africa. In addition, Telkom’s assets and the assets of members of its board of directors and
executive officers are located in whole or in substantial part in South Africa. As a result, it may not be
possible for you to effect service of legal process within the United States or elsewhere outside of the
Republic of South Africa upon our directors or officers, including with respect to matters arising under
US federal securities laws or applicable state securities laws. Moreover, it may not be possible for you
to enforce against Telkom or the members of its board of directors and executive officers judgments
obtained in courts outside South Africa, including the United States, based on the civil liability
provisions of the securities laws of those countries, including those of the United States. A foreign
judgment is not directly enforceable in South Africa, but constitutes a cause of action, which may be
enforced by South African courts with the approval of the South African Minister of Trade and Industry.
In addition, awards of punitive damages will not be enforceable in South Africa. Although it is possible
for an investor to bring an action against Telkom in a South African civil court to enforce rights in terms
of US federal securities laws, these laws will not be enforced if they are penal or revenue or taxation
laws or laws which are contrary to South African public policy. It is not possible therefore for an
investor to seek to impose criminal liability on us in a South African court arising from a violation of US
federal securities laws.

Your ability to sell a substantial number of ordinary shares and ADSs may be restricted by the
limited liquidity of ordinary shares traded on the JSE.

The principal trading market for Telkom’s ordinary shares is the JSE. Historically, trading volumes

and liquidity of shares listed on the JSE have been low in comparison with other major markets. In
addition, as of March 31, 2006, only 2.6% of the 237,123,985 ordinary shares publicly traded were
represented by ADSs trading on the NYSE. The limited liquidity of the ordinary shares and ADSs
could depress the trading prices of the ordinary shares and ADSs and could limit your ability to sell a
substantial number of ordinary shares or ADSs in a timely manner, especially
by means of a large block trade.

Your rights as a shareholder are governed by South African law, which differs in material
respects from the rights of shareholders under the laws of other jurisdictions.

39

Item 4.

Information on the Company

HISTORY AND DEVELOPMENT OF THE COMPANY

Telkom was incorporated on September 30, 1991 as a public limited liability company registered

under the South African Companies Act, 61 of 1973, as amended. Telkom’s registration number is
1991/005476/06. Telkom’s principal executive offices are located at Telkom Towers North,
152 Proes Street, Pretoria 0002, Gauteng Province, South Africa. Telkom’s telephone number is
(27) (12) 311 3566 and its internet address is http://www.telkom.co.za. Information contained on
Telkom’s website is not part of this annual report.

Recent Developments

Liberalization of South African communications market

Licensing of the second national operator

In September 2004, the South African Minister of Communications granted an additional license to

provide public switched telecommunications services to a second national operator, SNO-T, that is
30% owned by Transtel and Esitel, which are beneficially owned by the South African Government,
and other strategic equity investors, including 26% beneficially owned by TATA Africa Holdings (Pty)
Limited, a member of the TATA Group, a large Indian conglomerate with information and
communications operations. ICASA issued this license on December 9, 2005, however, SNO-T is not
expected to commence business activities until the second half of the 2006 calendar year.

Underserviced areas licenses

A process has also commenced to issue additional licenses to small business operators to

provide telecommunications services in underserviced areas with a teledensity of less than 5%.
The Minister of Communications has identified 27 of these underserviced areas. ICASA has issued
licenses to successful bidders in seven of them and has issued invitations to apply for licenses in the
remaining 20. It is expected that further licenses will be issued in the 2006 calendar year.

Determinations by the South African Minister of Communications

In September 2004, the Minister of Communications issued determinations pursuant to which,

since February 1, 2005:

• mobile cellular operators have been permitted to obtain fixed telecommunications links from

parties other than Telkom;

• VANS operators and private network operators have been permitted to resell the

telecommunications facilities that they obtain from Telkom;

• VANS operators have been permitted to allow their services for the carrying of voice, including

voice-over internet protocol;

• Telkom is no longer the sole provider of facilities to VANS operators; and

• licensing for the provision of payphone services has been expanded.

These determinations are incorporated in the Electronic Communications Act.

Electronic Communications Act

In March 2005, the Minister of Communications tabled a Convergence Bill in Parliament to

promote convergence and establish the legal framework for convergence in the broadcasting,
broadcasting signal distribution and telecommunications sectors that repealed the

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Telecommunications Act. The bill, renamed the Electronic Communications Bill, was passed by the
Parliament of South Africa in December 2005 and signed by the President of South Africa on April 18,
2006. The Electronic Communications Act, No. 36 of 2005 came into effect on July 19, 2006. The
Electronic Communications Act aims to supplement or replace current sector specific legislation and
change the market structure from a vertically integrated, infrastructure based, market structure
to a horizontal, service based, technology neutral, market structure with a number of separate
licenses being issued for electronic communications network services, electronic communications
services, broadcasting services and the radio frequency spectrum. All existing licenses are to remain
valid until converted to new licenses in line with the new licensing regime and regulations made under
the Telecommunications Act are also to remain in force until new regulations required are made to
fully implement the provisions of the Electronic Communications Act. As a result, Telkom’s licenses will
be converted to new licenses in accordance with the new licensing regime. We expect that the new
licensing framework will result in the market becoming more horizontally integrated and will
substantially increase competition in our fixed-line business. In addition, the process of converting our
licenses to the new licensing framework may be lengthy and complex and could result in the
imposition of additional obligations and limitations in connection with the converted licenses, which
could disrupt our business operations and decrease our net profit.

See “–Regulation and License Requirements–Regulation–Overview.”

ICASA Act Amendment Bill

A bill amending the ICASA Act, No 13 of 2000, was passed by the Parliament of South Africa in

December 2005 and was signed by the President of South Africa and came into effect on July 19, 2006.
The amendment to the ICASA Act redefines and expands the powers of ICASA to control, in conjunction
with the Electronic Communications Act, the communications market. The main provisions of the ICASA
Act amendments are the removal of the power of the Minister to approve regulations made by ICASA,
increased power of ICASA to conduct enquiries and to enforce its rulings and the establishment of a
Complaints and Compliance Committee to assist ICASA in hearings and making findings on complaints
and allegations of non-compliance with the Electronic Communications Act.

Carrier pre-selection

The Telecommunications Act mandated that fixed-line operators were required to implement

carrier pre-selection, which will enable customers to choose and vary their fixed-line
telecommunications carrier for long distance and international calls. Regulations were only published
on June 24, 2005 for the implementation of carrier pre-selection in two phases. In phase one, call-by-
call carrier pre selection must be implemented and must be provided by an operator within two
months of it being requested by another operator. In phase two, fully automatic pre-selection must be
implemented and must be provided by an operator within ten months of it being requested by another
operator. Telkom had already conditioned its exchanges to handle call-by-call carrier pre-selection by
December 31, 2003. Telkom will not be able to fully implement carrier pre-selection until the SNO-T’s
interconnection systems and the inter-operator process and systems to support carrier pre-selection
become available, however, Telkom does not believe that it will be able to implement automatic carrier
pre-selection within ten months of it being requested.

Number portability

The Telecommunications Act mandated that number portability to enable customers to retain their

fixed-line and mobile telephone numbers if they switch between fixed-line operators or between
mobile operators be introduced. A framework number portability regulation was published at the end of
2004 that generically provides for the introduction of fixed-to-fixed and mobile-to-mobile number
portability. It is currently expected that Telkom will be required to provide “block” number portability
in the 2006 calendar year and individual number portability later, but within 12 months from being

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requested by an operator. The full set of regulations for the implementation of fixed number portability,
however, have not yet been published. Telkom has received a request from SNO-T to implement both
“block” and individual number portability and discussions on the implementation of the required inter-
operator systems are under way. Telkom will not be able to determine the time required to implement
number portability until the functional specification regulations are published. On September 30, 2005,
ICASA published the number portability regulations and functional specifications for mobile number
portability which requires that mobile number portability must be implemented by June 30, 2006.
ICASA and the cellular operators have been in consultation over the last ten months to agree to the
functional and technical specifications to ensure compliance with the Telecommunications Act. As a
result, mobile number portability is expected to be implemented in the 2007 financial year.

Telkom’s price control regulation

Regulations made under the Telecommunications Act impose a price cap on a basket of Telkom’s

services and a sub-basket of those services provided to residential customers, including leased lines
up to and including lines of 2 Mbps of capacity and the rental and installation of business exchange
lines. Our tariffs for these services are filed with ICASA for approval. Revenue generated from
services for which we had exclusivity may not be used to subsidize competitive services. Effective from
August 1, 2005 through July 31, 2008, the annual permitted percentage increase in revenues from both
the whole basket and the residential sub-basket was lowered from 1.5% to 3.5% below inflation and
ADSL products and services have been added to the basket. In addition, draft regulations have been
published for comment on the pricing and provision of ADSL services, which would, among other
things, prohibit Telkom from charging monthly rental for providing ADSL service and limit Telkom to
charging an installation fee for such service. See Item 3. “Key Information–Risk Factors–Risks
Related to Regulatory and Legal Matters–Our tariffs are subject to approval by the regulatory
authorities, which may limit our flexibility in pricing and could reduce our net profit. Vodacom’s revenue
and net profit could decline if wholesale price controls are imposed on it.” and Item 4. “Information on
the Company–Business Overview–Fixed-line Communications–Fees and Tariffs–Tariff rebalancing”
and Item 4. “Information on the Company–Regulation and License Requirements.”

Business Connexion offer

On April 4, 2006, Telkom announced its firm intention to make an offer to acquire the entire issued

share capital of Business Connexion Group Limited, or BCX, other than the BCX shares held as
treasury shares and, if the trustees of the BCX share incentive trust so agree, the BCX shares held by
the BCX share incentive trust. Telkom has offered to acquire the outstanding options in BCX on the
same terms and conditions as the offer for the shares. The offer would be implemented by way of a
scheme of arrangement in terms of section 311 of the South African Companies Act, to be proposed
by Telkom between BCX and its shareholders.

Telkom believes that the transaction will advance Telkom’s ongoing data strategy. In particular,

Telkom believes that the transaction will enhance Telkom’s ability to offer its customers end-to-end
solutions across the information communications technology value chain. Telkom’s strength has to
date been on information communications technology services relevant to its core connectivity
proposition, managed network and internet access. BCX offers a complementary service offering.
Telkom believes that the transaction will enable Telkom to have a meaningful presence in the
information technology services market extending its value chain with BCX’s capabilities in business
application and support management, business process outsourcing and other information technology
related complementary lines of business.

BCX has defined a strategy to expand into the communications arena and has been considering

a relationship with a communications company to that effect. If the offer is successful, BCX is
expected to continue to operate as a standalone or separate business unit within Telkom. BCX
expects to retain and expand its service offering and service its clients with ongoing commitment.

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Telkom’s offer is for the entire issued share capital of BCX at a cash consideration of R9.00 per

share for an aggregate of R2.4 billion, including outstanding options. In addition, Telkom has agreed to
BCX paying a dividend of R0.25 per share following the scheme meeting, but prior to the
implementation of the scheme. Furthermore, Telkom has agreed to BCX continuing to pay dividends
in the ordinary course of business in line with its current policy to maintain a three times dividend
cover ratio, excluding exceptional items, provided that such dividends do not materially alter the net
cash position of BCX as of November 30, 2005, unless such diminution in cash occurred due to an
increase in assets of BCX.

On June 12, 2006, BCX’s shareholders voted in favor of the scheme and on June 20, 2006, the

South African courts sanctioned the scheme, subject to the approval of the offer by the South African
competition authorities, either unconditionally or subject to such conditions as may be acceptable to
Telkom by no later than December 15, 2006, or such later date as agreed between Telkom and BCX.

Telkom’s offer remains subject to the fulfilment, by no later than December 15, 2006, of the

following conditions precedent:

• a certified copy of the order of court sanctioning the scheme being registered by the South

African Registrar of Companies;

• the approval of the offer by the South African competition authorities, either unconditionally or

subject to such conditions as may be acceptable to Telkom; and

• the approval of the scheme by all regulatory authorities if and to the extent necessary, including the

South African Reserve Bank, the South African Securities Regulation Panel, the JSE and ICASA.

Telkom has also entered into and agreement with Gadlex (Pty) Limited pursuant to which it has

the right to acquire an additional minority interest in Business Connexion (Pty) Limited, BCX’s major
operating subsidiary, at the implied value of the offer for BCX, from a portion of Gadlex’s 25%
investment in Business Connexion (Pty) Limited. This agreement is subject to a number of conditions
and may change.

Vodafone’s acquisition of an additional 15% beneficial interest in Vodacom

On April 20, 2006, Vodafone acquired 100% of the shares of VenFin Limited, who ultimately

owned 15% in Vodacom, thus increasing its beneficial interest in Vodacom to 50%.

Vodacom’s acquisitions

Vodacom acquired a 51% stake in Cointel VAS (Pty) Limited, or Cointel, for approximately

R84.3 million on August 1, 2005. Cointel’s core business is providing value added and m-commerce
services to the telecommunications industry.

An offer to acquire the cellular business of Africell Cellular Services (Pty) Limited, or Africell, an

exclusive Vodacom dealer in South Africa, was accepted on April 6, 2006. The acquisition is subject to
a number of conditions, including approval by the South African Competition Commission.

Vodacom‘s change in South African definition of active customers

Vodacom’s South Africa operations historically defined active customers as customers with a SIM

card that had revenue generating activity in the three months leading up to the reporting date. Up to
mid June 2006, calls forwarded to voicemail were regarded as revenue generating activity and such
SIM cards were classified as active customers. An analysis of the customer base, based on a
statistical sampling, has revealed that a large number of SIM cards have calls forwarded to voicemail
as their only revenue generating activity. The majority of such messages are never retrieved by the
customer. Vodacom estimates that these SIM cards have an ARPU of less than R1 per month, which
is below the cost of maintaining such SIM cards on the network.

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Vodacom has therefore decided to change its definition of active customers to exclude calls

forwarded to voicemail from the definition of revenue generating activity. Such SIM cards would be
disconnected from the network after being inactive for a 215 consecutive day period in accordance
with Vodacom South Africa’s current disconnection policy. The retrieval of a voice message by a
customer is classified as a revenue generating activity.

Based on statistical analyses, Vodacom estimates that approximately 3.5 million affected pre-paid

SIM cards included in Vodacom South Africa’s customer base on June 30, 2006 will be deleted by
December 31, 2006. It is also expected that monthly churn from July 2006 onwards would increase as
a result of the activity rule change.

Agreement with SAVVIS

In July 2006, Telkom and SAVVIS Inc, a NASDAQ listed provider of IT infrastructure services for business

applications, signed a strategic collaboration agreement to work on businessgrowth opportunities. Under the terms of the agreement, Telkom will provide SAVVIS’ utility computing and managed hosting services to its customers, including local businesses and global organizations with operations in South Africa. This alliance is also expected to enable Telkom South Africa to provide SAVVIS with network services into this region. The collaboration is part of a strategic move by Telkom to continue to deliver increased value to the business community in South Africa and is expected to enable Telkom to provide its customers with leading technologies.

Appointment of new CEO

On August 17, 2005, the Telkom board announced the appointment of Mr. Papi Molotsane as the

new chief executive officer of Telkom with effect from September 1, 2005.

Historical Background

Prior to 1991, the former Department of Posts and Telecommunications of South Africa provided

telecommunications and post office services in South Africa on an exclusive basis. In 1991, the
Government of South Africa transferred the entire telecommunications enterprise of the Department of
Post and Telecommunications of South Africa to a new entity, Telkom, as part of a commercialization
process intended to liberalize certain sectors of South Africa’s economy. Between 1991, when Telkom
was incorporated and 1996, when the South African Telecommunications Act was enacted, we were
the exclusive provider of public switched telecommunications services, including international voice
services in South Africa, acting pursuant to the now repealed South African Post Office Act, 44 of
1958. Telkom remained a wholly state owned enterprise until May 14, 1997, when the Government of
South Africa sold a 30% equity interest in Telkom to Thintana Communications LLC, a Delaware
limited liability company, 60% beneficially owned by SBC Communications, Inc. and 40% beneficially
owned by Telekom Malaysia S.D.N. Berhard.

As part of the sale to Thintana Communications, the then Minister of Posts, Telecommunications

and Broadcasting of South Africa entered into an agreement with Thintana Communications under
which Thintana Communications undertook significant operational and managerial responsibilities and
acquired the ability to exercise effective operational and managerial control over us until May 2002.
Pursuant to the agreement, Thintana Communications had the power to staff certain management
positions with individuals seconded to Telkom from SBC Communications and Telekom Malaysia. In
addition, Thintana Communications and the Government were entitled to appoint a number of
directors to Telkom’s board of directors, based on their ownership of Telkom, and a number of our
corporate actions were subject to specific approval by Thintana Communications and the Government
or their board representatives. These matters generally included approval of business plans, annual

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budgets, training programs and payment of dividends. Until May 2002, Thintana Communications was
also entitled to appoint the majority of the members of Telkom’s operating committee, thus granting it
control over many of our significant operational matters. These matters generally included the
preparation and implementation of business plans and annual budgets for approval by Telkom’s board
of directors and the performance of obligations and the exercise of rights under Telkom’s public
switched telecommunications services license.

On March 7, 2003, we completed our initial public offering and listing on the JSE and NYSE,

pursuant to which the Government of South Africa sold a total of 154,199,467 ordinary shares,
including 14,941,513 ordinary shares through the exercise of an over-allotment option.

BUSINESS OVERVIEW

Business Summary

Telkom is one of the largest companies registered in South Africa and one of the largest

communications services provider on the African continent based on operating revenue and assets.
We had consolidated operating revenue of R47.6 billion ($7.7 billion), profit for the year attributable to
the equity holders of Telkom of R9.2 billion ($1.5 billion) and cash flow from operating activities of
R9.5 billion ($1.5 billion) in the year ended March 31, 2006 and we had total assets of R57.5 billion
($9.4 billion) and equity attributable to the equity holders of Telkom of R29.2 billion ($4.7 billion) as of
March 31, 2006. As of March 31, 2006, we had approximately 4.7 million telephone access lines in
service and 99.9% of our telephone access lines were connected to digital exchanges. We offer
business, residential and payphone customers a wide range of services and products, including:

• fixed-line voice services, including subscriptions and connections services, local, long distance,

fixed-to-mobile and international voice services, interconnection and hubbing communications
services, international voice over internet protocol services, subscription based value-added
voice services and customer premises equipment rental and sales;

• fixed-line data services, including domestic and international data transmission services, such

as point to point leased lines, ADSL services and packet-based services, managed data
networking services and internet access and related information technology services;

• directory and wireless data services through our Telkom Directory Services and Swiftnet

subsidiaries, respectively; and

• mobile communications services, including voice services, data services, value-added services

and handset sales through Vodacom.

Vodacom is our mobile communications joint venture with Vodafone. Vodacom is the largest

mobile communications network operator in South Africa with an estimated market share of
approximately 58% as of March 31, 2006 based on total estimated customers. Vodacom had
23.5 million customers as of March 31, 2006, of which 19.2 million were in South Africa. Vodacom has
investments in mobile communications network operators in Lesotho, Tanzania, the Democratic
Republic of the Congo and Mozambique. Vodacom had consolidated revenue of R34.0 billion
($5.5 billion), net profit attributable to equity shareholders of R5.0 billion ($815 million) and
cash flow from operating activities of R4.5 billion ($732 million) in the year ended March 31, 2006 and
total assets of R24.8 billion ($4.0 billion) and equity attributable to equity holders of Vodacom
of R8.4 billion ($1.4 billion) as of March 31, 2006.

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Our Competitive Strengths

We believe that we are well-positioned to strengthen our business and successfully meet future

competition based on the following:

We have the leading market position and are well placed to face competition in the South
African fixed-line communications market.

We believe our leading market position and our strong brand recognition will enable us to

successfully meet competition in the fixed-line communications market without significant future fixed-
line roll-out. Key to achieving our objectives is our continued focus on rigorous cost management,
efficiency improvements, deployment of key technologies and the successful implementation of our
business strategy.

Customer retention is one of our key focus areas and we have undertaken the following actions

to ensure we retain our customers:

• placed customer-centricity at the core of our corporate strategy and refocused our emphasis

from a traditional communications organization to a customer-centric organization;

• focused our marketing initiatives on creating greater awareness of our range of consumer

products and business solutions to ensure that our customers view us as a competitive and
innovative telecommunications provider that caters to their individual needs;

• refocused our sales and marketing force into more specialized divisions and entered into long

term contracts with a number of our larger corporate and business customers;

• improved the efficiency and quality of our network, including commencing the evolution of our

fixed-line network to a next generation network with an enhanced internet protocol service
capability;

• improved distribution channels through the launch of TelkomDirect and enhanced Vodashop

distribution and improved our online distribution channel by offering fully automated purchasing
and provisioning of TelkomInternet via the telkomsa.net website; and

• enhanced the value proposal to our customers by launching packages, such as PC bundle and

Telkom Closer.

We have a fully digital fixed-line network that provides service to every major urban area in
South Africa.

We believe our extensive digital fixed-line network places us in a strong position to compete with

new providers of communications services as it enables us to sell value-added voice and data
services. Since 1997, we have:

• modernized our fixed-line network, completed our fixed-line line roll-out program and, as of

March 31, 2006, had 99.9% of our telephone access lines connected to digital exchanges;

• modernized and enhanced our fixed-line network’s resiliency and performance through the

deployment of synchronous digital hierarchy managed self-healing optical fiber rings and by
increasing our use of optical fiber;

• deployed a national network operations center with the ability to proactively monitor our network

and offer managed data networking services to global and corporate customers;

• deployed a national business solution center alongside our national network operations center

and our data center which provides Telkom with a centralized information technology backbone;

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• invested in the South Atlantic Telecommunications Cable-3/West African Submarine Cable/South

Africa Far East, or SAT-3/WASC/SAFE, submarine cable system, which provides increased fiber
optic transmission capability between South Africa and international destinations;

• enhanced our core and access network to meet increased demand for broadband services such

as xDSL;

• supplemented our fixed line access network with point to multipoint wireless access and WiFi;

• enhanced our intelligent service platform capabilities through the introduction of softswitch

technology; and

• evolved our internet protocol network to a carrier class multi protocol label switching, or MPLS,

enabled network with quality of service that supports enhanced services such as internet
protocol and virtual private networks.

We are an integrated communications service provider of bundled voice, data, video and
internet services with the expertise to expand our service offerings.

Our network and resources enable us to provide customers with a wide range of integrated

communications services, including voice services, data communications services, video services and
internet services. We have undertaken the following actions to strengthen our data communications
service capabilities and improve our integrated communications service offerings:

• successfully launched WiFi in 2005, ADSL in August 2002 and ISDN in 1995 and have

introduced several flexible and cost effective options for these products;

• developed extensive experience in designing and operating customized data communications

and managed data networking products and services, including managed local and wide area
networks;

• established contracts with a number of leading communications equipment and software

suppliers such as Amdocs, MDSI, Marconi, Alcatel, Siemens, Cisco Systems, Hughes Network
Systems, Gilat and Sun Microsystems to provide fully integrated communications solutions over
our core fixed-line network and satellites and have introduced several flexible and cost effective
options for these products;

• deployed an extensive voice-over-internet protocol, or VoIP, network, and launched a voice over

internet protocol regional clearing house to serve as a hub for voice traffic on the African
continent; and

• successfully introduced a full range of private branch exchange, or PABX, systems sourced

from LG Electronics, with the capability to integrate with IP and DSL technologies.

We have a highly qualified management team.

We have appointed a high quality management team. We believe our management team and

employees have the required experience and knowledge to execute our business strategy in the face
of increased competition. Rapidly changing technology, increasing specialization requirements and
capacity gaps necessitate ongoing development and training. Telkom continues to invest significantly
in its employees to ensure that the appropriate business skills are available to meet customer
requirements. Telkom has developed detailed plans to identify high potential individuals within the
company who can be developed for future senior management positions to ensure all future employee
requirements are met. Telkom has demonstrated the strength of its succession and retention plans by
appointing approximately 80% of senior management vacancies from within the company, utilizing the
existing skills and potential of its current employee base.

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Vodacom is the leading South African mobile communications network operator with strong
brand recognition, extensive network coverage and distribution channels.

Vodacom is the largest mobile communications network operator in South Africa with an estimated

market share of approximately 58% as of March 31, 2006 based on total estimated customers.
Vodacom has an extensive network that covers approximately 97.5% of South Africa’s population
based on the last official census conducted in 2001 and approximately 69.4% of the total land surface
area of South Africa as of March 31, 2006. Vodacom has a broad distribution network consisting of
Vodacom owned shops and sales forces and independent dealers, franchises, national chains and
Vodacom Direct shops as well as an extensive informal distribution channel servicing primarily the
emerging market.

Vodacom is leveraging its successful experience in South Africa to selectively expand into
other African countries, primarily in Sub-Saharan Africa.

Vodacom is pursuing future growth through selected mobile expansion initiatives in other African

markets, primarily in Sub-Saharan Africa. Investments outside of South Africa are evaluated and
monitored against key investment criteria, focusing primarily on countries with stable economic and
political conditions or good prospects for growth, market leadership and profitability. Other key factors
include Vodacom’s ability to gain majority ownership, develop strong local partnership relationships
and obtain non-recourse financing. Other African operations are branded under the “Vodacom” name.

Vodacom benefits from an experienced and long-serving management team complemented by
its experienced international and local shareholders, Vodafone and us.

Vodacom has an experienced, long-serving management team with a record of innovation as the

first commercial 3G network operator in South Africa, the first mobile communications network
operator in the world to offer prepaid mobile communications services on an intelligent network
platform and to offer its customers coverage across the whole of Africa where commercial roaming
based on the Global System for Mobile, or GSM, communications technology is available. Vodacom
was also the first South African mobile communications network operator to provide nationwide
coverage in South Africa.

Vodacom benefits from the financial, operational and managerial expertise of its shareholders,

Vodafone and us. Vodacom has an alliance with Vodafone, pursuant to which Vodacom is able to
market Vodafone branded products and services, such as the Vodafone Mobile Connect Card
Vodafone live!, Mobile TV and BlackBerry®. Vodacom’s alliance with Vodafone also provides
Vodacom access to Vodafone’s global research and development, High Speed Downlink Packet
Access or HSDPA, which enhances 3G data speeds, and access to Vodafone’s marketing and buying
powers.

Our Group Strategy

Our vision is to be a leading customer and employee centered information and communications

technology, or ICT, solutions service provider. We are focused on balancing the needs of all
stakeholders while seeking long term sustainable and profitable growth. Our commitment to the
socio-economic transformation of South Africa underpins this strategy.

In seeking to sustain the creation of value in response to developments in our dynamic market

environment, our management has implemented certain shifts in our strategic emphasis. We are
increasing our focus on customers and employees, while continuing to balance the needs of all
stakeholders.

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We intend to focus on the following primary imperatives to support growth:

• Enhancing customer satisfaction through customer centricity;

• Retaining revenue and generating growth;

• Evolving our fixed-line network to a next generation network in order to support profitable

growth through prudent cost management;

• Engaging Telkom’s employees;

• Repositioning Telkom stakeholder management to create healthy relationships with all

stakeholders; and

• Capitalizing on the growing mobile communications market in South Africa and other African

markets through Vodacom.

Enhancing customer satisfaction through customer centricity

Telkom’s goal is to develop a customer-centric culture that permeates its entire organization

through people, processes and systems, with the objective of making Telkom the customer’s service
provider of choice in the ICT market. In this regard, Telkom is aiming to improve its ratings in the
South African Customer Survey Index performance year-on-year. Telkom’s strategy in this area is to:

– introduce a companywide customer centric corporate culture;

– focus on customer facing staff to ensure they have the appropriate skills to deliver excellent

customer service;

– review organization and work design to support and enable customer centricity;

– closer align rewards and recognition programs to customer centricity; and

– improve customer service.

Retaining revenue and generating growth

Telkom is pursuing growth opportunities beyond South African borders and is developing new

offerings in its rapidly transforming market in order to counter and maintain diminishing revenue
streams with new ones. Telkom’s aim is to minimize the impact of competition from existing or new
entrants and penetrate new markets to supplement diminishing revenue streams. Telkom’s main focus
will be to:

– aggressively grow data and converged internet protocol services;

– grow DSL penetration by focusing on price, content, speed and channels;

– develop and increase penetration of internet protocol and voice over internet protocol solutions;

and

– grow annuity income by increasing sales of bundled product and service packages.

To ensure effective delivery of end-to-end service offerings and customer-specific solutions,

Telkom intends to continuously assess the viability of developing alliances, partnerships, mergers and
acquisitions with other leading players. Telkom will also seek group strategies to support its revenue
retention and growth strategies. Telkom’s focus will be in the following two areas:

– increasing synergies with Vodacom; and

– pursuing information technology acquisition opportunities.

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Telkom is also seeking new value enhancing opportunities outside South Africa and the African

continent to achieve continued growth. Telkom is pursuing the following primary opportunities:

– fixed/mobile;

– fixed only;

– mobile only;

– internet service provider services;

– data and broadband services; and

– value added network service provider services.

Telkom will seek to consider the following investment strategies when opportunities arise:

– strategic equity partnerships;

– acquisitions;

– joint ventures;

– management contracts; and

– acquisition of new licenses.

Evolving our fixed-line network to a next generation network in order to support profitable
growth through prudent cost management

Telkom is seeking to evolve its network, operating support systems, information technology and

skills fit to a next generation network in order to support its growth strategy, while expanding existing
services and applying continuing prudent cost management. Telkom is adopting an evolutionary
approach through incremental rollout of a next generation network gradually evolving from its legacy
networks. Telkom’s objectives and goals for 2010 are to:

– attain an information communications technology – capable next generation network;

– materially migrate to an internet protocol based next generation network to enable Telkom to

provide a new range of services and converged voice, data and video products as a means
of generating incremental revenues; and

– consolidate its network to create opportunities for cost savings.

Telkom believes that its next generation network strategy will enable it to:

– offer new products, services and features based on broadband delivered over a next

generation network, thereby creating new sources of revenue;

– remain competitive in a rapidly growing market, where new next generation network - based

services are created and offer faster time to market;

– migrate towards a network with reduced network infrastructure, thereby minimizing long-term

capital expenditure and operating expenditure; and

– retain revenue for products, services and features delivered over its current network.

Engaging Telkom’s people

Telkom is developing programs designed to enhance employee satisfaction in order to sustain a

culture of engagement with its people. Telkom is focusing on:

– improving its employee engagement in order to become an employer of choice;

– improving performance and productivity;

– building its employee competencies and enhancing its leadership capabilities; and

– transforming towards a customer centric corporate culture.

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Repositioning Telkom stakeholder management to create healthy relationships with all
stakeholders

Telkom is seeking to effectively manage stakeholder relationships as it believes they are critical to

corporate reputation management. Telkom’s strategic objective and goals for 2010 are to:

– implement a coherent framework to reposition Telkom’s stakeholder management in order to

create healthy relationships and improve Telkom’s reputation; and

– improve stakeholder management and effectively manage stakeholder risk, with particular

emphasis on regulatory risk.

Capitalize on the growing mobile communications market in South Africa through Vodacom
and expand into other African markets.

We intend to continue our participation in the South African mobile communications market

through Vodacom and will support its strategic objectives. Vodacom’s strategic objectives are to
achieve sustainable growth in profits and cash flow, while maintaining its leading market position in
South Africa, growing its operations in other African countries and establishing new operations in
select African countries, primarily in sub-Saharan Africa. In order to achieve these objectives,
Vodacom intends to pursue the following strategies:

– Achieve sustainable growth in profits and cash flows. Vodacom will continue to strive for growth

in profits and cash flows by growing customer numbers, while carefully managing its existing
customer base, customer acquisition and retention costs, capital expenditures and operating
expenses. During previous years Vodacom has sought to streamline its relationships with its
customers by increasing direct ownership of service providers. In the 2006 financial year it
extended its service provider agreements with independent service providers for a further period
of five years. In addition, on April 16, 2004, Smartphone SP (Pty) Limited, or Smartphone,
Vodacom’s 51% owned subsidiary, purchased an 85.75% equity stake in Smartcom (Pty)
Limited, or Smartcom, and on February 1, 2005, Vodacom acquired the contract customer base,
dealer agreements and five employees of Tiscali (Pty) Limited, or Tiscali. As of March 31, 2006,
Vodacom directly controlled 83.5% of its contract customers and 99.3% of its prepaid customers
in South Africa. Vodacom also acquired a 51% stake in Cointel for approximately R84.3 million,
on August 1, 2005. Cointel’s core business is providing value added and m-commerce services
to the telecommunications industry. An offer to acquire the cellular business of Africell, an
exclusive Vodacom dealer in South Africa, was accepted on April 6, 2006. The acquisition is
subject to a number of conditions including approval by the South African CompetitionCommission.

– Expand data products. Vodacom intends to seek to continue to increase its revenue and profits

by continuing to expand its range of offerings of value added data and content services over its
network, such as multimedia messaging services, information and banking services and location
based services through alliances with content service providers, while remaining focused on its
core mobile business. Vodacom launched the first commercial 3G network in South Africa in
December 2004. Vodacom also entered into an alliance with Vodafone, pursuant to which
Vodacom is able to market Vodafone branded products and services, including the Vodafone
Mobile Connect Card, Vodafone live!, Mobile TV and BlackBerry®. Vodacom also launched
Vodafone World, which is Vodacom’s new roaming price structure.

– Increase revenue from other African operations. Vodacom intends to increase revenue from its

other African operations, initially by growing its existing operations in Africa, and by selectively
acquiring additional mobile licenses or operators in other African markets in the future, focusing
primarily on countries in sub-Saharan Africa that have stable economic and political conditions
and good prospects for growth, market leadership and profitability. In its other African
operations, Vodacom seeks to gain majority ownership, develop strong local partnership
relationships and, if possible, obtain non-recourse financing. Vodacom’s revenue from other
African operations increased 30.8% in the year ended March 31, 2006 to R3.0 billion and 51.1%
in the year ended March 31, 2005 to R2.3 billion from R1.5 billion in the year ended March 31,
2004, 50% of which is included in the Telkom Group’s revenue.

51

Fixed-line Communications

Overview

Our fixed-line segment is our largest business segment and includes our fixed-line voice, data,

directory services and wireless data services businesses. Our fixed-line services consist of:

• fixed-line subscription and connection services to postpaid, prepaid and private payphone

customers using PSTN lines, including ISDN lines, and the sale of subscription based value-
added voice services and customer premises equipment rental and sales;

• fixed-line traffic services to postpaid, prepaid and payphone customers, including local, long

distance, fixed-to-mobile, international outgoing and international voice over internet protocol
traffic services;

• interconnection services, including terminating traffic from South African mobile operators,

terminating and transiting traffic from international operators and transiting traffic from mobile to
international destinations;

• fixed-line data services, including domestic and international data transmission services, such

as point to point leased lines, ADSL services, packet-based services, managed data networking
services and internet access and related information technology services; and

• directory services, through our Telkom Directory Services subsidiary, and wireless data services,

through our Swiftnet subsidiary.

Products and services

Subscriptions and connections

We provide postpaid, prepaid and private payphone customers with digital and analog fixed-line

access services, including PSTN lines, ISDN lines, and wireless access between a customer’s
premises and our fixed-line network. Each analog PSTN line includes one access channel, each basic
ISDN line includes two access channels and each primary ISDN line includes 30 access channels.
Each ISDN line transmits signals at speeds of 64 kilobits per second per channel. Subscriptions
to ADSL are included in our data services revenue. We were the first fixed-line operator in the world to
provide prepaid service on a fixed-line network. Our prepaid service offers customers an alternative
to the conventional postpaid fixed-line telephone service. All costs, including installation, telephone
equipment, line rental and call charges, are paid in advance so that there are no monthly phone bills.
We target our prepaid service mainly at first time home phone customers who do not have sufficient
credit history and are located in areas where we can provide access to our network without significant
additional investment. Customers who have previously had their telephone service disconnected due
to non-payment are also encouraged to migrate to our prepaid service option in order to reduce future
non-payments while satisfying demand for our services.

We also offer subscriptions to value-added voice services. We offer a broad range of value-added

voice services on a subscription or usage basis, including call forwarding, call waiting, conference
calling, voice-mail, toll free calling, ShareCall, which permits callers and recipients to share call costs,
speed dialing, enhanced fax services and calling card services for payphones. These services
complement our basic voice services and provide us with additional revenue while satisfying customer
demand, enhancing our brand and increasing customer loyalty.

We provide payphone services throughout South Africa. As of March 31, 2006, we operated

approximately 157,422 public payphones and approximately 8,024 private payphones, of which
approximately 42% were coin operated and combination payphones and the remainder were card
operated payphones.

52

The following table sets forth information regarding our postpaid and prepaid lines and payphones

as of the dates indicated, excluding our internal lines:

As of March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

(in thousands, except percentages)

Postpaid PSTN

(1)

3,048

3,006

2,996

(1.4)

(0.3)

Business

1,377

1,386

1,412

0.7

1.9

Residential

1,671

1,620

1,584

(3.1)

(2.2)

Prepaid PSTN

856

887

854

3.6

(3.7)

ISDN channels

601

664

693

10.5

4.4

Payphones

(2)

175

169

165

(3.4)

(2.4)

Total fixed access lines

(3)

4,680

4,726

4,708

1.0

(0.4)

(1)

Excluding ISDN channels. PSTN lines are provided using copper cable, DECT and fiber.

(2)

Includes public and private payphones.

(3)

Total fixed access lines are comprised of PSTN lines, including ISDN channels, and public and private payphones, but
excluding internal lines in service. Each analog PSTN line includes one access channel, each basic ISDN line includes
two access channels and each primary ISDN line includes 30 access channels.

The following table shows information related to the number of our fixed access lines in service,

net line growth and churn for the periods provided. Churn is calculated by dividing the number of
disconnections by the average number of fixed access lines in service during the period.

Year ended March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

(in thousands, except percentages)

Opening balance

4,709

4,680

4,726

(0.6)

1.0

Net line growth

(29)

46

(18)

n/a

n/a

Connections

804

675

615

(16.0)

(8.9)

Disconnections

(833)

(629)

(633)

(24.5)

0.5

Closing balance

4,680

4,726

4,708

1.0

(0.4)

Churn (%)

17.7

13.4

13.4

(24.3)

0.0

Connections include new line orders resulting primarily from changes in service and, to a lesser

extent, new line roll-out. Disconnections include both customer initiated disconnections and Telkom
initiated disconnections. Included in disconnections and churn are those customers who have
terminated their service with Telkom and subsequently subscribed to a new service with Telkom as a
result of relocation of premises or change of subscription to a different type of service. The decrease
in churn in the year ended March 31, 2005 is directly related to the lower level of disconnections, real
estate development contracts in affluent areas, marketing campaigns and lengthened prepaid
suspension time.

In the 2006 financial year Telkom continued to focus on customer retention through discounted

offers, relaxation of credit management policies and targeted marketing campaigns, including Project
Reconnect and Project JIKA, which were launched to stem line loss. Telkom continues to focus on
offering value-for-money, by launching packages like PC bundle and Telkom Closer. Although these
campaigns have been highly successful, Telkom’s line base declined by 0.4% in the 2006 financial
year. The decrease in the number of subscriber lines in the 2006 financial year was mainly in the
lower revenue generating areas such as residential postpaid PSTN lines and prepaid PSTN lines,
partially offset by an increase in ISDN channels and business postpaid PSTN lines. The decrease
also includes approximately 5,800 lines that migrated from ISDN Basic Rate to ADSL, which

53

amounted to a net loss of approximately 5,800 channels because ISDN Basic Rate lines include two
channels, while ADSL service includes only one channel. The higher revenue generating areas, such
as corporate and business lines, showed a positive growth of 3.7% in the 2006 financial year.
The decrease in the number of residential postpaid PSTN lines in the 2006 financial year was
primarily as a result of customer migration to mobile and higher bandwidth products such as ADSL
and lower connections. The increase in ISDN channels and ADSL services was primarily driven by
increased demand for higher bandwidth and functionality. This together with the expansion of
DSL 192, which was launched in February 2005, and DSL 1024, which was launched in
September 2005, added to the positive growth in ADSL services in the 2006 financial year.

Telkom focused on connecting and reconnecting fixed-line customers through discounted offers,

targeted marketing campaigns and the prudent relaxing of selected credit management policies in the
2005 financial year. Telkom is focused on offering value-for-money and is increasingly launching
bundled minute packages and calling plans such as XtraTime and Surf Anytime. These actions
led to a net line growth of 1.0%, excluding Telkom internal lines, in the 2005 financial year.
The increase in the number of subscriber lines in the 2005 financial year was mainly as a result of
fewer disconnections than in the prior year and increased ISDN, prepaid PSTN lines and business
postpaid PSTN lines, partially offset by lower residential postpaid PSTN lines and lower connections.
The decrease in the number of residential postpaid PSTN lines in the 2005 financial year was
primarily as a result of customer migration to mobile and data services and our prepaid PSTN service
and lower connections, partially offset by lower disconnections. The increase in the number of
postpaid ISDN channels was driven by increased demand for higher bandwidth and functionality. The
increase in prepaid lines was mainly due to our increased marketing efforts for our prepaid telephone
services, particularly to first-time residential customers with inadequate or no credit histories, and
postpaid customers encouraged to migrate to prepaid services due to late payments and credit
difficulties.

We also offer telecommunications equipment rentals and sales, such as telephones and private

branch exchange systems, or PABX systems, related post-sales maintenance and service for
residential and business customers in South Africa. The market in South Africa for such equipment
and systems, commonly known as customer premises equipment, is characterized by high
competition and low profit margins. We believe, however, that the supply and servicing of customer
premises equipment is an essential element of providing a full service to our customers.

Traffic

We offer local, long distance, fixed-to-mobile, international outgoing and international voice over

internet protocol services to business, residential and payphone customers throughout South Africa at
tariffs that vary depending on the destination, distance, length, day and time of call. Local traffic
services are for calls made to destinations less than 50km from origination. Long distance traffic
services are for calls made to national destinations greater than 50km from origination. We provide
international outgoing telephone services, including both voice and data traffic. We provide direct
international dialing access to approximately 230 destinations. In the 2004 financial year, we launched
a voice over internet protocol product to customers operating international call centers.

54

The following table sets forth information regarding our fixed-line traffic, excluding interconnection

traffic, for the periods indicated. We calculate fixed-line traffic by dividing fixed-line traffic revenues for
the particular category by the weighted average tariff for such category during the relevant period.

Year ended March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

(in thousands, except percentages)

Local

(1)

20,547

19,314

18,253

(6.0)

(5.5)

Long distance

(1)

4,616

4,453

4,446

(3.5)

(0.2)

Fixed-to-mobile

3,980

3,911

4,064

(1.7)

3.9

International outgoing

427

415

515

(2.8)

24.1

International voice over internet protocol

25

89

83

256.0

(6.7)

Total traffic

29,595

28,182

27,361

(4.8)

(2.9)

(1)

Local and long distance traffic includes internet dial-up traffic.

Traffic was adversely affected in both the 2006 and 2005 financial years by the increasing

substitution of calls placed using mobile services rather than our fixed-line service and dial-up internet
traffic being substituted by our ADSL service, as well as the decrease in the number of residential
postpaid PSTN lines and increased competition in our payphone business.

Interconnection services

We provide interconnection services to the three mobile operators, Vodacom, MTN and Cell C,

and certain other entities that lawfully provide licensed telecommunications services in South Africa
consisting of call termination and call transit, as well as access, through our network, to other
services, including FreeCall 080, ShareCall 0860 and HomeFree, emergency services and directory
enquiry services. We will also be required to provide interconnection services to the second national
operator and to other licensees.

We also provide interconnection services to international operators in respect of incoming

international calls and hubbing traffic through South Africa to other countries. We are seeking to
establish ourselves as the principal international telecommunications hub for Africa through our
investments in undersea cables and our network and our arrangements with other operators in Africa
in order to continue to increase international hubbing revenue.

The following table sets forth information regarding interconnection traffic terminating on or

transiting through our network for the periods indicated. We calculate interconnection traffic, other
than international outgoing mobile traffic and international interconnection traffic, by dividing
interconnection revenue for the particular category by the weighted average tariff for such category
during the relevant period. Fixed-line international outgoing mobile traffic and international
interconnection traffic are based on the traffic registered through the respective exchanges and
reflected in international interconnection invoices.

Year ended March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

(in thousands, except percentages)

Domestic mobile interconnection traffic

2,159

2,206

2,299

2.2

4.2

International interconnection traffic

1,188

1,318

1,355

10.9

2.8

Total

3,347

3,524

3,654

5.3

3.7

55

Domestic mobile interconnection traffic includes traffic from mobile operators terminating on our

network, international outgoing calls from mobile networks and access to other services such as
emergency services and directory enquiry services. The increase in domestic mobile interconnection
traffic in the years ended March 31, 2006 and 2005 was primarily due to an overall increase in mobile
calls as a result of growth in the mobile market, partially offset by increased mobile-to-mobile calls
bypassing our network.

International interconnection traffic consists of international termination traffic and international

hubbing traffic. In the year ended March 31, 2006, international interconnection traffic increased
primarily due to volume discounts and a settlement in the 2006 financial year preventing an illegal
operator from carrying international incoming traffic. In the year ended March 31, 2005, international
interconnection traffic increased mainly as a result of more traffic terminating on our network due to
increased activity of callback operators.

Data communications services

We offer a wide range of national and international data communications services, including:

• data transmission services, such as point to point leased lines, ADSL and packet-based

services;

• managed data networking services;

• global services; and

• internet access and related information technology services.

Data transmission services

Data transmission services provide the connection of information technology applications over

wide area networks. These services include point to point leased lines and packet-based services.
We have a growing portfolio of data transmission products tailored to different customer needs from
high bandwidth mission critical applications to low bandwidth best effort applications. We also offer our
customers tailor-made cost effective customer specific solutions.

Leased lines. We provide national and international leased lines in South Africa. Leased lines are

fixed connections between locations, which are secure and exclusive to the user, and are mainly used
for high volume data or multimedia transmission. Leased lines are our principal data transmission
service and include Diginet, Diginet Plus and Megaline services. We also provide leased lines to
broadcasters for audio and video services. Our leased line customers pay an initial installation charge
and a recurring fee based on the type, length and capacity of the leased line. Leased line charges
have decreased in both the 2006 and 2005 financial years and we expect that competition may
increase pressure on prices in the future.

With the growth in traffic carried on the mobile networks, a need was identified for the deployment

within these networks of transmission links with transmission speeds higher than the
2 Mbps provided by existing agreements. We entered into broadband fixed link leasing agreements
with Vodacom and MTN in the 2004 financial year and with Cell C in the 2005 financial year.
These agreements offer speeds of 45 Mbps and 155 Mbps and include formalized service level
agreements and a term and volume discount structure, as a counter to the competitive challenges
that are expected to occur in this area of the business.

56

The following table sets forth the bandwidth capacity of our Diginet, Diginet Plus, ATM Express

and broadcasting data transmission services:

Leased Line

Bandwidth

Diginet

2.4 Kbps to 64 Kbps

Diginet Plus

128 Kbps to 2 Mbps

ATM Express

2 Mbps to 155 Mbps

Broadcasting

Analogue audio

7.5 or 15KHz

Analogue video

70 MHz

Digital

2 Mbps to 155 Mbps

ADSL Services. ADSL allows the provisioning of high speed connections over existing copper

wires using digital compression. We have different ADSL services available, aimed at the distinct
needs of our customers. The following table indicates our product offerings as of March 31, 2006:

HomeDSL    HomeDSL     HomeDSL     HomeDSL

BusinessDSL BusinessDSL

192

384

512

1024

512

1024

Downstream speed

192 Kbps

384 Kbps

512 Kbps

1024 Kbps

512 Kbps

1024 Kbps

Upstream speed

64 Kbps

128 Kbps

256 Kbps

256 Kbps

256 Kbps

256 Kbps

We also offer ADSL packages, including a free modem, with a 24 month contract. The

HomeDSL 512 and HomeDSL 384 are also available in packages, branded HomeDSL 512 Premium
and HomeDSL 384 Supreme, which are bundled with line rental and include a free modem, free
Callmore voice minutes and other value added services such as free WiFi minutes on a 24 month
contract.

Packet-based services. Packet-based services are based on a statistical multiplexing technique

that allows customers to share bandwidth more cost effectively based on a virtual private network
concept. Our packet-based services include packet-switched services (X.25), frame relay services,
asynchronous transfer mode (ATM) services and internet protocol (IP) services.

Our packet-switched service is Saponet-P, which allows data communications for a range of

applications, such as database searches, electronic fund transfers and e-mail. We use the
X.25 protocol, which is a worldwide standard for transmitting data using packet-switched networks.
Packet-switched services are based on a mature technology and account for a significant but
declining amount of our data transmission service revenue. Although traffic still has shown some
growth in recent years, we are increasingly offering migration to other packet based services, such as
frame relay based services, asynchronous transfer mode based services and internet protocol
services.

Our frame relay service, branded as Frame Express, is a high speed open protocol that is more

efficient than X.25 packet-switching and is well suited for data intensive applications, such as
connecting local area networks. Instead of leasing high capacity lines in order to accommodate
occasional or intermittent high data volumes, customers using frame relay pay for capacity sufficient
to satisfy their average requirements with the flexibility to use more than average capacity during peak
periods. Frame relay based services currently account for a relatively larger percentage of our data
transmission service revenue. Growth in frame relay based services is however declining as a result
of the industry trend to provide all new solutions based on internet protocol. Our internet protocol
based solutions also cater for the growing number of applications that require the speed and flexibility
of more advanced technologies.

Our asynchronous transfer mode based services include ATM Express, which we launched in

2002, and Megaline Plus. ATM Express provides digital transmission services for wide area networks
at speeds from 2 megabits per second up to 155 megabits per second. ATM Express provides a
medium for companies to transmit high volumes of information at high speeds over their wide area
network with high quality and reliable connections. Voice, video and data applications can be

57

supported simultaneously over a connection. Megaline Plus is a broadband service providing for the
carrying of voice, video and data at a constant bit rate across our asynchronous transfer mode
network. ATM Express and Megaline Plus serve as an integral component of our integrated virtual
private network service offering that allows for the convergence of voice, data, video, e-commerce and
web services across a single access medium over our network. We expect our asynchronous transfer
mode based service revenue to grow as a result of customers’ growing demand for bandwidth,
flexibility and reliability.

Our primary internet protocol data transmission products, ViPLink and ViPDial have been

superceded by our flagship IP-based VPN product, branded VPN Supreme. VPN Supreme offers our
customers the ability to converge voice, data and video applications over a single, managed VPN.
On the international front we have invested in an internet protocol and voice-over internet protocol
network and launched a regional clearinghouse to serve as a hub for voice traffic on the African
continent. We intend to launch additional internet protocol data transmission products in the future.

Managed data networking services

Our managed data networking services combine our data transmission services discussed above

with active network management provided from our state-of-the-art national network operations
center. We offer a wide range of integrated and customized networking services, including planning,
installation, management and maintenance of corporate wide data, voice and video communications
networks, as well as other value-added services, such as capacity, configuration and software version
management on customers’ networks. To support our service commitment, we offer guaranteed
service level agreements on a wide range of our products, which include guaranteed availability, or
uptime, of the network through the use of our national network operations center.

Our managed data networking services include our customer network care service, which

facilitates the network management of all our data transmission services using the leased lines or
packet-based services discussed above, and our Spacestream and IVSat products, which are satellite
based products. Spacestream is a high quality, flexible satellite networking service that supports data,
voice, fax, video and multimedia applications, both domestically and into the rest of Africa.

Managed data networking services are billed on a monthly basis and vary by customer

depending on the particular services provided and the number of network sites under management.
The following table sets forth information regarding the number of managed network sites for each
of our managed data networking services as of the dates indicated.

As of March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

Terrestrial based

4,794

6,425

9,492

34.0

47.7

Satellite-based

4,267

5,536

7,395

29.7

33.6

Total managed network sites

9,061

11,961

16,887

32.0

41.2

Global services

Our portfolio of global international products consists of a number of different products. We have

international private line circuits, which are our Diginet equivalent to international destinations with
bandwidths ranging from 2.4 Kbps up to 155 Mbps. The international private line circuits use both
cable infrastructures, such as submarine cables, or satellite infrastructure. This product is
complimented by our three global alliances with Infonet, Equant and BT, which are used to offer
customers connectivity based on these companies’ global networks. Our global alliances have
coverage throughout the world and it is easier for customers to use them from an ordering, installation
and support point of view, as they have physical presence or formally appointed partners in each

58

country. Due to the packet-based nature of these global networks, the cost efficiencies inherent in
these networks can be passed on to customers to ensure more affordable services.

Internet access services and other related information technology services

We are one of the leading internet access providers in South Africa in the retail and wholesale

internet access provision markets. We also package our TelkomInternet product with personal
computers, ADSL and ISDN services, as well as our satellite access products, SpaceStream Express
and SpaceStream Office.

Our South African internet eXchange, or SAIX, is South Africa’s largest internet access provider

offering dedicated and dial-up, ADSL and satellite internet connectivity to internet service providers
and value added network providers. SAIX has offered fixed-line network internet access through
dial-up service since 1995. SAIX derives revenue for its access services primarily from subscription
fees paid by internet service providers and value added network providers for access services.
The SAIX customer base has expanded beyond only service providers and value added network
providers, and now includes Vodacom and other operators in Africa. These include incumbents in
Mozambique, Namibia, Angola, Zimbabwe and Lesotho.

In the retail market, TelkomInternet offers a range of internet services to residential and business

customers. These services include analog and ISDN dial-up services, ADSL services, TelkomInternet
powered by Satellite services and dedicated internet access services. The access services are
complemented by a range of value-added services, including e-mail services, domain name services
and hosting services. All TelkomInternet access bundles include e-mail services, Web based e-mail
access, anti-virus and anti-SPAM services, exclusive content through our TelkomInternet web site and
24 hour technical support services.

In October 2003, Telkom launched full commercial service of a broadband based internet access

powered by satellite. It is a Vsat product offering that allows effective sharing of the satellite platform
making the service more affordable. Following the successful introduction of TelkomInternet via
satellite, Telkom expanded its SpaceStream Express product into Africa branded as SpaceStream
Africa.

In July 2005, TelkomInternet introduced a range of internet access and personal computer

bundles to the consumer market. These bundles included a personal computer, internet access,
internet call minutes, and various traditional Telkom services. During this year TelkomInternet also
introduced toll free technical support.

The following table sets forth information regarding our wholesale and retail internet services and

customers as of the dates indicated.

As of March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

Wholesale
Internet leased lines-equivalent 64kbps

7,588

13,470

16,832

77.5

25.0

Dial-up ports

14,329

15,375

12,889

7.3

(16.2)

Retail
Internet dial-up subscribers

142,208

202,410

228,930

42.3

13.1

Internet ADSL subscribers

8,559

22,870

53,997

167.2

136.1

Internet satellite subscribers

192

1,427

1,981

643.2

38.8

Our wholesale internet services are billed on a bandwidth basis while our retail internet services

are billed on a monthly subscription basis. We also generate fixed-line traffic revenue from internet
traffic routed over our fixed-line network.

59

Information technology and related services. We have expanded our data offering to selected

information technology services that include local area network services, basic hosting, data center
hosting, managed infrastructure hosting, web application hosting, security services, disaster recovery,
storage services and application service provider hosting. Our security services include firewalls,
intrusion detection, and spam and virus protection.

We also offer e-commerce products and services, including electronic data interchange, hosted

procurement market place, payment gateways, electronic storefronts, electronic bill presentment and
message translation services. CyberTrade, our web based e-commerce service provider, provides
users with a secure platform to perform online banking and stock market trading, to buy and sell
goods and products from electronic merchants and to access critical information.

Directory and other services

Directory services. We own 64.9% of Telkom Directory Services, the largest directory publisher in

South Africa providing white and yellow pages directory services and electronic white pages. In the
year ended March 31, 2006, Telkom Directory Services published approximately 7.5 million white and
yellow directories. Telkom Directory Services also provides electronic yellow pages and value added
content through full color advertisements. Telkom Directory Services has improved the accessibility
and distribution of directories through door-to-door delivery and electronic media. We also provide
national telephone inquiries and directory services.

Wireless data application services. We own 100% of Swiftnet, which operates under the name

Fastnet Wireless Service. Fastnet is a wireless network providing asynchronous wireless access on
our X.25 network, Saponet-P, to its customer base. This service has been expanded by Swiftnet to
offer a GPRS driven solution using a dual sim card allowing the customer to roam on both the
Vodacom and MTN GPRS South African networks. Services include retail credit card and check point
of sale terminal verification, telemetry, security and vehicle tracking.

Fees and tariffs

Tariff rebalancing

We made significant progress in rebalancing our fixed-line tariffs. Telkom’s tariff rebalancing

program was historically aimed at better aligning its fixed-line traffic charges with underlying costs and
international norms. As a result of its efforts, the ratio of tariffs for long distance calls to all destinations
over 200 km compared to tariffs for local calls declined from 13.2:1 as of March 31, 1997 to 2.7:1 as
of March 31, 2002. In the future, Telkom expects that its tariff rebalancing will focus more on the
relationship between the actual costs and tariffs of subscriptions and connections and traffic in order
to more accurately reflect underlying costs.

Regulations made under the Telecommunications Act impose a price cap on a basket of Telkom’s

services, including installations; prepaid and postpaid line rental; local, long distance and international
calls; fixed-to-mobile calls; public payphone calls; ISDN services; our Diginet product; and our
Megaline product. A similar cap applies to a sub-basket of those services provided to residential
customers, including leased lines up to and including lines of 2 Mb/s of capacity and the rental and
installation of business exchange lines. Approximately 80% of Telkom’s operating revenue in the year
ended March 31, 2005 was included in this basket, compared to approximately 66% of Telkom’s
operating revenue in the year ended March 31, 2006. The reason for the decrease was due to a
change in methodology of the amount included in the basket for purposes of our filing with ICASA in
the 2006 financial year to exclude the mobile termination fees for fixed-to-mobile calls. Our tariffs for
these services are filed with ICASA for approval. Revenue generated from services for which we had

60

exclusivity may not be used to subsidize competitive services. The price cap operates by restricting
the annual percentage increase in revenues from all services included in the basket that are
attributable solely to price changes to annual inflation, measured by changes in the consumer price
index, less a specified percentage.

Historically, the annual permitted percentage increase in revenues from both the whole basket

and the residential sub-basket was 1.5% below inflation. Effective from August 1, 2005 through
July 31, 2008, the annual permitted increase in revenues from both the whole basket and the
residential sub-basket was lowered to 3.5% below inflation and ADSL products and services have
been added to the basket. In addition, the price of no individual service within the residential sub-
basket can be increased by more than 5% above inflation except where specific approval has been
received from ICASA. Draft regulations have also been published for comment on the pricing and
provision of ADSL services, which would, among other things, prohibit Telkom from charging a
monthly rental for providing ADSL service and limit Telkom to charging only an installation fee for such
service.

ICASA approved a 2.2% increase in the overall tariffs for services in the basket effective January

1, 2004, a 0.2% increase in the overall tariffs for services in the basket effective January 1, 2005 and
a 3.0% reduction in the overall tariffs for services in the basket effective September 1, 2005. Due to a
delay in the finalization of the tariff regulations, ICASA allowed us to implement our new tariffs
effective September 1, 2005. In line with Telkom’s strategy of delivering excellent service to customers
at competitive prices, on June 5, 2006 Telkom announced average price reductions on its regulated
basket of products and services of 2.1%, effective August 1, 2006. As a result, from August 1, 2006,
the following price changes will be effective:

• ADSL rental

24% average decrease

• Local call charges

No change

• Long distance call charges

10% decrease

• International call charges

10% average decrease

• Data products

9% average decrease

• Subscription: analog line rental

8% average increase

See Item 3. “Key Information–Risk Factors–Risks Related to Regulatory and Legal Matters–Our

tariffs are subject to approval by the regulatory authorities, which may limit our flexibility in pricing and
could reduce our net profit. Vodacom’s revenue and net profit could decline if wholesale price controls
are imposed on it above and “–Regulation and License Requirements” below. All tariffs include value
added tax at a rate of 14%.

Subscription and connection tariffs

We provide reduced installation charges to most packaged services and provide discounts for

other customer specific solutions. In order to attract high volume corporate and business customers
we offer volume and term programs on certain data products that fix rates at the lower of the
prevailing rates or the rate at the time of the contract. We also offer term discounts on our ISDN
primary service.

61

The following tables show our subscriptions and connections tariffs as of January 1, 2004,

January 1, 2005 and September 1, 2005 and our proposed tariffs as of August 1, 2006 based on our
tariff filing with ICASA in June 2006.

As of January 1, 2004

PSTN

PSTN

ISDN2

ISDN30

Postpaid

Prepaid

Basic

Primary

(ZAR, including value-added tax)

Business
Installation

274.35

n/a

384.75

20,721.00

Monthly rental

108.80

n/a

216.82

3,264.00

Residential
Installation

274.35

158.40

384.75

n/a

Monthly rental

81.90

50.80

184.28

n/a

As of January 1, 2005

PSTN

PSTN

ISDN2

ISDN30

Postpaid

Prepaid

Basic

Primary

(ZAR, including value-added tax)

Business
Installation

291.60

n/a

409.00

22,026.00

Monthly rental

115.65

n/a

230.50

3,469.60

Residential
Installation

291.60

168.40

409.00

n/a

Monthly rental

87.05

54.00

195.90

n/a

As of September 1, 2005

PSTN

PSTN

ISDN2

ISDN30

Postpaid

Prepaid

Basic

Primary

(ZAR, including value-added tax)

Business
Installation

316.10

n/a

443.35

23,876.00

Monthly rental

122.60

n/a

230.50

3,677.87

Residential
Installation

316.10

182.50

443.35

n/a

Monthly rental

92.28

57.25

195.90

n/a

As of August 1, 2006

PSTN

PSTN

ISDN2

ISDN30

Postpaid

Prepaid

Basic

Primary

(ZAR, including value-added tax)

Business
Installation

342.30

n/a

480.10

25,855.30

Monthly rental

132.75

n/a

230.50

3,982.59

Residential
Installation

342.30

197.60

480.10

n/a

Monthly rental

99.92

57.25

166.52

n/a

62

Traffic tariffs

Local, long distance and fixed-to-mobile

When setting local and long distance call pricing, a number of variables are considered in order

to generate an optimal level of revenue and to balance demand and affordability within our price cap
limitations. These include the duration, the distance between the points of origin, the destination, the
time of day and the day of the week of the call.

For calls from our fixed-line customers to mobile users, we bill our customers the standard retail

tariff, retain a fixed portion of the retail tariff and pay the remainder of the tariff to the mobile operator.

The following table sets forth our postpaid and prepaid traffic tariffs as of January 1, 2004,

January 1, 2005 and September 1, 2005 and our proposed tariffs as of August 1, 2006 based on our
tariff filing with ICASA in June 2006.

As of

As of

As of

As of

January 1,

January 1,

September 1,

August 1,

2004

2005

2005

2006

Peak Off peak Peak Off peak Peak Off peak Peak Off peak

rates

(1)

rates

(2)

rates

(1)

rates

(2)

rates

(1)

rates

(2)

rates

(1)

rates

(2)

(ZAR, including value-added tax)

Postpaid services (residential and
business)
Local minimum call charge (0 – 50km)
for first unit

(3)

0.56

0.56

0.59

0.59

0.59

0.59

0.59

0.59

Local call rate per minute (0 – 50km)
after first unit

(3)

0.38

0.15

0.40

0.16

0.38

0.16

0.38

0.16

Long distance minimum call charge
(>50km) for first unit

(4)

0.99

0.99

0.89

0.89

0.80

0.80

0.72

0.72

Long distance call rate per minute
(>50km) after first unit

(4)

0.99

0.50

0.89

0.45

0.80

0.40

0.72

0.36

Fixed-to-mobile call rate per minute

(5)

1.84

1.13

1.89

1.17

1.89

1.17

1.89

1.17

Prepaid services (residential only)

Local minimum call charge (0 – 50km)
for first unit

(6)

0.56

0.56

0.59

0.59

0.59

0.59

0.62

0.62

Local call rate per minute (0 – 50km)
after first unit

(6)

0.43

0.17

0.46

0.18

0.43

0.18

0.45

0.19

Long distance minimum call charge
(>50km) for first unit

(7)

0.99

0.99

0.89

0.89

0.80

0.80

0.84

0.84

Long distance call rate per minute
(>50km) after first unit

(7)

1.17

0.59

1.06

0.53

0.95

0.48

1.00

0.50

Fixed-to-mobile call rate per minute

(5)

1.84

1.13

1.89

1.17

1.89

1.17

1.89

1.17

(1)

Monday to Friday 7 a.m. to 7 p.m. for local and long distance calls. Monday to Friday 7 a.m. to 8 p.m. for fixed-to-mobile
calls.

(2)

Monday to Thursday 7 p.m. to 7 a.m. the next morning, and Friday 7 p.m. to Monday 7 a.m. for local and long distance
calls. Monday to Thursday 8 p.m. to 7 a.m. the next morning, and Friday 8 p.m. to Monday 7 a.m. for fixed-to-mobilecalls.

(3)

The first unit for peak calls is 94 seconds (January 1, 2004 and 2005: 89 seconds) and for off peak calls is 223 seconds

(4)

The first unit for peak calls is 60 seconds and for off peak calls is 120 seconds.

(5)

Calls are charged in increments of 60 seconds for the first minute and in increments of 30 seconds thereafter.

(6)

The first unit for peak calls is 83 seconds (January 1, 2004 and 2005: 78 seconds) and for off peak calls is
194.5 seconds.

63

(7)

The first unit for peak calls is 51 seconds and for off peak calls is 101 seconds.

International outgoing

Our outgoing international call tariffs and payments are based on settlement rates negotiated with

other international carriers on a bilateral basis. The following table sets forth our international outgoing
traffic tariffs per minute as of January 1, 2004, January 1, 2005 and September 1, 2005 and our
proposed tariffs as of August 1, 2006 based on our tariff filing with ICASA in June 2006 for residential
and business customers to the ten most frequently called countries based on traffic.

As of

As of

As of

As of

January 1,

January 1,

September 1,

August 1,

2004

2005

2005

2006

Peak Off peak Peak Off peak Peak Off peak Peak Off peak

rates

(1)

rates

(2)

rates

(1)

rates

(2)

rates

(1)

rates

(2)

rates

(1)

rates

(2)

(ZAR, including value-added tax)

United Kingdom

3.12

2.81

1.70

1.50

1.70

1.50

1.40

1.30

United States

3.33

3.02

1.70

1.50

1.70

1.50

1.20

0.99

Namibia

1.66

1.30

1.66

1.30

1.66

1.30

1.30

1.30

Zimbabwe

1.66

1.30

1.66

1.30

1.66

1.30

1.60

1.30

Botswana

1.66

1.30

1.66

1.30

1.66

1.30

1.64

1.28

Australia

3.01

2.70

1.70

1.50

1.70

1.50

1.50

1.50

Germany

2.60

2.39

2.00

1.80

2.00

1.80

2.00

1.94

Swaziland

1.66

1.30

1.66

1.30

1.66

1.30

1.66

1.30

India

6.63

5.98

2.30

2.00

2.30

2.00

1.80

1.80

Mozambique

2.86

2.50

2.70

2.50

2.70

2.50

2.50

2.50

(1)

Monday to Friday 8 a.m. to 8 p.m.

(2)

Monday to Thursday 8 p.m. to 8 a.m. the next morning, and Friday 8 p.m. to Monday 8 a.m.

Interconnection tariffs

Interconnection termination rates for mobile operators are distance independent and are based on

aggregated measurements of traffic crossing the points of interconnection measured on a per-second
basis. For national calls from mobile users to fixed-line customers, the mobile operator pays us a
termination fee. The risk of uncollectibles is carried by the originating operator. For incoming
international calls destined for mobile users, we pay the mobile operator a termination rate which is
the same as the rate we pay for fixed-to-mobile calls, and for outgoing international calls originating
from mobile users, the mobile operators pay to us our standard retail rate for international calls, less a
discount.

Our current interconnection tariffs are set out in interconnection agreements negotiated and

agreed by us and the other operators. ICASA is entitled to issue, and has issued, regulations relating
to interconnection between South African licensed operators. Telkom’s interconnection agreements
provide for annual increases in the portion of fixed-to-mobile tariffs retained by Telkom and the
termination rates payable by Telkom to the mobile operators as well as the termination rates payable
to Telkom from the mobile operators for mobile-to-fixed calls.

64

The following table sets forth our fixed-to-mobile retail interconnection tariffs, including our

termination rates paid to mobile operators and our retention rates, and our mobile-to-fixed
interconnection tariffs as of January 1, 2004, January 1, 2005 and September 1, 2005 and our
proposed tariffs as of August 1, 2006 based on our tariff filing with ICASA in June 2006.
Fixed-to-mobile tariffs are billed for the first 60 seconds and 30 second increments thereafter.
Termination rates paid to mobile operators are paid on a per second basis.

As of

As of

As of

As of

January 1,

January 1,

September 1,

August 1,

2004

2005

2005

2006

Peak Off peak Peak Off peak Peak Off peak Peak Off peak

rates

(1)

rates

(2)

rates

(1)

rates

(2)

rates

(1)

rates

(2)

rates

(1)

rates

(2)

(ZAR, including value-added tax)

Fixed-to-mobile retail rate

1.84

1.13

1.89

1.17

1.89

1.17

1.89

1.17

Termination rate paid to mobile operators

1.40

0.86

1.43

0.88

1.43

0.88

1.43

0.88

Retention rate

0.44

0.27

0.46

0.29

0.46

0.29

0.46

0.29

Mobile-to-fixed retail rate

Termination rate paid to Telkom

0.29

0.16

0.31

0.17

0.31

0.17

0.31

0.17

(1)

Monday to Friday 7 a.m. to 8 p.m.

(2)

Monday to Thursday 8 p.m. to 7 a.m. the next morning and Friday 8 p.m. to Monday 7 a.m.

Data tariffs

We charge monthly fees for leased lines, which vary based on bandwidth and distance, and

monthly service charges for ADSL, which are not distance dependent. The following table sets forth
the monthly tariffs for our data leased lines using 20 km distances and ADSL service as of
January 1, 2004, January 1, 2005 and September 1, 2005 and our proposed tariffs as
of August 1, 2006 based on our tariff filing with ICASA in June 2006. Subscription to ADSL
service also requires the subscription to a PSTN postpaid line.

As of

As of

As of

January 1,

September 1,

August 1,

2004

2005

2005

2006

(ZAR, including value-added tax)

ADSL installation charges

HomeDSL192/384/512/ 1024

(1)

404

404

404

437.50

BusinessDSL 512/1024

(1)

404

404

404

437.50

ADSL access rental charges

HomeDSL192

n/a

329

270

245

HomeDSL 384

449

449

359

245

HomeDSL 512

680

680

477

362

BusinessDSL 512

800

800

477

362

HomeDSL 1024/BusinessDSL 1024

(1)

n/a

n/a

680

516

Diginet (64 Kbps)

2,196

2,236

2,214.11

2,160.30

Diginet Plus (512 Kbps)

6,165

6,165

5,244.68

5,067.07

ATM Express

2 Mbps – Bronze

15,419

13,828

11,952.90

10,826.58

2 Mbps – Silver

20,321

18,046

15,418.50

14,120.04

34 Mbps – Silver

117,882

104,572

89,613.12

81,058.56

140 Mbps – Silver

389,909

345,591

296,246.10

255,460.32

(1)

HomeDSL 1024 and BusinessDSL 1024 were launched in September 2005. These amounts represent the tariffs at date
of service launch.

65

The monthly tariffs for ADSL services were reduced as of March 31, 2005 and August 1, 2005 and are
scheduled to be further reduced as of August 1, 2006 as follows:

As of

As of

As of

March 31,

August 1,

August 1,

2005

2005

2006

(ZAR, including value-added tax)

ADSL access rental charges
HomeDSL 192

329

270

245

HomeDSL 384

449

359

245

HomeDSL 512

599

477

362

Home DSL 1024

(1)

n/a

680

516

BusinessDSL 512

699

477

362

Business DSL 1024

(1)

n/a

680

516

(1)

Home DSL and Business DSL 1024 were launched in September 2005. These amounts represent the tariffs at date of
service launch.

Managed data networking services are billed on a monthly basis and vary by customer depending

on the particular services provided and the number of network sites under management.

Sales and marketing

We group our fixed-line customer base into the following three categories in order to more

effectively target and service our customers:

• business customers;

• residential customers; and

• payphone customers.

Business customers

Business customers are comprised of global and corporate customers, business and government

customers and wholesale customers. We have separate sales and marketing departments to service
each of the sub-categories within our business customer category. Our business customer category
accounted for approximately 74% of our total fixed-line operating revenue, excluding directories and
other revenue, in the year ended March 31, 2006 and approximately 43.7% of our total fixed access
lines as of March 31, 2006.

Global and corporate

Global and corporate customers comprise over 200 of South Africa’s largest financial, retail,

manufacturing and mining companies with domestic and international operations. Global and
corporate customers accounted for approximately 15.8% of our total fixed-line operating revenue,
excluding directories and other revenue, in the year ended March 31, 2006 and approximately 11.6%
of our total fixed access lines as of March 31, 2006. We have increased our sales and marketing
efforts aimed at our large global and corporate customers in order to continue to improve customer
loyalty. We offer tailored packaged solutions and seek to enter into long-term relationships with our
global and corporate customers in order to maintain our leadership position in this customer market.
We market and sell our products and services to these customers primarily through corporate account
managers, supported by a team of specialists in the field of pre-sales consulting, project management
and post-sales service managers.

66

Business and government

Business and government customers comprise approximately 550,000 large, medium and small

business and governmental accounts. We estimate that Government customers, excluding certain
Government owned parastatal companies, accounted for at least 9% of our total fixed-line operating
revenue, excluding directories and other revenue, in the year ended March 31, 2006 and
approximately 4.0% of our total fixed access lines as of March 31, 2006. We also offer tailored
packaged solutions and seek to enter into long term relationships with our government and larger
business customers. In addition, we established a customer relation program to focus on retaining
business customers. We market and sell our products and services to these customers primarily
through customer account managers and sales representatives, the Telkom Business Call Center and
customer service branches. As of March 31, 2006, we had approximately 131 customer service
branches and Telkom Direct shops located throughout South Africa to assist our business customers
in finding the products and end user equipment that best fits their needs. In the 2006 and 2005
financial years, we have been successful in signing our business customers to long term service
agreements. We have also been successful in growing our ISDN, internet access, PABX, satellite and
data, including ADSL, products and services.

Wholesale

Wholesale customers comprise mobile operators, domestic licensed network operators,

international operators and service providers and domestic value- added network service providers.
We expect wholesale revenue from domestic operators to increase with the entrance of the second
national operator and the further liberalization of the South African telecommunications industry.
Products sold to wholesale customers primarily include mobile and international voice termination
services, data services and international transiting services. We also provide internet protocol services
to internet service providers. We are currently focusing on developing wholesale products that cater to
the needs of a more liberalized fixed-line market in terms of the second national operator and the
underserviced area licensees in South Africa by providing interconnection and facilities leasing. We
are also expanding our wholesale product portfolio to go into non-traditional markets outside of South
Africa. Our marketing and sales strategy for the wholesale services market is to be the carrier of
choice for other operators and the connectivity provider of choice for domestic
and other African service providers. We believe our digital network both in South Africa and in our
international undersea cables provides a solid foundation from which we can leverage these services.
We continuously revisit destinations for wholesale voice termination services. We intend to focus on
expanding our relationships with international operators and further increasing the penetration of our
transiting and connectivity services to international operators, including other African operators, for
traffic into and out of Africa.

Residential customers

Residential customers comprise both prepaid and postpaid residential customers using PSTN,

ISDN and ADSL services. Residential customers accounted for approximately 24% of our total fixed-line
revenue, excluding directories and other revenue, in the year ended March 31, 2006 and approximately
52.8% of our total fixed access lines as of March 31, 2006. Prepaid residential customers accounted for
approximately 34.3% of our residential fixed access lines as of March 31, 2006, compared to
approximately 34.5% of our residential fixed access lines as of March 31, 2005.

We are seeking to compete in the residential market by offering communications packages

focused on improving convenience and security to enhance consumers’ lifestyles, while at the same
time increasing revenue per customer. We intend to continue to introduce calling plans that target high
use customers and are designed to increase consumers’ value for money. We market and sell our
residential products through our customer call centers, customer service branches, Vodacom’s
customer service branches and Telkom Direct shops, the South African Post Office, independent

67

distributors and vendors and through telemarketing. We are focused on increasing the penetration
of our ADSL services to retail and high-end residential customers through targeted direct advertising
to high internet usage subscribers.

Payphone customers

Payphones comprise our public and private payphone units. Payphones accounted for

approximately 2% of our total fixed-line revenue, excluding directories and other revenue, in the year
ended March 31, 2006 and approximately 3.5% of our total fixed access lines as of March 31, 2006.

In order to increase sales in our payphone services business, we seek to provide easy access to

our services through the effective placement of our phones and phonecard outlets in high traffic areas.
Our key focus area is the premier market, which includes municipalities, prisons, gas stations,
shopping malls, taxi stands, airports, bus stops and train stations. In furtherance of this goal, we target
and enter into nationwide contracts with multi location telephone providers to ensure wider distribution
of our payphones. We market and sell our payphone products through our sales managers and
representatives and sales call centers. In order to improve efficiencies in public services and
telephony, Telkom implemented a quality management system in compliance with the South African
Bureau of Standards ISO9001:2000 standards, which was certified by the South African Bureau of
Standards in 2003. The aim was to develop products and services based on these quality standards
in an effort to grow and improve public telephony revenues and create a customer relations center.
Telkom’s aim was also to provide a “one-stop-shop” for support to all our customers.

Customer care and service

Telkom has placed customer-centricity at the core of its corporate strategy and refocused its

emphasis from a traditional communications organization to a customer-centric organization. Telkom
reviewed its organization and work design to support customer centricity and has restructured its
employees around organizational boundaries in order to better respond to its customers, tailored
systems to its customers’ needs and built meaningful customer experiences, thereby aligning the
organization with its customers.

We offer a number of customer care initiatives tailored to our different customer segments. We

allocate service managers to each of our global and corporate customers, who are responsible for
ensuring that all new installations and repairs are performed in a satisfactory and timely manner. In
addition, we have established a corporate customer call center in Cape Town for our global and
corporate customers, capable of making minor infrastructure changes from a single location. We also
use professional program managers to manage the implementation of complex network solutions.
We offer service level agreements on a number of our existing data communications products where
technology allows us to do so and our goal is to introduce service level agreements on all new data
communications products in the future. We confer VIP status on each of our global and corporate
customers and other selected customers that allows them direct access to key people within our
organization to ensure quick resolution of any problems they may have regarding our products and
services. We also intend on launching a wholesale call center for use by our expanding base of
wholesale customers.

Through our ambassador program, participating Telkom management employees adopt a few

small and medium businesses to strengthen relationships with these customers in a non sales
environment. An ambassador acts as a single point of contact for those customers in the event of any
queries relating to our products and services. In addition, our Telkom business call center provides
customer support for our medium and small business customers. We also offer a broad range of
internet based customer care tools to allow customers to manage their relationship with us more
conveniently. The Telkom and TelkomInternet websites offer online services such as fault reporting for
voice services, automated online registration and password changes for internet services, electronic
bill presentation and an email query facility.

68

We also provide our customers with a free SMS payment reminder where a cellular phone

number is provided to avoid suspension of late paying customers.

Network

Network quality

We have made significant investments in our national network operations center and our new data

center in order to increase our ability to identify and anticipate future customer needs more rapidly
and to provide the appropriate solutions and services. In order to take advantage of economies of
scale in scheduling, we have consolidated our six voice installation and fault management centers into
two centers to address faults, installation and service appointment scheduling and have consolidated
our six data installation and fault management centers into two centers.

During the 2005 financial year, we changed the method in which we measure service delivery.

In the past the focus was primarily based on quantitative measures. We added qualitative measures
to the calculation. Additionally we segmented our service delivery measures to be more in line with
how our market has been segmented both in terms of customer segmentation, as well as product
segmentation.

The new measurement methodology resulted in two key customer service indices. The first is a

customer assurance index, comprising percentage repaired in time, fault rate and quality of repair.
The second is a customer fulfilment index, comprising percentage installed in time, time to first failure
and quality of installation. The following table sets forth information regarding measurements during
the periods indicated.

Year ended March 31,

2004

2005

2006

Residential voice

% cleared in 24 hours

69%

46%

47%

Faults per 1,000 lines

410

441

470

% installed in 5 days

56%

51%

49%

Business voice

% cleared in 24 hours

94%

62%

61%

Faults per 1,000 lines

295

287

300

% installed in 5 days

85%

68%

63%

Data subrate

% cleared in 24 hours

99%

97%

92%

Faults per 1,000 lines

880

756

801

% installed in 10 days

65%

75%

40%

ADSL business

% cleared in 24 hours

80%

79%

54%

Faults per 1,000 lines

624

505

480

% installed in 20 days

86%

84%

56%

The decline in residential and business voice performance in the 2006 and 2005 financial years

was due to bad weather conditions and a high incidence of electrical storm activity resulting in
increased fault rates, which impacted on Telkom’s service levels. We have implemented a
sustainment program focused on access network reliability to reduce the impact of electrical storm
activity. During the 2006 financial year, there was a 146% increase in ADSL installations, which
resulted in a decline in the ADSL installation rate and the percentage cleared within 24 hours as a
result of the doubling of the installed base. The decline in the installation rate for data subrate was
primarily due to delays as a result of network capacity problems. We have upgraded our fixed-line
core network to increase bandwidth capacity.

69

Infrastructure and technology

The following table sets forth information related to the digitalization and upgrade of our network

at the dates indicated.

As of March 31,

2002

2003

2004

2005

2006

Digitalization (percentage of lines)

99.8

99.8

99.9

99.9

99.9

ATM switches

195

197

189

202

212

Digital exchange units

4,083

4,292

4,321

4,339

4,427

National network operations center

We have a state-of-the-art national network operations center, capable of monitoring our core

network and coordinating and dispatching core network repair personnel from one control point based
in Centurion, Pretoria. Our national network operations center enables us to be more proactive in
anticipating, localizing and isolating problems, such as congestion and cable breaks, so that they can
be corrected promptly. The national network operations center is capable of providing up to the
minute, real-time visual summary of the status of our entire network. Our national network operations
center includes an emergency restoration and control center that manages all network failure
restorations. Network service management specialists are able to obtain up to the minute information
from this center in order to proactively update global and corporate customers who have services
affected by any major network failure, including voice and data network services.

Switching network

An important part of our fixed-line network modernization program has been switch digitalization.

As of March 31, 2006, 99.9% of our telephone access lines were connected to digital exchanges.
Switch digitalization has made our network more efficient and resilient and has enabled us to offer
new value-added voice and data services, including caller line identification, electronic call answering
and the provisioning of innovative billing systems. Our switching network infrastructure is based on a
two-tier structure utilizing large capacity digital switches. The upper, or primary, tier is used for the
switching of long distance and international traffic and the lower, or secondary, tier is used for the
switching of regional and local traffic.

The primary tier consists of eight switching centers and two international switching centers.

Each of the switching centers includes two switches for redundancy purposes and in order
to handle larger volumes during peak times. Each of the primary switching centers is interconnected
by at least two self healing diverse routes. Interconnection between our network and the networks of
the three South African mobile operators takes place at primary level switches in the main centers.
Two international telephone switching centers each containing one switch, serve as the international
gateways. Secondary switching centers are connected to the primary switching centers by at least
two self-healing diverse routes. Each secondary switching center includes one switch with internal
redundancy mechanisms.

Softswitch capability is being deployed initially as an overlay network to enable the communication

of voice over internet protocol services.

Transmission network

Our national transmission network comprises a synchronous digital hierarchical and wave

division-multiplexing network. Both the primary and the secondary tier are based on a combination of
ring and meshed topology, which provides a dual path to each connection point. The ring topology
consists of interlocking self-healing rings, while the meshed topology consists of high capacity digital
cross-connects connected in meshed fashion via high capacity digital links. The primary tier consists
of eight stacked rings and fifteen digital cross-connects, while the secondary tier consists of 534 rings

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and 85 digital cross-connects. The synchronous digital hierarchy network, with its network
management capability, provides for faster provision and modification of service, improved grade of
service and lower maintenance costs. Telkom is investing in additional capacity to meet requirements
for growth in data traffic and leased lines.

At the beginning of the 2006 financial year, we commenced an aggressive roll-out of next

generation synchronous digital hierarchical equipment on both the primary and the secondary tier.
We are currently upgrading our wave division-multiplexing network to cater for larger capacities.

Access network

Access for our PSTN and data communications network is primarily via copper. Overlay point to

multi-point radio systems have been deployed in some metropolitan areas and are also used to
replace obsolete equipment in rural areas. Fiber in the loop has been and is deployed with
appropriate technologies to residential areas, office parks and shopping complexes. Optical fiber
distributed multiplexors and optical routers are also provided to mobile operators, corporate and large
customer sites. Telkom is still deploying additional access network infrastructure to enable the
provisioning of ISDN and xDSL services on demand. In addition, Telkom is focusing on the
rehabilitation of its existing access network infrastructure to improve the reliability and quality of its
network and to make it broadband friendly. Viable areas, which are out of reach of the broadband
footprint, will be serviced by fiber and appropriate wireless technologies.

Asynchronous transfer mode network

We have rolled out an asynchronous transfer mode network to deliver broadband services to

global and corporate customers. As of March 31, 2006, we had 212 switches in our asynchronous
transfer mode network. The present available bandwidth between the core switches on our
asynchronous transfer mode network is 129 STM-1s or 19.2 Gbps, while the available bandwidth
between the access switches, metropolitan switches and core switches is 394 STM-1s or 58.6 Gbps.
Access to our asynchronous transfer mode network is primarily provided via fiber.

Public broadband internet protocol network

Our public broadband internet protocol network comprises a three tier hierarchical network

consisting of eight core sites, 25 edge sites and 67 access locations, including over 28,600 modems
with an estimated dial-up base of greater than 500,000 customers, including Telkom and other internet
service providers as of March 31, 2006.

Telkom has designed its internet protocol network as the core for new products and services with

multi protocol label switching deployed in the network. 3,276 layer three virtual private network
endpoints have been deployed.

We introduced ADSL as a new access technology in August 2002 for our internet protocol

network. The ADSL roll out has been designed to provide maximum coverage in terms of prospective
ADSL customers. Our ADSL footprint covers approximately 82.1% of our customer base and consists
of 1,075 digital subscriber line access multiplexers, serving approximately 143,509 customers as of
March 31, 2006, an increase from 58,278 customers as of March 31, 2005 and 20,145 customers as
of March 31, 2004. This network is managed from our national network operations center.

Voice over internet protocol network

Our voice over internet protocol network terminates calls for numerous international voice carriers

into our fixed-line network. Call centers from around the world that have relocated to South Africa due
to favorable economic conditions and lower resource costs are also hosted on our voice over internet
protocol network. Telkom has points of presence for connectivity to the voice over internet protocol
network in Amsterdam, London, New York, Ashburn (Washington D.C.), Zambia, Zanzibar and

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Tanzania, with plans to expand to the Far East. The network can terminate 68 media gateways,
or approximately 32,640 voice circuits. The media gateways compress the traditional voice channels
of 64 Kbps to 9.6 Kbps channels thus enabling us to reduce the cost of international calls, while
maintaining the perceived voice quality of a 64 Kbps call.

WiFi

In February 2005, Telkom launched a hot spot service that provides wireless data access service

by using 802.11b/g WiFi technology. Any user with a wireless enabled notebook computer or personal
digital assistant can connect to the service while in the coverage area. WiFi is mainly targeted at hotel
groups, major shopping malls and some sites on national routes.

WiMAX

Telkom has concluded proof of concept testing of fixed WiMAX technology. This technology

is standards based broadband wireless access technology that provides high throughput connectivity
over long distances. It can be used for a number of applications, including access broadband
connections for hotspots and high-speed enterprise connectivity for businesses. The technology is
designed to reduce investment risks for operators and service providers by enabling Telkom to more
cost effectively take advantage of the market potential of wireless broadband access.

Services that have been successfully tested to date include internet access, high-speed

broadband data and voice over internet protocol via customer premises gateways. Service testing has
been confined to Telkom employees. Telkom has a memorandum of understanding in place with Intel
Corporation for the interchange of information on WiMAX in order to keep up with the latest WiMAX
developments. Telkom is a member of the WiMAX Forum and actively monitors the Forum for any
developments. Telkom will seek to deploy the fixed version of WiMax in the short to medium term and
the mobile version in the medium to long term subject to the availability of the technology.

Fixed Mobile Convergence Alliance, or FMCA

Telkom is a member of the Fixed Mobile Convergence Alliance, or FMCA, where we share

information on research and development related projects and new fixed-mobile convergence product
launches.

The FMCA is a global alliance of 24 telecommunications operators whose objective is to

accelerate the development of fixed-mobile convergence products and services. The members are
leading fixed, mobile and integrated (fixed and mobile) network operators from around the world
whose customers stand to benefit from the development of convergence products and services.
The total FMCA subscriber base is in excess of 800 million, or one in every three of the world’s
telecoms users. As the fastest growing operator-only alliance in the world, the FMCA provides a solid
foundation for shaping the convergence market, reducing the barriers to entry for new convergence
products and services to enter the market.

International connectivity

We offer international connectivity from two international switching centers to terrestrial, satellite

and submarine cable routes. Further international connectivity has been provided with the deployment
of very small aperture terminals and other satellite transmitters located at strategic locations
throughout the country. Telkom has satellite bandwidth available from Intelsat in the Atlantic and
Indian Ocean regions. Telkom also has access to satellite capacity from 64 Kbps to 45 Mbps upon
request. The Indian Ocean region can be connected to two satellites and the Atlantic Ocean region
can be connected to three satellites. Satellite access is provided from our earth stations at
Hartebeeshoek, west of Pretoria, Crowthorn in Gauteng and Klipheuwel in Cape Town. Currently we
have satellite voice and data connectivity to locations not reachable via undersea cable, including
most African countries, the Americas, Australia and Europe.

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We have investments in three cable systems connecting Africa and international destinations.

A submarine cable system, SAT-2, exists between Cape Town and Europe. We are the largest

capacity owner on the SAT-2 submarine cable system with the right to use approximately 65% of the
combined capacity. Consistent with our strategy of increasing international carrier traffic on our
network, we have invested approximately $85 million in the SAFE and SAT-3/WASC submarine cable
systems that were introduced into service during 2002. The cable systems provide fiber optic
connectivity between South Africa and international destinations. These cable systems utilize the
latest technology available in order to provide improved high speed voice, data, video and other on
demand high bandwidth services and have increased fiber optic bandwidth between Europe and
Africa significantly. We have the right to approximately 20% of the combined capacity on the SAFE
and SAT-3/WASC submarine cable systems, making us the largest capacity owner in these cable
systems out of the 36 telecommunications operators who have invested over $650 million in these
cables. We believe we are uniquely positioned to exploit the synergies between our extensive fixed-
line network in South Africa and our investments in these cables in order to become the
communications hub of Africa. The length of the SAFE cable is approximately 13,100 km and the SAT-
3/WASC is approximately 14,300 km.

Information technology/operations support systems

The quality of our operations support systems, which store, manage and analyze essential

business information, is critical to the success of our business. Our operations support systems permit
us to make timely and informed business decisions and respond to our customers’ needs with tailored
solutions. We have dedicated significant resources to the design and implementation of our new
operations support systems based on a comprehensive and well defined information technology
strategy.

We have a data center in Centurion, Pretoria in order to improve internal information technology

service levels and offer external internet and related services such as managed data center hosting
services. The center is safeguarded by state of the art environmental and security systems capable of
performing maintenance without impacting service or availability. The complex houses a 2,100 square
meter data center and over 9,000 square meters of usable office space and includes a twenty four
hour command/operations center. The command center contains a large video wall that enables
personnel to keep abreast of the current state of our information technology infrastructure twenty four
hours a day.

Our data center has been leveraged to include both our internal support systems and our external

hosted offerings. We have a business continuity and disaster recovery plan utilizing both our
Centurion and its sister data center site in Bellville locations for redundancy purposes. Both operations
can be monitored and operated from either location via service management tools and data for critical
systems is transferred between these sites for rapid disaster recovery should it be necessary.
Our power support systems have also been upgraded to add an additional level of environmental
redundancy. This redundancy is shared between the data center and the new national business
solutions center building to reduce cost.

In June 2003, Telkom officially inaugurated a center known as the national business solution

center. This center was built alongside the national network operations center and the data center
providing Telkom with a centralized information technology backbone. The national business solutions
center was commissioned and we are currently hosting 23 out of our 26 hosting customers in the
national business solutions center. Both the data center and the national business solution center are
operated from a command center and now provides an additional 3,000 square meters of computer
room space designed to the same specifications as our primary data center requirements. In addition,
this new facility gives Telkom the ability to provide high availability configurations that are split
between both buildings for redundancy purposes. Network reliability has also been enhanced by
creating a totally redundant, shared network environment between the data center, the national
business solution center building and the national network operations center.

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Telkom is currently in the process of implementing a number of management information and

other operating support systems in order to better respond to the increased liberalization of the
South African telecommunications industry. These systems are being designed to integrate with
Telkom’s billing and other management information systems, to provide Telkom with the capability of
providing comprehensive and detailed operating information, a single bill for customers with multiple
locations and products and configuring products and services across voice and data domains. The
nature and the current status of these systems are as follows:

• Workforce management system – an automated mechanism to manage and optimize Telkom’s

workforce. The first phase of the workforce management system was completed in the 2006
financial year. The roll-out of the second and third phases of the workforce management system
is planned for the 2007 financial year.

• Customer management system solution – a system to unify both voice and data customers, to

manage and maintain all customer information and interactions and to produce a single bill for
customers’ voice and data services or products. The roll-out of the customer management
system for selected segments that will enable Telkom to have a single view of its customer is
planned to commence towards the end of the 2007 financial year.

• Product catalogue (in conjunction with the customer management system solution) – a system

to configure and maintain products and services for both voice and data domains, to bundle
products and groups of products across voice and data product and service domains, and to
provide contract management functionalities for both voice and data services or products and
customers. The implementation for non-voice related products and services is planned for the
2007 financial year and for voice related products and services is targeted for completion in the
2008 financial year.

• Order management system (in conjunction with the customer management system solution) – a

system to provide end-to-end management of customer orders. The order management system for
non-voice related products and services is planned to be completed in the 2007 financial year and
for voice related products and services is planned for completion in the 2008 financial year.

• Fault management solution – a system to accelerate the real-time and accurate detection of

problems in Telkom’s network by event collection, filtering and correlation. The first phase was
successfully implemented in the national network operations center in the 2005 financial year
and the next phase is planned to be completed in the 2007 financial year.

• Enterprise asset management platform – a system for holistic asset lifecycle management in the

company. The final phase was successfully implemented in the 2006 financial year.

• Next generation operation support system – Telkom’s current operating support system needs to

be evolved and developed to a new next generation operating support system to integrate and
support Telkom’s conversion to a next generation network. The first phase will be a
comprehensive scoping exercise that is planned to be launched in the 2007 financial year.

Competition

We currently compete for telephone customers with the three existing mobile operators, Vodacom,

our 50% owned joint venture, MTN and Cell C. MTN is a public company listed on the JSE Limited
and Cell C recently announced that it would be entering into a joint venture with Virgin Mobile, which
we expect will increase competition. We also compete with service providers who use least cost
routing technology that enables fixed-to-mobile calls from corporate private branch exchanges to
bypass our fixed-line network by being transferred directly to mobile networks. In recent periods, our
fixed-line business has experienced significant customer migration from our fixed-line services to
mobile services, as well as substitution of calls placed using mobile services rather than our fixed-line
service. The entry of multinational corporations to South Africa is expected to be a further incentive for
global communications operators, which already service these corporations abroad, to establish or
enhance their presence in South Africa.

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In addition, our data services have faced increased competition from Sentech, which owns and

operates satellite transmission systems and in August 2003 launched a packaged, always-on,
bi-directional broadband service via satellite that allows users anywhere in South Africa to get
connected, regardless of whether landlines are available. In January 2004, Sentech also launched a
competing wireless high-speed internet access service offering. Similarly, Vodacom’s and MTN’s
3G networks now also enables customers to browse the internet on a high speed platform, which
provides increased competition for our data services.

We also face increased competition from mobile operators, value added network operators and

private network operators as a result of determinations by the South African Minister of
Communications in September 2004 and we expect that the new licensing framework to be
implemented in connection with the Electronic Communications Act will result in the market becoming
more horizontally integrated with a number of separate licenses being issued for electronic
communications network services, electronic communications services, broadcasting services and the
radio frequency spectrum and will substantially increase competition in our fixed-line business. We
expect that the introduction of number portability and carrier pre-selection could further enhance
competition and increase our churn rates.

In September 2004, the South African Minister of Communications granted an additional license to

provide public switched telecommunications services to a second national operator, SNO-T, that is
30% owned by Transtel and Esitel, which are beneficially owned by the South African Government,
and other strategic equity investors, including 26% beneficially owned by TATA Africa Holdings (Pty)
Limited, a member of the TATA Group, a large Indian conglomerate with information and
communications operations. ICASA issued this license on December 9, 2005, however, SNO-T is not
expected to commence business activities until the second half of the 2006 calendar year. A process
has also commenced to issue additional licenses to small business operators to provide
telecommunications services in underserviced areas with a teledensity of less than 5%. The Minister
of Communications has identified 27 of these underserviced areas. ICASA has issued licenses to
successful bidders in seven of them and has issued invitations to apply for licenses in the remaining
20. It is expected that further licenses will be issued in the 2006 calendar year.

In September 2004, the Minister of Communications issued determinations, pursuant to which,

since February 1, 2005:

• mobile cellular operators have been permitted to obtain fixed telecommunications links from

parties other than Telkom;

• VANS operators and private network operators have been permitted to resell the

telecommunications facilities that they obtain from Telkom;

• VANS operators have been permitted to allow their services for the carrying of voice, including

voice over internet protocol;

• Telkom is no longer the sole provider of facilities to VANS operators; and

• licensing for the provision of payphone services has been expanded.

In March 2005, the Minister of Communications tabled a Convergence Bill in Parliament to

promote convergence and establish the legal framework for convergence in the broadcasting,
broadcasting signal distribution and telecommunications sectors that repealed the
Telecommunications Act, however, all existing licenses are to remain valid until converted to new
licenses in accordance with the new licensing regime and regulations made under the
Telecommunications Act are also to remain in force until new regulations required are made to fully

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implement the provisions of the Electronic Communications Act. The bill, renamed the Electronic
Communications Bill, was passed by the Parliament of South Africa in December 2005 and was
signed by the President of South Africa on April 18, 2006. The Electronic Communications Act came
into effect on July 19, 2006. The Electronic Communications Act aims to supplement or replace
current sector specific legislation and change the market structure from a vertically integrated,
infrastructure based, market structure to a horizontal, service based, technology neutral, market
structure with a number of separate licenses being issued for electronic communications network
services, electronic communications services, broadcasting services and the radio frequency
spectrum. We expect that the new licensing framework will result in the market becoming more
horizontally integrated and will substantially increase competition in our fixed-line business.

See “–Regulation and License Requirements.”

As competition intensifies, the main challenges our fixed-line business faces are continuing to

improve customer loyalty through improved services and maintaining our leadership in the South
African communications market. As a result of increasing competition, we anticipate a reduction in
overall average tariffs and market share and an increase in costs in our fixed-line business, which
could cause our growth rates, operating revenue and net profit to decline.

We compete primarily on the basis of customer service, dependability and price in those areas

where we currently face competition and where we expect to compete for public switched
telecommunications services in the future. We intend to introduce new products and services and tariff
structures with the aim of maintaining and gaining revenue.

Procurement

We utilize a transparent multi disciplined approach to purchasing and supplier management

in order to ensure that we receive the best products and services from reliable suppliers at the best
overall price. We have established cross functional sourcing teams staffed with individuals from
different areas of our organization to evaluate and make recommendations on certain bids, which,
depending on value, require the further approval of our executive committee and board of directors
and notification of certain approvals to our board of directors. Bid requests are published in our weekly
tender bulletin and on our web site. We have adopted affirmative procurement policies that favor
historically disadvantaged suppliers. We seek to utilize at least two suppliers for all critical equipment
where possible in order to minimize supply risk. In the year ended March 31, 2006, our top twenty
suppliers accounted for approximately 70% of all purchases and our main supplier was Total Facilities
Management Company (Pty) Limited, or TFMC, which accounted for approximately 18% of all
expenditure. During the year ended March 31, 2006, Telkom directed R6.4 billion to black economic
empowerment suppliers, representing approximately 67% of Telkom’s total procurement spending,
compared to R5.2 billion and R4.6 billion in the years ended March 31, 2005 and 2004 respectively.

Mobile Communications

Overview

We participate in the South African mobile communications market through our 50% interest

in Vodacom. Vodacom is the largest mobile communications network operator in South Africa
with an estimated market share of approximately 58% as of March 31, 2006 based on total estimated
customers. Vodacom has investments in mobile communications network operators in Lesotho,
Tanzania, the Democratic Republic of the Congo and Mozambique. Vodacom’s other shareholder
is Vodafone, which beneficially owns 50% of Vodacom.

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South Africa

Vodacom had approximately 19.2 million customers in South Africa as of March 31, 2006.

As of March 31, 2006, Vodacom’s 6,401 base stations were capable of reaching approximately 97.5%
of the country’s population based on the last official census conducted in 2001 and approximately
69.4% of the total land surface of the country. The estimated penetration rate for mobile
communications in South Africa has increased to approximately 70% as of March 31, 2006.

Vodacom offers public mobile communications services which are based on second generation

Global System for Mobile Communications, or GSM, and third generation Universal Mobile
Telecommunication System, or UMTS, mobile communication standards. Vodacom was granted a
mobile cellular telecommunications license in South Africa in September 1993 and commenced
service in June 1994. This mobile cellular telecommunications service license was confirmed and
reissued in August 2002 pursuant to the Telecommunications Act, and was renewed until
May 30, 2024 on the same terms and conditions as the existing license. In addition, Vodacom was
awarded a permanent 1800 MHz license and a 3G spectrum license during the 2005 financial year.

Products and services

Vodacom offers a wide range of mobile voice and data communications products and services,

including value-added services. Vodacom’s services also include the sale of handsets. Vodacom has
a history of innovation as illustrated by its record of product offerings. Vodacom was the first mobile
communications network operator in the world to offer prepaid mobile communications services on an
intelligent network platform and to offer its customers coverage across the whole of Africa where
commercial GSM roaming is available. Vodacom was also the first mobile communications network
operator in South Africa with nationwide coverage. Vodacom launched the first commercial
3G network in South Africa in December 2004. Vodacom also entered into an alliance with Vodafone,
pursuant to which Vodacom is able to market Vodafone branded products and services.

Vodacom recently introduced 3G with high-speed downlink access, or HSDPA, giving its

customers access to global high speed broadband communications. Vodacom’s 3G HSDPA became
commercially available on April 2, 2006. In addition, in December 2005, Vodacom became the first
South African cellular network to bring its customers Mobile TV that allows customers to watch a wide
variety of popular channels on their 3G Vodafone live! cellphone.

Vodacom will seek to continue to grow data revenues by launching useful office tools and

software applications such as 3G, HSDPA, Mobile TV, Vodafone Mobile Connect Cards and
BlackBerry®, at competitive prices. BlackBerry®Connect, as well as BlackBerry®Built-In, which
enable customers to access BlackBerry services without a traditional BlackBerry® device, are also
expected to be available on certain Motorola, Siemens and Sony Ericsson handsets in the
2007 financial year. In the future, Vodacom intends to continue to focus on offering premier interactive
voice response, premium short messaging services, general packet radio services, multimedia
services, HSDPA services, internet services, e-mail services and fixed-to-mobile products.

Contract subscription services

As of March 31, 2006, approximately 12.3% of Vodacom’s South African customers were contract

customers. Contract subscription is typically for an initial 24-month contract. Vodacom offers residential
and business contract customers a range of mobile service packages designed to appeal to specific
customer segments. Vodacom offers two broad categories of contract subscription packages, leisure
packages, such as Weekend Everyday, and business packages, such as Business Call. Vodacom
launched the Family Top Up package in the 2004 financial year, a hybrid contract product which
combines the benefits of a contract service with the financial control offered by a prepaid service and
is designed to facilitate migrations to contract packages from existing prepaid packages. Vodacom’s

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Family Top Up package has proven highly successful and has contributed to the growth in contract
customers. As of March 31, 2006, 27.6% of Vodacom’s contract customers were Top Up customers
compared to 19.8% as of March 31, 2005 and 5.1% as of March 31, 2004.

The monthly subscription and call charges vary with each of the packages. All contract packages

make available voice, fax and data services, voice-mail, caller identification, call forwarding, call
waiting and short message service capabilities. Depending on the contract package, customers either
pay a fixed monthly charge and receive a set number of free minutes or pay a monthly subscription
for access plus a per minute or per second fee. In addition, Vodamail Executive is available to all
contract packages on request. This is an integrated voice and fax mailbox that offers features such
as Faxmail, group distribution list and voice-mail messaging.

Prepaid services

As of March 31, 2006, approximately 87.5% of Vodacom’s South African customers were prepaid

customers. Vodacom has two prepaid products, Vodago and 4U. Vodago was Vodacom’s initial
prepaid product and offers two tariff plans, Vodago Standard and Vodago Smartstep. Vodacom’s 4U
is a prepaid per second billing product targeted at the youth market who have higher usage of SMS
and a need for per second billing. Since its inception, the number of 4U customers has increased
significantly and as of March 31, 2006, approximately 77.0% of Vodacom’s prepaid customers were
4U customers. Vodago and 4U provide instant access to the Vodacom network and enable low
volume customers to control mobile telephone costs based on usage because there are no long term
contracts. Fax and certain data services became available to Vodago customers in the 2006 financial
year.

Vodacom offers eight prepaid vouchers, seven of these ranging from R12 worth of airtime value

and a 90 day usage time window to R1,100 worth of airtime value and a 365 day usage time window.
An eighth voucher option is available for R365 that allows the customer R265 worth of airtime value
and a 2 year airtime window regardless of activity. In November 2005, Vodacom introduced the 46664
starter pack, a Super six starter pack in which Vodacom donates a portion of the proceeds to the
Nelson Mandela 46664 Foundation to help fight against HIV/AIDS. During the 2005 financial year,
Vodacom introduced a new Super six 4U starter pack which changed the Vodago Super six starter
pack to include free SMSs.

Recharge-related innovations in the 2005 financial year included the Yebo 5 voucher, adding SMS

as a recharge channel, and the addition of electronic recharge as a service to the Vodacom4me
portal. Remaining airtime value and time window are accumulated provided the customer recharges
before the time window expires. The accumulated time window cannot exceed 24 months. Vodacom
also offers a voucher that entitles customers to receive unlimited incoming calls for 365 days. This
voucher does not entitle the customer to make outgoing calls, but can be combined with other
vouchers that entitle the customer to make outgoing calls as well as accumulate time window.

A wide variety of retail outlets, such as handset dealers, gas stations, tobacco shops and post

offices, sell recharge vouchers for Vodacom’s prepaid customers. Recharging can also take place
electronically and through the use of banking networks. Because prepaid customers pay in advance
for their mobile service, the risk of bad debts is eliminated and the risk of fraud is substantially
reduced. In addition, prepaid services provide cost savings to Vodacom as bills do not need to be sent
to prepaid customers and handsets for prepaid customers are not subsidized. There are less service
offerings for the prepaid mobile communications market than there are for the contract base market.
Following the launch of 4U and Vodago SmartStep, Vodacom is continuing to implement initiatives to
expand its prepaid mobile communications service offerings and to gain a greater understanding of its
prepaid customer base and its requirements.

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Community services

In 1996, Vodacom, jointly with Siemens and Psitek, developed community telephone units that are

installed throughout communities either on an individual basis or grouped in a container with the
Vodacom brand. Community service phones are purchased by local entrepreneurs who resell
community phone services. Community service phones are preloaded with airtime and can be
recharged electronically by telephone shop operators when the airtime on the phone expires.

The demand for community service phones has been strong since its introduction. Vodacom had

deployed approximately 30,287 community service phones as of March 31, 2006, exceeding its
aggregate license target of 22,000 community service phones. The development of community service
phones has made it possible to provide mobile access to the more than 20 million
South Africans who live in communities where there is less than one telephone line per hundred
people and have improved the quality of life for many South Africans who previously had no
access to telecommunications. Community service phones have also been a cost effective method
of significantly increasing traffic revenue on Vodacom’s network due to their low roll-out costs to
Vodacom and low barriers to entry for customers. Community service phones generated ARPUs of
more than 12 times Vodacom’s average total South African ARPUs in the year ended March 31, 2006.
Vodacom intends to appropriately adopt its business model for community service phones in its other
African operations.

Value-added mobile voice and data services

Vodacom offers an extensive portfolio of value-added mobile voice and data services, including

caller identification, call forwarding, call waiting, voice-mail, entertainment, mobile information and
commerce services, short messaging services, mobile multimedia services, data services, mobile
internet access, fax services and twin call services, the latter of which enable customers to use two
mobile phones under the same number. Vodacom’s Call Sponsor offering enables contract customers
to sponsor the calls of up to three prepaid customers. Vodacom has experienced substantial growth
in the use of its value-added voice and data services, resulting in increased traffic revenue on its
network. Short messaging services and, to a lesser extent, new data initiatives such as Vodafone
Mobile Connect Cards, Vodafone live!, Mobile TV and BlackBerry®, were the key contributors to
Vodacom’s R1.9 billion, R1.2 billion and R943 million of data revenue in South Africa in the years
ended March 31, 2006, 2005 and 2004, respectively. Vodacom transmitted approximately 3.5 billion
short messaging services over its network in the year ended March 31, 2006, up from approximately
2.4 billion and 2.0 billion in the years ended March 31, 2005 and 2004, respectively.

Vodacom launched the first commercial 3G network in South Africa in December 2004. In the

2005 financial year, Vodacom also entered into an alliance with Vodafone, pursuant to which Vodacom
is able to market Vodafone branded products and services. In connection with the launch of its
3G network, Vodafone launched Vodafone Mobile Connect Cards, 3G/GPRS/HSDPA datacards
providing fast, secure access to corporate networks from laptop or desktop computers, Vodafone live!
with global and local content, picture and video messaging and downloads, Mobile TV and
BlackBerry®. Vodacom’s alliance with Vodafone also provides Vodacom access to Vodafone’s global
research and development and access to Vodafone’s marketing and buying powers. As of March 31,
2006, Vodacom had 179,576 3G handsets active on its network and had sold 37,798 Vodafone Mobile
Connect Cards. In the 2004 financial year, Vodacom launched SMS-only roaming and promotional
offerings such as free MMSs and free SMSs. Vodacom launched MyLife, its MMS and GPRS network
service, on October 17, 2002, Office Anywhere in August 2003, location based services Look4me in
February 2004 and Look4it in March 2004. Vodacom was also the first to launch BlackBerry® devices
into the South African market, shifting the focus to data and e-mail on demand. As at March 31, 2006
Vodacom had 12,028 BlackBerry® users registered on its network.

79

There was an increase in the usage of GPRS during the 2006 financial year, with the number of

GPRS users increasing to approximately 1.4 million at March 31, 2006 from approximately 0.6 million
at March 31, 2005 and approximately 0.1 million at March 31, 2004. A major contributor to the volume
of GPRS and 3G data traffic is Vodafone live!, which was launched on March 22, 2005 and by
March 31, 2006 there were 351,427 users. On December 1, 2005 Vodafone Release 7 was launched
with welcome tones and Mobile TV as major new services. By March 31, 2006 there were 16 TV
channels available on Vodafone live! with 12,903 users.

New and innovative value added services include e Billing. Further additions and enhancements

include video telephony charged at the same rate as voice calls, video mail and the missed call
keeper service.

Vodacom continued to deliver on its data strategy which utilizes wireless application service

providers, or WASPs, to provide ease of connectivity and standardized interfaces. Currently, the
WASP model is driven largely by consumer applications, with the majority of interest being in
premium-rated outgoing SMS and bulk incoming SMS services. As of March 31, 2006, 152 WASPs
had applied for connectivity to the Vodacom network.

Premium rated SMS content is still focused on competitions, information and alert services.

Average monthly volumes have grown to 13 million premium rated SMSs in the 2006 financial year.

Data revenue contributed 6.0% of Vodacom’s total revenue in the year ended March 31, 2006, up

from 4.9% in the year ended March 31, 2005 and 4.5% in the year ended March 31, 2004. Vodacom
expects that the broad introduction of “always on” faster response and generally higher speed
packet-switched data services, such as GPRS and universal mobile telecommunications system,
or UMTS, will provide the platform for future value-added services.

Handset sales

Vodacom Service Provider Company (Pty) Limited, or Vodacom Service Provider, sells handsets

to its distribution channel and other service providers. Service providers in South Africa generally
subsidize handsets when a contract customer enters into a new contract or renews an existing
contract, depending on the airtime and tariff plan and type of handset purchased. Handset sales for
the 2006 financial year amounted to approximately 3.8 million units, a year-on-year growth of
approximately 58.3% and 14% for the 2006 and 2005 financial years, respectively. Vodacom’s state of
the art warehouse in Midrand handled an average of 2,130 orders per day, up by 29.7% from the prior
year figure of 1,642 orders per day. Approximately 98.1% of all deliveries to distribution channels are
finalized within 48 hours of receipt of the order. Camera technology in phones has improved with 1.3
mega pixel cameras being the standard, 2 mega pixel cameras now available on high end phones
and up to 5 mega pixels expected to be available in the 2007 financial year. HSDPA handsets are also
expected to become available in the market in the 2007 financial year. In addition, bluetooth
technology is available on most mid- and high-end phones. The Vodafone live! handset portfolio has
increased significantly during the course of the year and accounted for approximately 17% of
Vodacom’s total sales in the 2006 financial year. 3G handset prices also declined significantly in the
last few months making 3G handsets now more affordable. Bundling offers of the Vodafone Mobile
Connect Card with laptops and desktops are expected to be increased in the coming year with the
introduction of embedded 3G modules in laptops and desktops.

Mobile users may use any handset on the Vodacom or any other network if the handset contains

a SIM-card for Vodacom or the other network. No modifications, other than the replacement of the
SIM-card, are required to utilize handsets on either the Vodacom or other mobile communications
network operators’ networks, unless the handset is network locked.

Interconnection services

Vodacom has interconnection agreements with national mobile operators, MTN and Cell C, as

well as with Telkom and carrier-of-carriers licensee, Sentech. In addition, Vodacom has an
interconnection agreement in place with six out of the seven USALs, VANS operator Gateway
Communications and is in the process of negotiating agreements with another nine VANS operators
as well as with SNO-T.

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Roaming services

Vodacom concluded a fifteen year national roaming agreement with Cell C, until March 31, 2019.

This roaming agreement enables Cell C to provide national coverage to its customers, by allowing the
routing of calls over Vodacom’s mobile communications network. Vodacom has also entered into
roaming agreements with six out of the seven USALs. Similar to CellC, the USALs are allowed to
make use of Vodacom’s network to originate and terminate calls. In addition, Vodacom provides the
USALs with certain ancillary services such as SIM card provisioning, recharge facilities and customer
care.

International roaming enables Vodacom’s contract customers to make and receive calls with their

mobile telephones in countries using the networks of operators with whom Vodacom has entered into
international roaming agreements. As of March 31, 2006, Vodacom had international roaming
agreements with 350 mobile communications network operators in 169 countries. Vodacom also
receives revenue from its roaming partners for calls made in South Africa by their customers.

Customers

Vodacom has experienced substantial growth in its mobile customer base since its inception in

1994. As of March 31, 2006, there were an estimated 33.0 million mobile customers in South Africa,
which represents an estimated penetration rate of 70.6% of the population. As of March 31, 2006,
Vodacom estimated that its customers represented approximately 58% of South African mobile
customers, making Vodacom the leading mobile communications network provider in South Africa
based on total estimated customers.

The following table sets forth customer data for Vodacom’s mobile communications services in

South Africa as of the dates indicated.

Year ended March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

Customers (thousands)
(at period end)

(1)

9,725

12,838

19,162

32.0

49.3

Contract

1,420

1,872

2,362

31.8

26.2

Prepaid

8,282

10,941

16,770

32.1

53.3

Community services

23

25

30

8.7

20.0

Total inactive mobile customers (%)
(at period end)

(2)

n/a

7.9

8.7

n/a

10.1

Contract

n/a

1.5

2.4

n/a

60.0

Prepaid

n/a

9.0

9.6

n/a

6.7

Gross connections (thousands)

4,998

6,180

9,140

23.6

47.9

Contract

377

610

702

61.8

15.1

Prepaid

4,617

5,566

8,422

20.6

51.3

Community services

4

4

16

–

300.0

Churn (%)

(3)

36.6

27.1

17.7

(26.0)

(34.7)

Contract

10.1

9.1

10.0

(9.9)

9.9

Prepaid

41.3

30.3

18.8

(26.6)

(38.0)

(1)

Customer totals are based on the total number of customers registered on Vodacom’s network, which have not been
disconnected, including inactive customers, as of the end of the period indicated.

(2)

Vodacom’s inactive customers are defined as all customers registered on Vodacom’s network for which no revenue
generating activity has been recorded for a period of three consecutive months. In the 2005 financial year, a software
error was identified in the calculation of inactive customers. Vodacom has corrected inactive customers as of March 31,
2005. Information for prior years is unavailable.

(3)

Churn is calculated by dividing the average monthly number of disconnections during the period by the average monthly
total reported customer base during the period. See below for a discussion of when customers are disconnected from
Vodacom’s network.

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Vodacom’s contract customers are disconnected when they terminate their contract, or their

service is disconnected due to non-payment. Prepaid customers in South Africa were disconnected if
they did not recharge their vouchers after being in time window lock for six months for periods prior to
November and December 2002, for four months for periods from November and December 2002 until
April 2003 and for three months from April 2003 until December 2003. Time window lock occurs when
a customer’s paid active time window, or access period, expires. In December 2003, Vodacom
changed the deactivation rule for prepaid customers in South Africa to align itself with European and
industry standards. From December 2003, prepaid customers in South Africa are disconnected from
its network if they record no revenue generating activity within a period of 215 consecutive days.
See “Item 4.“Information on the Company– History and development of the Company–Recent
Developments–Vodacom’s change in South African definition of active customers”.

Vodacom believes the significant year on year growth in customer numbers since inception is due

primarily to historical pent up demand for basic voice telephone services, particularly in underserviced
and rural, outlying areas of South Africa. Vodacom also attributes its growth to the launch of its
prepaid services, which have enabled those that lack access to credit and steady income to obtain
telephone service. Vodacom believes that its aggressive marketing campaign, the creation of strong
distribution channels for Vodacom’s products and services and the introduction of new value-added
voice and data services have further contributed to growth.

The South African customer base has continued to grow in the 2006 and 2005 financial years with

the majority of the growth resulting from the prepaid market. The strong growth in customers was a
direct result of the large number of gross connections achieved. Prepaid gross connections increased
51.3% to approximately 8.4 million in the 2006 financial year compared to approximately 5.6 million in
the 2005 financial year. Contract gross connections increased 15.1% to approximately 702,000 in the
2006 financial year compared to approximately 610,000 in the 2005 financial year. Growth in contract
customers was largely due to the increase in connections in Vodacom’s hybrid contract product,
Family Top Up. As of March 31, 2006, 27.6% of Vodacom’s contract customers were Top Up
customers, compared to 19.8% as of March 31, 2005.

Vodacom expects that the number of contract customers in South Africa will eventually level off

and that the number of prepaid customers in South Africa will continue to grow in the medium term
driven by the continued demand for basic voice telephone services. Vodacom’s growth in prepaid
customers could be negatively impacted by restrictions contained in RICA, which may require a
burdensome registration process for customers and may require Vodacom to disconnect prepaid
customers if it is not able to obtain such information. See “Risk Factors.” Vodacom believes that
mobile communications services provide a cost effective means of telephone services for customers
in underserviced and rural, outlying areas. Vodacom’s efforts will therefore continue to focus on
growing customer numbers while carefully managing its existing customer base, marginal revenue per
customer and customer related acquisition and retention costs. Vodacom, MTN and Cell C each
provide connection commissions to service providers and dealers, or agents. These are often utilized
by agents to subsidize handsets as an incentive for customers to switch operators to obtain a new
handset and to reduce the cost of access. As a result, Vodacom focuses on keeping its contract churn
rate low and retaining high value customers through focused handset upgrade policies and other
retention measures, while continuously monitoring customer acquisition and retention costs. Vodacom
also actively manages churn through customer relationship management systems, developing its own
distribution and logistics capabilities and other retention initiatives. Prepaid customer churn is
negatively affected by the high rate of unemployment in South Africa and the low cost of access.

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Traffic

The following table sets forth information related to the traffic volume of Vodacom’s customers in

South Africa for the periods indicated. Traffic comprises outgoing calls made in South Africa and
abroad and incoming calls received by Vodacom’s customers in South Africa, excluding national
roaming and incoming international roaming calls.

Year ended March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

Total Traffic (millions of minutes)

12,172

14,218

17,066

16.8

20.0

Outgoing

(1)

7,647

9,231

11,354

20.7

23.0

Incoming (interconnection)

4,525

4,987

5,712

10.2

14.5

(1)

Vodacom has changed the calculation of traffic in the 2006 financial year to exclude packet switch data traffic. Traffic has
been recalculated for the 2005 and 2004 financial years.

Growth in traffic in the 2006 financial year was mainly due to the 49.3% growth in the total

customer base in South Africa from 12.8 million customers as of March 31, 2005 to 19.2 million
customers as of March 31, 2006. Also evident was a marked change in customer calling patterns, with
total mobile to mobile traffic increasing by 26.1% while total mobile to fixed and fixed to mobile traffic
increasing by 1.7%. Growth in traffic in the 2005 financial year was mainly due to a 32.0% growth in
the customer base from 9.7 million customers as of March 31, 2004 to 12.8 million customers as of
March 31, 2005.

Tariffs

Vodacom’s tariffs are subject to regulatory scrutiny, and, in certain circumstances, approval of

ICASA. The contract tariff packages are designed to appeal to leisure and business customers.
Vodacom sets its contract subscription package tariffs utilizing a balanced mix of access and usage.
For those tariff packages where voice usage is high, the per minute rate is lowered and the monthly
subscription tariff is raised. For those packages where the voice usage is low, the per minute tariff rate
is increased and the monthly subscription tariff is lowered. For those users where the monthly
subscription tariff is a barrier to entry, Vodacom offers prepaid packages with no monthly subscription
tariff, but sets the per minute voice tariff rate higher. Vodacom and MTN are parties to an amended
interconnection agreement with each other and new interconnection agreements with Cell C. Effective
January 2005, the mobile-to-mobile interconnection rates for both commercial and community service
telephone originated calls were increased from R1.23 peak and R0.73 off peak to R1.25 peak and
R0.77 off peak for commercial calls and from R0.04 peak and R0.04 off peak to R0.06 peak and
R0.06 off peak for community service calls, in each case exclusive of VAT.

The following table sets forth selected tariff information as of March 31, 2006 for a family top up

package, a leisure contract package, a business contract package and a prepaid package. Peak
hours are weekdays between 7:00 a.m. and 8:00 p.m., whereas Happy Hours, which were introduced
in the 2006 financial year, are weekdays between 5:00 p.m. and 8:00 p.m. Off peak hours are all other
times and all day during public holidays and weekends. Tariffs for international calls vary according to
thedestination country of the call. Vodacom’s most recent annual tariff amendments were lodged on
August 26, 2005 and approved by ICASA on September 6, 2005. The amendments resulted in an
average tariff decrease of 4.9%, effective October 1, 2005.

83

As of March 31, 2006

Family

Leisure

Business

Top Up

(1)

Contract

(2)

Contract

(3)

Prepaid

(4)

(ZAR, including value-added tax)

Connection fee

97.00

97.00

97.00

–

Monthly charge/subscription

135.00

135.00

185.00

–

National calls

(ZAR/minute, including value-added tax)

Mobile-to-fixed peak calls

2.70

2.75

1.76

2.99

Mobile-to-fixed off peak calls

0.90

0.95

0.95

1.08

Mobile-to-mobile peak calls-own network

1.80

1.80

1.76

2.99

Mobile-to-mobile “Happy Hours” – own network

1.49

1.49

1.49

1.49

Mobile-to-mobile off peak calls-own network

0.90

0.90

0.95

1.08

Mobile-to-mobile peak calls-other networks

2.75

2.75

2.30

2.99

Mobile-to-mobile off peak calls-other networks

1.05

0.95

1.15

1.30

International calls

Peak

7.20, 10.80,

1.76+

1.76+

7.20, 10.80,

14.40, 18.00,

Telkom

Telkom 14.40, 18.00,

21.60 or 25.20

peak

peak

21.60

or 25.20

42.00,

depending depending

on zone

on zone

Off peak

7.20, 10.80,

0.95+

0.95+

7.20, 10.80,

14.40, 18.00,

Telkom

Telkom 14.40, 18.00,

21.60 or 25.20

off peak

off peak

21.60

or 25.20

dependingdepending

on zone

on zone

(ZAR, including value-added tax)

SMS per message

Peak

0.80

0.80

0.80

0.80

Off peak

0.35

0.35

0.35

0.35

(1)

Tariff for “Family Top Up,” Vodacom’s hybrid contract package. Vodacom’s “Family Top Up” contract includes R135 of
credit airtime value per month. Calls are charged for the first 60 second increment and one-second increments thereafter.
As of March 31, 2006, “Family Top Up” customers accounted for 27.6% of Vodacom’s total contract customers.

(2)

Tariff for “Weekend Everyday,” Vodacom’s contract leisure package. Vodacom’s “Weekend Everyday” contract includes
120 free off peak minutes per month. Calls are charged for the first 60 second increment and 30 second increments
thereafter. As of March 31, 2006, “Weekend Everyday” customers accounted for 23.1% of Vodacom’s total contract
customers.

(3)

Tariff for “Business Call,” Vodacom’s contract business package. Vodacom’s “Business Call” contract includes no free
minutes per month. Calls are charged for the first 60 second increment and 30 second increments thereafter. As of
March 31, 2006, “Business Call” customers accounted for 4.9% of Vodacom’s total contract customers.

(4)

Tariff for “4U.” Calls are charged per second. As of March 31, 2006. “4U” customers accounted for 77.0% of Vodacom’s
total prepaid customers.

Sales and marketing

Vodacom’s sales and marketing strategy is split into two focus areas, marketing and brand

building and sales and distribution. Vodacom’s promotional strategy seeks to build a brand that is
widely recognized by customers. Vodacom’s advertising and promotion campaign is focused on
television advertising and sponsorship of sporting and entertainment events.

84

The sale and distribution of Vodacom’s products and services and the acquisition and retention of

customers are performed by Vodacom’s wholly owned subsidiary, Vodacom Service Provider, a
company incorporated in South Africa, and the other independent and exclusive service providers. In
recent years, Vodacom has purchased a number of the previously independent service providers and
consolidated its sales and distribution operations into Vodacom Service Provider Company. On March
1, 2004, Vodacom purchased 51% of Smartphone, acquiring an additional 2.5 million prepaid
customers. On April 16, 2004, Smartphone purchased an 85.75% equity stake in Smartcom, acquiring
an additional 40,000 contract customers. On February 1, 2005, Vodacom acquired the contract
customer base, dealer agreements and five employees of Tiscali.

Vodacom acquired a 51% stake in Cointel for approximately R84.3 million on August 1, 2005.

Cointel’s core business is providing value added and m-commerce services to the telecommunications
industry.

An offer to acquire the cellular business of Africell, an exclusive Vodacom dealer in South Africa,

was accepted on April 6, 2006. The acquisition is subject to a number of conditions, including
approval by the South African Competition Commission.

In addition, Vodacom Service Provider Company seeks to enter into exclusive relationships with

leading national retailers, wholesalers, dealers and franchisees in order to acquire and retain contract
and prepaid customers. Vodacom utilized two exclusive service providers and two independent non-
exclusive service providers as of March 31, 2006. As of March 31, 2006, 97.4% of Vodacom’s total
customer base, 83.5% of its contract customer base and 99.3% of its prepaid customer base in South
Africa was managed by exclusive service providers or controlled directly by Vodacom.

Vodacom currently targets four market segments, namely:

• Corporate market-services to corporations and enterprises;

• Developed market-services to customers in the higher income groups;

• Developing market-services to customers in underserviced areas and lower income groups, who

increasingly participate in the economy; and

• Youth market-services specifically designed for the needs of the youth.

Since most customers in the developed market already have cell phones, Vodacom’s objective in

the short to medium term is to retain market share and attract new customers through attractive
products. Loyalty and retention programs played an integral role in achieving this objective. Vodacom
also sought to increase its contract customer base by migrating appropriate high-end prepaid
customers to Vodacom’s hybrid contract product, Top Up, in the 2006 and 2005 financial years.

As of March 31, 2006, Vodacom’s distribution network consisted of:

• Vodaworld – A unique one stop mobile telecommunications mall, showcasing the latest

technology in cellular hardware.

• Dealers and franchises – 610 company and independently owned mobile dealer and franchise

outlets, which include Vodashops, Vodacares, Vodacom 4U stores, Vodacom Active stores and
Telkom Direct shops.

• National chains – 9,870 retail outlets.

• Vodacom Direct – Vodacom’s call center based selling division.

• Corporate solutions – An extensive direct sales division within Vodacom which concentrates on

the sale of contracts, data products and value-added services to businesses.

• Wholesale – A significant channel representing underserviced areas and street vendors.

85

Dealer incentives

Vodacom pays amounts to its service providers and dealers for the ongoing administration of its

customers on a monthly basis.

Vodacom also pays the following incentive commissions to its service providers and dealers:

Contract connection incentive commissions. These commissions are paid to service providers or

dealers for the acquisition and activation of each new customer for all contract packages.

Contract retention incentive commissions. These commissions are paid to service providers or

dealers for the retention of all contract packages, excluding Vodacom 4U. The purpose of these
incentives is to retain customers.

Prepaid incentive commissions. These commissions are paid to service providers or dealers for

the acquisition and activation of each new customer for all prepaid packages.

Distribution incentive commissions. These commissions are paid to service providers or dealers

to maintain and increase their loyalty to, and exclusivity with, Vodacom. These incentives include
exclusivity payments and advances to service providers in respect of purchases of assets for stores
and providing distribution outlets with distribution subsidies to maintain the loyalty of distribution
outlets through the stimulation of sales.

Handset incentive commissions. These incentives are offered by Vodacom to dealers who

purchase phones from Vodacom to provide to customers, which are recorded as a net against
revenue.

Customer care

Vodacom services customer needs through a variety of channels such as call centers, walk-in

centers established in Cape Town, Durban, Midrand and Port Elizabeth, interactive voice response,
through e-mail and Vodacom’s web sites. Vodacom’s key focus area for the 2006 financial year has
been Vodacom’s customer self service. Approximately 75% of customer queries in the 2006 financial
year were handled by the interactive voice response system and more than 80% of customer queries
were resolved on the first call. Consequently, Vodacom has significantly improved its customer
information systems and become increasingly proactive in developing relationships with its customers,
particularly in the high revenue segment of the market. Vodacom is currently planning to establish
more walk-in centers in other parts of the country. A fifth walk-in center was opened in Bloemfontein
on May 8, 2006.

During the 2006 financial year, customer care was split into two focus areas, namely systems

support and operations and retentions, in order to provide greater focus and more effective span of
control. An email contact center was also established and has experienced significant growth.
Vodacom also outsourced its directory inquiries and basic prepaid calls, which has had a positive
impact on overall service levels and freed in-house call centers to manage more complex queries,
particularly resulting from the growth in data.

The growth of the customer base has necessitated recruitment of an additional 1,000 customer

care staff with 75% to be placed in the frontline to improve call handling capacity. The additional staff
were used to fill existing seating capacity in the Western Cape, Port Elizabeth and Midrand, however,
the bulk were allocated to a new call center in the city center of Johannesburg.

Vodacom has developed a customer relationship management package that enables it to create a

historical profile of customers so that customer information can be shared among the group and used
in Vodacom’s customer retention initiatives. Although customer focus has always been important to
Vodacom, during the last three years customer relationship management has become a key strategic
focus area and an important philosophy in Vodacom. The current year saw ongoing integration of

86

support systems and staff training as part of improving this continuously challenging area. Vodacom
strives to improve relationships with customers by understanding their needs, their likes, dislikes, how
they use its products and how they would like Vodacom to interact with them. Vodacom reassures its
performance through independent customer satisfaction surveys designed by Vodafone and
conducted on a quarterly basis. Vodacom launched its Vodacom Customer Reward Program to
recognize and reward for influential and high spending contract individuals, which it believes, has
contributed to a very low churn in this sector.

In addition, Vodacom has undertaken a number of other initiatives, including the development

of distribution and logistics capabilities to better service customers, called Vodacare. As of
March 31, 2006 the Vodacare infrastructure consisted of 28 branches and franchises in all the
major centers providing walk-in customer support to Vodacom customers, and an advanced repair
center hub for high-level repairs situated in Midrand. Vodacom believes that, with an average of
approximately 60,000 repairs per month, this dedicated customer service support infrastructure
differentiates Vodacom’s service from that of its competitors. During the 2004 financial year,
Vodacom launched a new 48 hour swap program to further increase service levels. The primary focus
is to manage and facilitate the process of putting the customer back on the air with as little interruption
as possible and is achieved by using a combination of repairs, swaps, refurbished handsets, loan
handsets, and managed repairs through third parties.

Vodacom plans to continue to invest in sophisticated information systems to facilitate the interface

between operational support systems, administrative systems, billing systems, distribution systems
and customer service systems. Vodacom believes that the new information systems will allow for the
development of enhanced service management processes.

Vodacom’s contract customers receive itemized bills and are encouraged to pay by direct debit

transfer. Vodacom has a flexible billing system for corporate customers allowing it to offer multiple
tariff rates, more customized billing information and billing for all GPRS- and 3G-related services.
Vodacom monitors its exposure to credit loss and customer fraud through a credit scoring system that
evaluates potential contract customers. The evaluation process has led to decreases in contract
customer churn rates and increases in the overall credit quality of its mobile contract customers. For
its prepaid customers, Vodacom offers the option to recharge over the telephone and certain websites
using credit cards in order to make the recharge process quicker and easier, as well as from internet
sites from specific banks.

Infrastructure and technology

Vodacom operates one of the largest mobile communications networks on the African continent

using and deploying digital GSM technology within the GSM900/1800MHz frequency band based on
total estimated customers.

In South Africa, the network’s core GSM infrastructure is characterized by mobile switching

centers (including visitor location register, or VLR, and gateways), base station controllers, base
transceiver stations, including transceivers and GPRS functionality across the network.

As of March 31,

2004

2005

2006

Macro base transceiver stations

4,158

4,518

4,873

Micro base transceiver stations

1,555

1,508

1,528

Total

5,713

6,026

6,401

The Vodacom network’s UMTS 3G infrastructure as of March 31, 2006 consisted of 14 radio

network controllers, 1,504 UMTS base transceiver stations (Node B), 4,512 UMTS transceivers and
HSDPA functionality across the 3G network.

87

Prepaid services are supported by the same GSM technology as contract services. In addition,

prepaid services utilize a network of intelligent network nodes and associated front-ends and
mediation systems for a variety of interactive voice response and electronic recharging options,
including commercial bank ATM and point of sale terminal recharging.

As of March 31, 2006, Vodacom’s transmission network is comprised of 18,596 E1 links and

228 broadband links leased from Telkom, which are managed by a comprehensive next generation
synchronous digital hierarchy digital cross-connect and multi-services platform infrastructure. In
addition, Vodacom operates an extensive data network for its internal and commercial data
requirements, based on internet protocol. It is comprised of more than 50 nodes and is supported by
the Ethernet over synchronous digital hierarchy.

This network enables Vodacom to provide value-added voice and data services supported by

voice-mail platforms, short messaging service centers, a wireless application protocol platform, a
mobile internet gateway platform supporting advanced SIM toolkit applications and an intelligent
network platform.

Vodacom has designed its mobile communications network using scaleable technology in order to

be able to increase capacity in an economic manner as demand dictates. The network is capable of
providing a high level of service quality despite an extremely varied distribution of traffic, difficult
terrain conditions and a complex regulatory environment. In the year ended March 31, 2006, Vodacom
had a call retention rate of 99.6% and a call success rate of 99.3% in South Africa.

As of March 31, 2006, approximately 23.5% of Vodacom’s base stations were 3G enabled and

Vodacom had installed dual band (GSM900/GSM1800MHz) base transceiver stations in 1,599
locations, comprising 13,945 GSM1800MHz transceivers. In addition, all base transceiver stations in
metropolitan areas have been upgraded with dual band antennas and feeder cables to accommodate
GSM1800MHz equipment, while Vodacom continues to deploy GSM1800MHz radio equipment in all
regions to provide additional customer capacity as necessitated by the increase in network traffic. In
the design of its network, Vodacom has paid careful attention to the needs of customers and to the
environment by making an extensive effort to implement sites in the most discrete manner possible.
Furthermore, attention has been given to management of electromagnetic emissions to ensure
compliance with recognized international environmental standards such as those developed by the
International Commission on Non Ionizing Radiation Protection.

Vodacom’s billing system allows for the billing of GPRS services, such as multi-media messaging

services and other content-based services. Unlike traditional GSM services where calls are billed
on a per second or per minute basis, customers utilizing GPRS services are billed according to the
number of bytes of data sent or received.

Vodacom believes its 3G license will continue to assist in stimulating further growth in products

and services to satisfy customer demand. As a result, during the 2006 financial year Vodacom
increased its capital spending in this area and expects to further increase its capital spending in this
area in the 2007 financial year.

Competition

The current South African mobile telecommunications market consists of three mobile

communications network operators, Vodacom, MTN, a wholly owned subsidiary of MTN Group
Limited, a public company listed on the JSE, and Cell C, which recently announced that it would
be entering into a joint venture with Virgin Mobile and we expect will increase competition. As of
March 31, 2006, Vodacom was the market leader with an estimated 58% market share based on the
total estimated customers in the South African mobile communications market, while MTN had an
estimated 33% market share and Cell C had an estimated 9% market share. Vodacom competes
primarily on the basis of product quality, availability and network coverage. Vodacom believes that
increased competition could have an adverse impact on its tariffs and churn rate.

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Operations in other African countries

Vodacom intends to increase revenue from its other African operations, initially by growing its

existing operations primarily in sub-Saharan Africa, and, in the future, by selectively acquiring
additional mobile licenses or operators primarily in other sub-Saharan African markets. Investments
outside of South Africa are evaluated and monitored against key investment criteria, focusing primarily
on countries with stable economic and political conditions or good prospects for growth, market
leadership and profitability. Other key factors include Vodacom’s ability to gain majority ownership,
develop strong local partnership relationships and obtain non-recourse financing, where available.
Where Vodacom is not able to obtain non-recourse financing, it seeks to fund operations from
internally generated funds. Other African operators are branded under the “Vodacom” name.

Vodacom has investments in mobile communications network operators in Lesotho, Tanzania,

the Democratic Republic of the Congo and Mozambique. The number of customers served by
Vodacom’s operations outside South Africa has grown significantly to approximately 4.4 million as of
March 31, 2006 from approximately 2.6 million as of March 31, 2005 and approximately 1.5 million
as of March 31, 2004. Revenue from Vodacom’s operations outside of South Africa has grown to
R2,974 million in the year ended March 31, 2006 from R2,274 million in the year ended
March 31, 2005 and R1,505 million in the year ended March 31, 2004. Our share of Vodacom’s
operating profit from other African operations was R144 million in the year ended March 31, 2006,
compared to an operating loss of R98 million in the year ended March 31, 2005 and an operating
profit of R29 million in the year ended March 31, 2004.

Vodacom entered into a five year management agreement with Vee Networks Limited, or Vee

Networks, effective April 1, 2004, pursuant to which Vodacom would have managed Vee Networks’
cellular network operations in Nigeria with the intention of acquiring an equity stake in the business.
On May 31, 2004, however, Vodacom announced that it had elected to terminate the management
contract and abandon its plan to make an equity investment in the business of Vee Networks in
Nigeria. Vodacom continued to provide technical support to Vee Networks for a period of six months.
All negotiations to acquire a controlling interest in Vee Networks, trading as V-Mobile in Nigeria, have
been terminated due to the parties being unable to reach agreement on the valuation of Vee
Networks. In 2004, Econet Wireless Network had initiated various actions against Vee Networks and
Vee Networks’ shareholders. Vodacom was featured in some of these actions as a potential defendant
in the event its acquisition of Vee Networks’ shares occurred. Since Vodacom did not acquire any
shareholding in Vee Networks, no action was instituted against it by Econet Wireless Network.

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The following table sets forth customer data for Vodacom’s mobile communications networks in its

other African operations as of the dates specified. The table reflects 100% of all of Vodacom’s operations.

Year ended March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

Other African countries
Customers (thousands)
(at period end)

(1)

1,492

2,645

4,358

77.3

64.8

Lesotho

80

147

206

83.8

40.1

Tanzania

684

1,201

2,091

75.6

74.1

Democratic Republic of the Congo

670

1,032

1,571

54.0

52.2

Mozambique

58

265

490

356.9

84.9

Churn (%)

(2)

Lesotho

65.1

17.3

22.3

(73.4)

28.9

Tanzania

30.0

29.6

28.5

(1.3)

(3.7)

Democratic Republic of Congo

20.2

23.1

28.1

14.4

21.6

Mozambique

0.3

11.3

32.2

n/a

185.0

Gross connections (thousands)

Lesotho

51

70

98

37.3

40.0

Tanzania

404

746

1,353

84.7

81.4

Democratic Republic of the Congo

513

565

892

10.1

57.9

Mozambique

58

225

342

287.9

52.0

Penetration (%) (at period end)

(3)

Lesotho

5.1

7.4

12.9

45.1

74.3

Tanzania

3.3

5.1

9.2

54.5

80.4

Democratic Republic of the Congo

2.3

3.5

5.5

52.2

57.1

Mozambique

2.6

4.2

8.4

61.5

100.0

ARPU

(4)

Lesotho (ZAR)

125

92

78

(26.4)

(15.2)

Tanzania (ZAR)

128

81

67

(36.7)

(17.3)

Democratic Republic of the Congo (ZAR)

150

98

86

(34.7)

(12.2)

Mozambique (ZAR)

110

52

36

(52.7)

(30.8)

Number of employees (at period end)

(5)

761

1,074

1,154

41.1

7.4

Lesotho

68

63

67

(7.4)

6.3

Tanzania

316

350

438

10.8

25.1

Democratic Republic of the Congo

334

538

479

61.1

(11.0)

Mozambique

43

123

170

186.0

38.2

(1)

Customer totals are based on the total number of customers registered on Vodacom’s network, which have not been
disconnected, including inactive customers, as of the end of the period indicated.

(2)

Churn is calculated by dividing the average monthly number of disconnections during the period by the average monthly total reported customer base during the period. Vodacom’s contract customers are disconnected when they terminate their contract, or their service is disconnected due to non-payment. For other African countries, each subsidiary has its own disconnection rule to disconnect inactive prepaid customers.  Vodacom Lesotho disconnects its prepaid customers at the expiration of time window lock of 210 days. Vodacom Tanzania, Vodacom DRC and Vodacom Mozambique disconnect their prepaid customers if they record no revenue generating activity within a period of 215 consecutive days. See Item 4. “Information on the Company–Business Overview–Mobile communications.”

(3)

Penetration calculations are Vodacom estimates.

(4)

ARPU is calculated by dividing the average monthly revenue during the period by the average monthly total reported
customer base during the period. ARPU excludes revenue from equipment sales, other sales and services and revenue
from national and international users roaming on Vodacom’s networks.

(5)

Headcount excludes outsourced employees. Employees seconded to other African countries are included in the number
of employees of other African countries and excluded from Vodacom South Africa’s number of employees.

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Lesotho

Vodacom owns an 88.3% interest in Vodacom Lesotho (Pty) Limited, or Vodacom Lesotho,

a company incorporated in the Kingdom of Lesotho, while Sekha-Metsi Enterprises (Pty) Limited,
a company incorporated in the Kingdom of Lesotho, owns the remaining 11.7% of Vodacom Lesotho.
Vodacom Lesotho’s network was commercially launched in May 1996. Vodacom Lesotho’s license
has a term of 20 years with 10 years remaining.

Although Vodacom Lesotho is a very small operation by South African standards, Vodacom

launched its Lesotho operations due to the strategic geographical importance of Lesotho in terms of
Vodacom’s market share in neighboring South Africa. The network has 59 base transceiver stations,
one mobile service switching center, two base station controllers, one short message service center,
one intelligent network platform and one voicemail platform. Vodacom Lesotho’s cumulative capital
expenditures through March 31, 2006 were R225 million, compared to R210 million through
March 31, 2005 and R201 million through March 31, 2004. The continued investment is an indication
of the company’s drive to expand and optimize the existing infrastructure ensuring the highest
coverage and service levels to its customer base.

Vodacom Lesotho offers a variety of prepaid and contract products to customers. The current

prepaid offering is known as Mocha-o-chele. Vodacom Lesotho’s SuperTalk50 and SuperTalk100
contract products are the first and only contracts in Lesotho that offer bundled minutes and a
subsidized handset. Additional contract packages include Corporate Executive, Master Plan, Budget
Plan and Family Plan, all of which provide connectivity options without bundled services or subsidized
handsets. Vodacom Lesotho also offers public phone services and a direct connect service allowing
customers to access the Vodacom Lesotho network directly from their PABX. Vodacom Lesotho’s
distribution is maintained via eight Vodashops, six Super Dealers and four retail groups and Vodacom
products can be purchased from over 100 outlets in Lesotho. Customers are serviced through a walk-
in customer care center or via a customer care call center.

Vodacom Lesotho managed to increase its customer base by 40.1% to 206,000 as of

March 31, 2006 from 147,000 as of March 31, 2005. The customer base increased by 83.8%
in 2005 from 80,000 as of March 31, 2004. The prepaid plan is the most popular package and
accounted for 97.1% of Vodacom Lesotho’s total customers as of March 31, 2006, compared to
96.6% as of March 31, 2005 and 95.0% as of March 31, 2004. The net increase in total customers in
the year ended March 31, 2006 is the result of 98,000 gross connections for the year, compared to
70,000 in the year ended March 31, 2005, and 51,000 in the year ended March 31, 2004. Vodacom
Lesotho had a churn rate of 22.3% in the 2006 financial year, compared to 17.3% in the 2005 financial
year and 65.1% in the 2004 financial year. The lower churn rate in the 2005 financial year was due to
completion of the clean up of the inactive customer base and the result of the introduction of a seven-
month disconnection policy in April 2004. The high churn rate in the 2004 financial year was the result
of an ongoing process of cleaning up the inactive customer base.

Econet-Ezicell remains the only direct mobile GSM competitor in the region, with Vodacom

Lesotho having superior coverage and infrastructure. Vodacom Lesotho had implemented
13 additional sites during the 2006 financial year. Vodacom Lesotho has increased its international
roaming agreements to match that of Econet Ezicell. This will remain a priority in the 2007 financial
year, with the core focus of retaining and expanding its estimated 80% market share as of
March 31, 2006.

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The headcount for Vodacom Lesotho increased to 67 employees as of March 31, 2006,

compared to 63 employees as of March 31, 2005 and 68 employees as of March 31, 2004.
The number of customers per employee improved by 31.6% from 2,333 customers per employee
as of March 31, 2005 to 3,071 customers per employee as of March 31, 2006.

The regulatory environment in Lesotho continues to prove challenging. Changes in the operating

environment include the licensing of a third network operator, Bethlehem Technologies, with an
international gateway to provide data services, and a further amendment to Telecom Lesotho’s license
allowing it to provide a product, Lekomo Flexi, which is a mobile service using the Econet Ezi-Cell
infrastructure. The license to Bethlehem Technologies has been challenged through court action by
Lesotho Telecommunications Corporation. The Government of Lesotho has taken a decision to extend
Telecom Lesotho’s fixed-line exclusivity rights for an additional twelve month period.

Tanzania

Vodacom owns a 65% interest in Vodacom Tanzania Limited, or Vodacom Tanzania, a company

incorporated in the United Republic of Tanzania, or Tanzania, while Planetel Communication Limited,
a company incorporated in Tanzania, owns a 16% interest in Vodacom Tanzania, and Caspian
Construction Proprietary Limited, a company incorporated in Tanzania, owns a 19% interest in
Vodacom Tanzania. Vodacom Tanzania was initially granted a 15 year license to operate a GSM
network in Tanzania, which became effective on December 21, 1999. The period of the license was
subsequently extended for a further 10 years to 25 years from the initial date of the license. The roll-
out of the network commenced in March 2000 and the commercial launch of the network occurred in
August 2000.

Vodacom Tanzania became the largest mobile communications network operator in Tanzania

within one year of launching. Vodacom Tanzania’s cumulative capital expenditures through
March 31, 2006 were R1.5 billion, or TSH297.6 billion, compared to R1.4 billion, or TSH240.1 billion,
through March 31, 2005 and R1.1 billion or THS201.0 billion through March 31, 2004. Network
coverage expanded to approximately 15% of the land surface of Tanzania and approximately 45% of
the population as of March 31, 2006, compared to approximately 12% of the land surface and
approximately 43% of the population as of March 31, 2005 and approximately 9% of the land surface
and approximately 38% of the population as of March 31, 2004.

Vodacom Tanzania’s current package offerings are Vodago, its prepaid product, Vodachoice, its

contract product, and Vodatariffa, an SMS based information service. During the course of the 2006
financial year, Vodacom Tanzania introduced Vodafasta, a recharge product which allows prepaid
customers to electronically recharge airtime via registered vendors. This product enhances the
availability of Vodago prepaid airtime and reduces the cost of physical distribution. Vodachoice
continues to be the preferred contract package although Vodajazza, a contract hybrid product offered
on the prepaid billing platform, has gained popularity in the corporate market. The peoples phone
“Adondo” continues to form an integral part of the company’s public phone offering and strategy.
Vodacom Tanzania was the first operator in Tanzania to introduce per second billing on
October 3, 2003. Per second billing has proved highly successful in Tanzania, and as of
March 31, 2006, approximately 2.0 million of Vodacom Tanzania’s customers were utilizing this
service, compared to approximately 980,000 as of March 31, 2005 and approximately 400,000 as of
March 31, 2004. Vodacom Tanzania currently offers international roaming on 171 networks in
95 countries. Vodacom Tanzania launched an interactive voice response in the 2004 financial year to
improve customer service levels. Customers can now be served in 2 languages, namely Kiswahili
and English.

The Vodacom Tanzania market profile was 99.5% prepaid as of March 31, 2006, compared to

99.3% prepaid as of March 31, 2005 and 98.9% prepaid as of March 31, 2004, and this is not
expected to change significantly in the near future. Vodacom Tanzania has increased the number of

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customers registered on its network by 74.1% to approximately 2.1 million as of March 31, 2006 from
approximately 1.2 million as of March 31, 2005 and approximately 684,000 as of March 31, 2004
mainly because of an 81.4% increase in gross connections to approximately 1.4 million in the year
ended March 31, 2006, compared to approximately 746,000 in the year ended March 31, 2005 and
approximately 404,000 in the year ended March 31, 2004. Vodacom Tanzania had a churn rate of
28.5% in the 2006 financial year, 29.6% in the 2005 financial year and 30.0% in the 2004 financial
year due to the high levels of competition in Tanzania.

There are three other mobile operators licensed in Tanzania, Zantel, Mobitel and Celtel Tanzania.

Zantel, which had historically operated exclusively on the island of Zanzibar, moved onto the mainland
during the year and enhanced its coverage by entering into a national roaming agreement with
Vodacom Tanzania, effective from July 31, 2005. Tanzania Telecommunication Company Limited, or
TTCL, transferred its majority shareholding in Celtel Tanzania to the Tanzanian government and
subsequently Celtel International B.V was acquired by Mobile Telecommunications Company, or MTC,
of Kuwait. There was no national prepaid tariff reduction during the year, however, contract off-network
tariffs were reduced in response to competition. Since the deregulation of the international market,
many more international operators entered the market, which allowed Vodacom Tanzania to reduce
international call tariffs toward the end of the year due to more favorable negotiated terminating
settlement rates.

Vodacom Tanzania’s estimated market share was approximately 58% as of March 31, 2006,

compared to approximately 59% as of March 31, 2005 and approximately 57% as of March 31, 2004.
Vodacom estimates that Celtel had a market share of approximately 27%, 26% and 25%, Mobitel had
a market share of approximately 11%, 11% and 14% and Zantel had a market share of approximately
4%, 4% and 4% as of March 31, 2006, 2005 and 2004, respectively, based on the total estimated
mobile market.

Vodacom Tanzania had a total headcount of 438 employees as of March 31, 2006, compared to

350 employees as of March 31, 2005 and 316 as of March 31, 2004. Included in employees as of
March 31, 2006 are 10 secondees who are employed out of Vodacom International Limited. Effective
April 1, 2005, a new managing director, Romeo Khumalo, was appointed the managing director,
replacing Jose dos Santos, who was transferred to Vodacom Mozambique.

Vodacom Tanzania continues to support the development of local Tanzanian skills. Vodacom

Tanzania views employee relations as a key factor in ensuring a positive working environment. Staff
issues are addressed via a consultative forum where staff are given a platform to address issues and
agreed actions are monitored on a monthly basis.

The regulatory environment has been dominated by the negotiation of the terms and conditions of

migration of Vodacom’s existing license to the new regulatory framework, which had not been finalized
at the end of the year. Vodacom Tanzania also applied for its own international gateway license as
part of this process. The arbitration of the historical dispute between TTCL and Vodacom in respect of
outstanding interconnection fees was settled during the 2006 financial year as Vodacom decided not
to pursue the case.

In July 2004 the Tanzanian Communications and Regulatory Authority issued new interconnection

rates for both mobile and fixed operators. The mobile termination rate was proposed to be reduced
from 17.5 US cents to 10.0 US cents from August 1, 2004 and 8.9 US cents from January 1, 2005
with further annual reductions in the future. Vodacom submitted comments in support of its views on
the introduction of cost based interconnection and Vodacom Tanzania challenged the process by
which the termination rates were introduced. A public hearing was held during September 2004 to
discuss these issues, the result of which was that the revised 2005 interconnect rates were introduced
from October 1, 2004 and the further reduction was delayed by two months to March 1, 2005.

93

In February 2006, the Tanzanian Communications and Regulatory Authority issued new

interconnection rates for both mobile and fixed operators. The mobile termination rate was reduced
from 8.9 US cents to 8.0 US cents from March 1, 2006, slightly above the previously published
expected rate of 7.9 US cents. This rate is scheduled to remain in place until December 31, 2007.

A new Telecommunications Act was introduced, effective February 23, 2005. This ended the fixed

line monopoly of Tanzanian Telecommunications Company Limited, and is expected to lead to the
liberalization of the telecommunications market within the country. The Ministry of Telecommunications
is currently engaging the industry in respect of a new regulatory framework, and accordingly licensing
of services has yet to be finalized. Vodacom Tanzania has in the meantime commenced the routing of
international traffic via Zantel at rates which are expected to improve margins over those offered by
the Tanzanian Telecommunications Company Limited.

Democratic Republic of the Congo

On December 11, 2001, Vodacom, together with Congolese Wireless Network s.p.r.l., a company

incorporated in the Democratic Republic of the Congo, formed Vodacom Congo (RDC) s.p.r.l., or
Vodacom Congo, a company incorporated in the Democratic Republic of the Congo. Vodacom owns a
51% interest in Vodacom Congo, while Congolese Wireless Network owns the remaining 49% interest
in Vodacom Congo. Congolese Wireless Network s.p.r.l. had a limited existing network in the
Democratic Republic of the Congo. Vodacom Congo’s network was officially launched under the
Vodacom brand in May 2002. Vodacom Congo has 13 years remaining on its license.

During the year ended March 31, 2004, 51% of Vodacom Congo was proportionally consolidated

in Vodacom’s financial statements. Effective April 1, 2004, Vodacom Congo is being fully consolidated
as a subsidiary in Vodacom’s financial statements after certain clauses granting the minority
shareholders participating rights were removed from the shareholders agreement.

Vodacom Congo is currently performing well under challenging circumstances. The local currency

appreciated 13.0% against the US Dollar over the 2006 financial year, after depreciating 32.9% in the
2005 financial year, improving affordability levels for the general population. Improved affordability
fuelled expansion of Vodacom Congo’s customer base as the penetration rate of mobile customers in
Congo increased from 3.5% as of March 31, 2005 to 5.5% as of March 31, 2006. ARPU was affected
negatively as lower end users constituted a large part of the growth. Despite aggressive competition
for market share, Vodacom has been able to retain dominance in the Congolese cellular market. An
aggressive coverage strategy, implementation of an effective and aggressive sales and distribution
strategy and improvement in consumer confidence and spending was the main contributing factors in
achieving the successes in customer growth and improved profitability for the financial year.

Congo’s first presidential and parliamentary elections took place on July 30, 2006, after an official

postponement was announced in June 2005. It is hoped that the outcome of the elections will bring
political stability and economic growth to the Democratic Republic of the Congo. Vodacom believes
that its current coverage and market share levels provide Vodacom Congo a strong position to benefit
from any economic upturn.

Network coverage has been rolled out in all of the nine provinces of the Democratic Republic of

the Congo, including 184 towns and consisted of 373 base stations and four mobile service switching
centers as of March 31, 2005, compared to 130 towns, 289 base stations and four mobile service
switching centers as of March 31, 2005 and 71 towns, 227 base stations and four mobile service
switching centers as of March 31, 2004. Network capacity in the main centers has also been
upgraded to maintain quality and service. Vodacom Congo covered approximately 30% of the
geographical area of the Democratic Republic of the Congo and approximately 67% of the population
as of March 31, 2006, compared to approximately 26% of the geographical area and approximately
65% of the population as of March 31, 2005 and approximately 25% of the geographical area and
approximately 55% of the population as of March 31, 2004.

94

Vodacom Congo is financing its roll-out in the Democratic Republic of the Congo with a non-

recourse medium term facility and equity contributions. Vodacom Congo’s cumulative capital
expenditures through March 31, 2006 were more than US$323 million, compared to US$281 million
through March 31, 2005 and US$227 million through March 31, 2004.

Vodacom Congo currently offers three products, a contract service, a prepaid service and a public

phone service. The contract product is aimed at the corporate market with the focus on value added
services and customer service. Service to contract customers was further enhanced in the 2006
financial year with the possibility to migrate to time-sharing options and the introduction of the
corporate PABX product. The prepaid and public phone products are aimed at the general Congolese
market with the main competitive advantage being coverage, network quality and distribution.

To further enhance data revenue streams, Vodacom Congo commercially launched GPRS in

February 2006. The application was introduced to support data transfer requirements during the
electoral process and meet the data demands of local businesses and corporate clients.

In May 2005, Vodacom Congo launched an electronic voucher solution called “Voda E” in order to

strengthen its distribution capabilities and enable customers to recharge to the value of US$0.30,
compared to the previous lowest denomination of US$1.00, and to transfer airtime among users via
text messaging with the use of a standard handset. The new airtime distribution platform accounted
for approximately 30% of all voucher sales on the network in the 2006 financial year.

Vodacom Congo’s customer care center serves customers in their choice of French, English,

Lingala, Kingongo, Swahili and Tshiluba. Vodacom Congo’s interactive voice response handled in
excess of 45,000 calls per day as of March 31, 2006. Vodacom Congo has been successful in
establishing international roaming agreements with 328 operators in 158 countries.

Vodacom Congo’s customer base consisted of 97.9%, 97.9% and 97.5% prepaid customers as of

March 31, 2006, 2005 and 2004, respectively. Vodacom Congo increased customers significantly in
the 2006 financial year to approximately 1.6 million customers as of March 31, 2006 from
approximately 1.0 million customers as of March 31, 2005 as a result of approximately 892,000 gross
connections, coupled with a churn percentage of 28.1%, in the 2006 financial year, compared to
approximately 565,000 gross connections, coupled with a churn percentage of 23.1%, in the 2005
financial year. As of March 31, 2004 Vodacom Congo’s customer base consisted of 670,000
customers as a result of approximately 513,000 gross connections and a churn percentage of 20.2%
in the 2004 financial year. Vodacom competes on the basis of low priced, quality handsets, effective
distribution channels, network coverage and network quality.

Vodacom Congo continued to be the market leader in the Democratic Republic of the Congo with

an estimated market share of approximately 48% as of March 31, 2006, compared to 47% as of
March 31, 2005 and 2004 based on the total estimated mobile market. Celtel is the main competitor in
the Democratic Republic of the Congo with a similar approach of covering a large part of the
population across the country, focusing its coverage in the main city centers. Celtel and SAIT have
embarked on an aggressive pricing campaign and further coverage roll-out. Celtel had an estimated
market share of approximately 44% as of March 31, 2006, compared to approximately 46% as of
March 31, 2005 and 45% as of March 31, 2004 based on the total estimated mobile market. The other
two competitors in the Democratic Republic of the Congo, SAIT and Congo Chine Telecom, had
estimated market shares of approximately 2% and 6%, respectively, as of March 31, 2006.

Vodacom Congo had 479, 538 and 334 employees as of March 31, 2006, 2005 and 2004,

respectively. The process of evaluation, identifying and training of local staff is a continuous focus of
the company as part of the skills transfer process.

95

The National Regulatory Agency, or NRA, has been active during the year working with

international consultants appointed by the World Bank on the reformation of the telecommunication
legislative framework and regulations. Key focus areas included:

– spectrum (national planning, management and fees);

– interconnection guidelines and principles;

– cost modelling;

– numbering (national planning, management and fees); and

– universal service fund (constitution and funding mechanisms).

Draft guidelines and regulations were submitted to network operators for consultation purposes.

The NRA has also been holding public hearings in regards to the introduction of 3G technology.
The NRA’s findings are expected to soon be submitted to the government.

SuperCell, affiliated to MTN-Rwanda cell, was previously granted a license on a regional basis by

the Rassemblement Congolats pour la Democratic, or RCD, political organization. The new political
order established RCD as a recognized political power and SuperCell was granted a national license.
Although the issue remains unresolved, the National Regulatory Agency’s position is currently that no
local interconnection is allowed with SuperCell. In view of the controversy associated with SuperCell’s
operations, the Minister of Post, Telephone and Telegraph subjected the validity of the SuperCell
license to a minimum required investment in the Democratic Republic of the Congo by SuperCell of
core network elements.

In addition to its GSM license rights, Vodacom Congo was granted additional exploitation rights

for PABX (including an assigned spectrum for corporate direct connection) and internet / WiMax.

Mozambique

Vodacom Mozambique was established on October 23, 2003 and launched commercial

operations on December 15, 2003. Vodacom owns 98% of VM (S.A.R.L.), trading as Vodacom
Mozambique and the remaining 2% is held by a local consortium named EMOTEL. Vodacom
Mozambique was awarded its license in August of 2002, but due to the fixed-line operator and the
cellular operator being one company with no interconnect rates applicable, the license was not
accepted until August 2003 when the issues were satisfactorily resolved. The license is a 2G GSM
license and will expire in 2018.

Vodacom Mozambique’s infrastructure roll-out consisted of one mobile services switching center,

four base station controllers and 169 base transceiver stations as of March 31, 2006. The network had a
capacity of 1.0 million customers as of March 31, 2006, with an increase to a capacity of 1.5 million
planned for 2007. Vodacom Mozambique’s cumulative capital expenditures, excluding the license,
through March 31, 2006 were approximately R605 million, or approximately MZM 2,645 billion,
compared to R696 million, or MZM 2,173.7 billion, through March 31, 2005 and R478 million, or
MZM 1,785.6 billion, through March 31, 2004. The South African Rand equivalent expenditure is lower
in the current year due to the devaluation of the Mozambique Meticals against all major currencies.
GPRS / Enhanced Data for GSM Evolution, or EDGE, is expected to be available by the end of June
2006 for contract customers and at the end of July 2006 for prepaid customers. EDGE is a data
service that provides a faster version of GSM wireless service.

Vodacom Mozambique offers customers contract and prepaid plans and rolled out public phones

in the 2006 year. Prepaid packages accounted for 98.6%, 98.5% and 98.3% of the gross connections
in the 2006, 2005 and 2004 financial years, respectively. Contract products are mainly aimed at the
corporate and business market, while the prepaid products are aimed at the large informal market.
Vodacom Mozambique has an interactive voice response in place and customer care can handle
customer queries in two languages, namely Portuguese and English.

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Vodacom Mozambique has managed to increase its customer base to 490,000 customers

as of March 31, 2006 from 265,000 customers as of March 31, 2005 and 58,000 customers as of
March 31, 2004. The increase in total customers is as a result of 342,000 and 225,000 gross
connections in the 2006 and 2005 financial years, as well as a churn rate of 32.2% in the 2006
financial year and 11.3% in the 2005 financial year.

During the 2006 financial year, Vodacom Mozambique moved towards an exclusive distribution

arrangement, expanded its distribution network and introduced regional distribution centers. Vodacom
Mozambique also increased its growth incentive and target parameters.

Vodacom Mozambique’s only competition is Moçambique Cellular, previously Telecomunicações

Móveis de Moçambique, Lda, or mCel, a company owned by Telecomunicações de Moçambique,
or TDM, who is also the national fixed-line operator. Vodacom Mozambique had an estimated market
share of approximately 30% as of March 31, 2006, compared to approximately 33% as of
March 31, 2005 and 11% as of March 31, 2004 based on the total estimated mobile market. Vodacom
Mozambique is focusing on coverage expansion, building sound distribution and delivering innovative
value propositions underscored by a warm and receptive brand identity. A unique point of
differentiation for Vodacom Mozambique has come from its corporate social investment projects which
saw the complete reconstruction of a school in Maputo and the donation of sorely needed books and
encyclopedias to schools nationally.

mCel continues to be an aggressive competitor. Given its greater financial and market power,

mCel remains a formidable opponent in the foreseeable future. As of February 2006, mCel had soft-
launched its GPRS offering to contract customers in the Maputo area.

Vodacom Mozambique employed 170 and 123 people as of March 31, 2006 and 2005,

respectively. Effective April 1, 2005, a new managing director was appointed. Vodacom Mozambique
continues to support the development of local skills. A succession plan and development programs
were implemented to transfer skills and knowledge to local employees. Staff issues are addressed via
a consultative forum where they are given a platform to address issues. Vodacom Mozambique
embarked on an HIV/AIDS education and awareness campaign in December 2005 that included an
Industrial Theatre and various speakers, which was well received by employees.

Draft universal service fund regulations are being reviewed by the Ministry of Communications.

Indications are that the regulations will make provision for operator representatives to sit on the board
of the Fund. Intelcon Research & Consulting Limited, consultants appointed by the National
Regulatory Authority, released their report on a proposed pilot project to introduce universal access
followed by a workshop to discuss the pilot project and proposed legislation to govern administration
of the universal access fund. The pilot project will focus on areas in Zambezia and Nampula provinces
in the northern parts of Mozambique. The project will be funded by the World Bank and a subsidy of
US$3.2 million is to be allocated to the successful bidder. Operators are invited to bid for the project.
Apart from providing the necessary coverage, the winning operator is expected to roll-out over
900 community pay-phones and provide the necessary support to the operators of these phones.
The tender document is expected to be released by September 2006, with the project to commence in
December 2006. Vodacom is well into year three in terms of its license obligations for infrastructure
roll-out.

The Ministry of Commerce and Trade is preparing a competition policy for Mozambique. The

project is funded by the United States Agency for International Development, or USAID, and the World
Bank. A discussion document has been circulated for comment and Vodacom Mozambique is a
member of the ministerial task force that is assisting in the development of the policy.

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All operators have been informed by the Instituto Naçional das Comunicaçoes de Moçambique, or

INCM, that all licenses are to be re-issued in compliance with the new Telecommunications Law of
2004. Vodacom Mozambique was invited to submit suggestions to any amendments it wished to make
to its existing license.

In March 2006 the INCM was formally notified by the Administrative Tribunal that, upon Vodacom

Mozambique’s application, Resolution 10/05 of December 20, 2005 that established significantly lower
interconnection rates has been suspended. The INCM is waiting to reduce interconnection rates.
Current attempts are being resisted to ensure that the proper procedure is followed. If the rate
reduction is enforced, it is estimated that it would result in a decrease of approximately US$400,000 in
revenue for the 2007 financial year. It is believed that the launching of GPRS and EDGE, as well as
the prospect of gaining additional market share in the corporate customer and sophisticated high
spending customer area, may mitigate this reduction in part.

Vodacom Mozambique believes that its ability to strictly manage costs in the face of low ARPU

and low minutes of usage, while expanding coverage and distribution and intensifying promotional and
product offerings, will be critical to achieving improved results.

Due to the competitive and economic environment in which Vodacom Mozambique operates,

Vodacom assessed its assets for impairment in accordance with the requirements of IAS 36:
Impairment of Assets. The recoverable amount of these assets was based on the fair value less cost
of disposal at March 31, 2006 and 2005. The fair value of the assets was based on the assumption
that the assets would be disposed of on an item by item basis. The amount by which the carrying
amount exceeded the recoverable amount was recognized as an impairment loss in Vodacom’s and
Telkom Group’s consolidated financial statements for the 2005 financial year. In the 2006 financial
year, this impairment loss was reversed in part due to an increase in the fair value of the assets.

Procurement – Vodacom South Africa

Vodacom South Africa solicits bids for all goods and services in excess of R1 million. Bids are

through a closed tender system by invitation only. A multi-disciplinary cross-functional team evaluates
and awards bids to the best supplier based on the best overall score, taking into account technical
specification, delivery time, costing, financial viability and the participation of black economic
empowerment partners.

Vodacom spent approximately 66.2% of its eligible procurement expenditure with BEE companies

during the year ended March 31, 2006, compared to 75% during the year ended March 31, 2005 and
60% during the year ended March 31, 2004.

Vodacom seeks to utilize at least two suppliers for all critical equipment where possible to

minimize supply risk. Vodacom’s main technology suppliers are Siemens for the core network, and
Alcatel and Motorola for the radio networks.

CAPITAL EXPENDITURES

For information relating to our capital expenditures, see Item 5. “Operating and Financial Review

and Prospects–Liquidity and Capital Resources–Group Liquidity and Capital Resources.”

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REGULATION AND LICENSE REQUIREMENTS

Overview

The licensing and provision of telecommunications services in the Republic of South Africa has

historically been subject to the Telecommunications Act and the extensive regulations made under the
Telecommunications Act. The Telecommunication Act was repealed by the Electronic Communications
Act when the Electronic Communications Act came into effect on July 19, 2006. While a new licensing
regime will be created by the Electronic Communications Act, all existing licenses are to remain valid
until converted to new licenses in accordance with the new licensing regime. Regulations made under
the Telecommunications Act are also to remain in force until new regulations required are made to
fully implement the provisions of the Electronic Communications Act. As a result, the regulatory
environment is evolving, lacks clarity in a number of areas and is subject to interpretation, review and
amendment as the telecommunications industry is further developed and liberalized. In addition, the
regulatory process entails a public comment process, which, in light of the politicized issue of
privatization of industries such as telecommunications in South Africa, makes the outcome of the
regulations uncertain and may cause delays in the regulatory process. A number of significant matters
have not been addressed or clarified.

Regulatory authority

In 2000, the Independent Communications Authority of South Africa Act, 13 of 2000, created

ICASA, a new regulatory body for the telecommunications and broadcasting industries. ICASA
currently serves as the primary regulatory and licensing authority for the South African
communications industry, except with respect to those specific licenses that can only be granted by
the Minister of Communications. In respect of these specific licenses, ICASA is empowered to
evaluate license applications made in response to invitations issued by the Minister of
Communications and to make recommendations to the Minister, who is vested with the final power
to grant licenses, which are then issued by ICASA. Upon its establishment, ICASA inherited a legacy
of regulatory problems from its predecessors. It has been reported that ICASA may currently lack
adequate resources to effectively fulfill its regulatory and licensing functions and to deal with
regulatory challenges that continue to change given the rapidly evolving telecommunications
environment.

Policy directions

The Telecommunications Act entitled the Minister of Communications, after a public comment

period, in consultation with ICASA and after referral to Parliament for comment, to issue and publish
policy directions consistent with the objectives of the Telecommunications Act. Once such policy
directions have been issued, ICASA is obliged to perform its regulatory and other functions in
accordance with such directions.

Regulations

The Telecommunications Act entitled ICASA to make regulations, drafts of which must first be

published in the Government Gazette for public comment before final regulations can be prescribed
and published in the Government Gazette by the Minister of Communications.

Under South African law, it is possible for licensees such as Vodacom and Telkom and for other

interested parties to have the regulations and rulings issued by ICASA reviewed and tested in a court
of law for compliance with the objectives and other provisions of the Telecommunications Act, and
other relevant laws such as the South African Constitution.

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The Telecommunications Act is not entirely clear on a number of issues which are expected to be

addressed by regulation. In addition, because ICASA was only established in 2000 and the
regulations governing the telecommunications industry in South Africa are evolving, lack of clarity
exists in a number of areas that are still subject to interpretation, review and amendment. Therefore
there is some degree of regulatory uncertainty for Telkom, Vodacom and other communications
providers.

The regulatory process entails a public comment process which, in light of the politicized issue of

the privatization of industries such as telecommunications in South Africa, makes the outcome of the
process uncertain and may cause delays.

Licensing of the second national operator

In September 2004, the South African Minister of Communications granted an additional license to

provide public switched telecommunications services to a second national operator, SNO-T, that is
30% owned by Transtel and Esitel, which are beneficially owned by the South African Government,
and other strategic equity investors, including 26% beneficially owned by TATA Africa Holdings (Pty)
Limited, a member of the TATA Group, a large Indian conglomerate with information and
communications operations. ICASA issued this license on December 9, 2005, however, SNO-T is not
expected to commence business activities until the second half of the 2006 calendar year.

Underserviced areas

A process has also commenced to issue additional licenses to small business operators to

provide telecommunications services in underserviced areas with a teledensity of less than 5%.
The Minister of Communications has identified 27 of these underserviced areas. ICASA has issued
licenses to successful bidders in seven of them and has issued invitations to apply for licenses in the
remaining 20. It is expected that further licenses will be issued in the 2006 calendar year.

Determinations by South African Minister of Communications

In September 2004, the South African Minister of Communications issued determinations, as

provided for in the Telecommunications Act. Since February 1, 2005, pursuant to the determinations:

• mobile cellular operators have been permitted to obtain fixed telecommunications links from

parties other than Telkom;

• VANS operators and private network operators have been permitted to resell the

telecommunication facilities that they obtain from Telkom;

• VANS operators have been permitted to allow their services for the carrying of voice, including

voice over internet protocol;

• Telkom is no longer the sole provider of facilities to VANS operators; and

• licensing for the provision of payphone services has been expanded.

These determinations are incorporated in the Electronic Communications Act.

Electronic Communications Act

In March 2005, the Minister of Communications tabled a Convergence Bill in Parliament to

promote convergence and establish the legal framework for convergence in the broadcasting,
broadcasting signal distribution and telecommunications sectors that repealed the
Telecommunications Act. The bill, renamed the Electronic Communications Bill, was passed by the

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Parliament of South Africa in December 2005 and was signed by the President of South Africa on
April 18, 2006. The Electronic Communications Act came into effect on July 19, 2006. All existing
licenses are to remain valid until converted to new licenses in line with the new licensing regime and
regulations made under the Telecommunications Act are also to remain in force until new regulations
required are made to fully implement the provisions of the Electronic Communications Act. As a result,
Telkom’s licenses will be converted to new licenses in accordance with the new licensing. We expect
that the new licensing framework will result in the market becoming more horizontally integrated with a
number of separate licenses being issued for electronic communications network services, electronic
communications services, broadcasting services and the radio frequency spectrum and will
substantially increase competition in our fixed-line business. In addition, the process of converting our
licenses to the new licensing framework may be lengthy and complex and could result in the
imposition of additional obligations and limitations in connection with the converted licenses, which
could disrupt our business operations and decrease our net profit. See “—Legislative developments”
below.

Interconnection

The Telecommunications Act established the general conditions for interconnection among licensed

operators. In particular, the Telecommunications Act guaranteed the right of any licensed operator to
interconnect with operators licensed to provide public switched telecommunication services, including
the second national operator. The Telecommunications Act empowered ICASA to prescribe guidelines
as to the terms and conditions of interconnection agreements and it conferred on ICASA powers to
intervene and propose, or to set its own terms and conditions where the parties were unable to reach
an agreement or the agreed terms are not consistent with the relevant guidelines. Any terms and
conditions of an interconnection agreement set by ICASA are binding between the parties.

In 2000, ICASA made, and the Minister of Communications approved and promulgated,

interconnection guidelines, which stipulate, among other things, that certain operators may be
declared to be “Public Operators,” that certain operators may be declared to be “Major Operators,”
and that certain telecommunication services may be declared to be “Essential Services.” A Major
Operator must provide Essential Services to Public Operators at the Long Run Incremental Cost, or
LRIC, of those services, including a reasonable allocation of common costs and the reasonable cost
of capital. The Electronic Communications Act replaced the concept of Major Operator status with that
of significant market power in a market segment and empowers ICASA to impose pro-competitive
conditions on operators found to have significant market power, which may affect the manner in which
interconnection services are to be provided by such operators.

Supplementary interconnection guidelines, approved by the Minister of Communications, were

made by ICASA in 2002. These guidelines declare Telkom to be a Major Operator, its interconnection
services to be Essential Services and SNO-T, the mobile cellular operators and the underserviced
area licensees to be Public Operators. An amendment to the Telecommunications Act in 2004
declares that, for the purpose of the interconnection guidelines, Sentech, Telkom, SNO-T, the mobile
cellular operators, national long-distance licensees, local area licensees, under serviced areas
licensees, and public payphone licensees are Public Operators. The guidelines further prescribe that
the Essential Services must be made available at the “Fully Allocated Cost” of those services for the
first two years, and thereafter, LRIC based interconnection prices will become mandatory. In May
2005 ICASA initiated an enquiry into whether MTN and Vodacom should be declared Major Operators.
If MTN and Vodacom were declared to be Major Operators, they would be required, like Telkom, to
provide interconnection services at LRIC based interconnection prices.

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Draft interconnection guidelines were published for comment in January 2005. These guidelines

consolidate all previous interconnection guidelines, however, they propose to extend the right to
interconnection services at LRIC based prices to all licensees. Public hearings on these guidelines
were held on March 20 and 22, 2006, but the final regulations have not yet been published.

The interconnection agreements between Telkom and Vodacom and MTN that preceded the

Telecommunications Act were renegotiated and amended in 2001. An interconnection agreement, on
substantially the same terms, was negotiated and concluded with Cell C. We have received a request
to interconnect from SNO-T and negotiations on an interconnection agreement with them are under
way.

Facilities leasing

As in the case of interconnection, the Telecommunications Act established the general conditions

for the leasing of telecommunications facilities. The Telecommunications Act guaranteed the right of
licensed operators to obtain telecommunications facilities from operators licensed to provide public
switched telecommunication services, including the second national operator, and it empowers ICASA
to prescribe guidelines for facilities leasing agreements. The Telecommunications Act conferred on
ICASA powers to intervene and propose, or to set its own terms and conditions where the parties
were unable to reach an agreement or where the agreed terms are not consistent with the relevant
guidelines, regulations or the Telecommunications Act. Any terms and conditions of a facilities leasing
agreement set by ICASA are binding between the parties.

In 2000, ICASA made, and the Minister of Communications approved and promulgated, facilities

leasing guidelines, which stipulate, among other things, that certain operators may be declared to be
“Public Operators,” that certain operators may be declared to be “Major Operators,” and that certain
telecommunication facilities may be declared to be “Essential Facilities.” A Major Operator must
provide Essential Facilities to Public Operators at the LRIC of those facilities, including a reasonable
allocation of common costs and the reasonable cost of capital. An amendment to the
Telecommunications Act in 2004 declares that, for the purpose of the facilities leasing guidelines,
Sentech, Telkom, SNO-T, the mobile cellular operators, national long-distance licensees, local area
licensees, and licensees in underserviced areas are Public Operators. The Electronic
Communications Act replaced the concept of Major Operator status with that of significant market
power in a market segment and empowers ICASA to impose pro competitive conditions on operators
found to have significant market power, which may affect the manner in which facilities are leased by
such operators.

In addition, the Telecommunications Act required us to allow SNO-T to use all of our

telecommunications facilities for the first two years of its license, on a resale basis, for the purpose of
providing public switched telecommunication services. As a result, SNO-T will be able to lease
facilities from Telkom for a two year period to provide its services, and is allowed to have shared
access to the local loop for a period of two years. It is unclear whether we will be required to allow
access to SNO-T at LRIC-based prices beyond such two year period in respect of other services,
although the guidelines issued by ICASA may be interpreted to prescribe that beyond the two year
period, LRIC prices will become mandatory as described below. We may also be required to lease or
otherwise make our telecommunications facilities available to SNO-T beyond the first two years of its
license. The Electronic Communications Act provides that ICASA may prescribe a framework for the
unbundling of Telkom’s local loop. The Minister of Communications has announced that she planned
to issue policy directives with respect to the time period for the unbundling of Telkom’s local loop and
the sharing of access to Telkom’s undersea cables and has formed a committee to evaluate the
unbundling of Telkom’s local loop.

The supplementary facilities leasing guidelines issued by ICASA and approved and promulgated

by the Minister of Communications in 2002 declared Telkom to be a Major Operator and list a set of
Telkom’s facilities that are declared to be Essential Facilities. Among those essential facilities is

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shared access to the local loop by SNO-T for the first two years of its license. The guidelines further
prescribe that the Essential Facilities must be made available at the Fully Allocated Cost of those
facilities for the first two years and thereafter LRIC based prices will become mandatory.

Draft facilities leasing guidelines were published for comment in January 2005. These guidelines

consolidate all previous facilities leasing guidelines, however, they propose to extend the right to
obtain facilities at LRIC based prices to all licensees. Public hearings on these guidelines were held
on March 23 and 24, 2006, but the final regulations have not yet been published. If we are unable to
negotiate favorable terms and conditions for the provision of the services and facilities covered by the
guidelines or ICASA otherwise imposes terms and conditions that are unfavorable to us, our business
operations could be disrupted and our net profit could decline.

Tariffs

Regulations made under the Telecommunications Act impose a price cap formula on a basket of

Telkom’s specified services, including installations; prepaid and postpaid line rental; local, long
distance and international calls; fixed-to-mobile calls; public payphone calls; ISDN services; our
Diginet product; and our Megaline product. A similar cap applies to a sub-basket of services provided
to residential customers, including leased lines up to and including lines of 2 Mbps of capacity and the
rental and installation of business exchange lines. Approximately 80% of Telkom’s operating revenue
in the year ended March 31, 2005 was included in this basket, compared to approximately 66% of
Telkom’s operating revenue in the year ended March 31, 2006. The reason for the decrease was due
to a change in methodology of the amount included in the basket for purposes of our filing with ICASA
in the 2006 financial year to exclude the mobile termination fees for fixed to mobile calls. Our tariffs for
these services are filed with ICASA for approval. Revenue generated from services for which we had
exclusivity may not be used to subsidize competitive services. The price cap operates by restricting
the annual percentage increase in revenues for all the services included in the basket that are
attributable solely to price changes to annual inflation, measured by changes in the consumer price
index, less a specified percentage.

Historically, the annual permitted percentage increase in revenues from both the whole basket

and the residential sub-basket was 1.5% below inflation. Effective from August 1, 2005 through July
31, 2008, the annual permitted increase in revenues from both the whole basket and the residential
sub-basket was lowered to 3.5% below inflation and ADSL products and services have been added to
the basket. In addition, the price of no individual service within the residential sub-basket can be
increased by more than 5% above inflation except where specific approval has been received from
ICASA. Draft regulations have also been published for comment on the pricing and provision of ADSL
services, which would, among other things, prohibit Telkom from charging a monthly rental for
providing ADSL service and limit Telkom to charging only an installation fee for such service.

ICASA approved a 2.2% increase in the overall tariffs for services in the basket effective January 1,

2004, a 0.2% increase in the overall tariffs for services in the basket effective January 1, 2005 and a
3.0% reduction in the overall tariffs for services in the basket effective September 1, 2005. Due to a
delay in the finalization of the tariff regulations, ICASA allowed us to implement our new tariffs
effective September 1, 2005. In line with Telkom’s strategy of delivering excellent service to customers
at competitive prices, on June 5, 2006 Telkom announced average price reductions on its regulated
basket of products and services of 2.1%, effective August 1, 2006. As a result, from
August 1, 2006, the following price changes will be effective:

• ADSL rental

24% average decrease

• Local call charges

No change

• Long distance call charges

10% decrease

• International call charges

10% average decrease

• Data products

9% average decrease

• Subscription: analog line rental

8% average increase

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Pursuant to its mobile cellular telecommunications license, Vodacom has to lodge all tariff plans or

any amendments to existing tariff plans with ICASA. No increase in the price of any service or in
some cases, a basket of services, greater than the percentage annual increase in the consumer price
index is allowed without ICASA’s approval. Vodacom South Africa’s most recent annual tariff
amendments were lodged on August 26, 2005 and approved by ICASA on September 6, 2005.
The amendments resulted in an average tariff decrease of 4.9%, which was effective
October 1, 2005. In 2004, Vodacom South Africa’s annual tariff filing resulted in an average
tariff increase of 0.4%, effective November 1, 2004.

See Item 3. “Key Information–Risk Factors–Risks Related to Regulatory and Legal Matters–Our

tariffs are subject to approval by the regulatory authorities, which may limit our flexibility in pricing and
could reduce our net profit. Vodacom’s revenue and net profit could decline if wholesale price controls
are imposed on it” and “–Regulation and License Requirements.”

Universal service obligations

As part of our five year exclusivity period ended May 7, 2002, we had 16 service quality and line

roll-out targets for our fixed-line business. We substantially met all of our fixed-line service and line
roll-out targets with the exception of our residential fault rate target, our aggregate fixed-line roll-out
target and targets which required us to provide service to underserviced villages and to replace
analog lines with digital lines. ICASA has started a process to amend our PSTS license to bring it in
line with the license issued to SNO-T, as provided for in the Telecommunications Act. As a result of
this process we expect that quality of service targets will again be imposed on us with penalties if
targets are not met.

Our public switched telecommunications license requires us to provide basic voice telephone

service to every person in South Africa who requests such service, who can afford it and who enters
into a contract with us for such service, and to install, connect, maintain and repair a telephone to use
such service, and provide access to emergency organizations and directory information services.
However, we are not required to provide the foregoing services where ICASA determines that the
demand for such services can be met by other means and, as a result, it would be unduly
burdensome in the circumstances for us to provide the telecommunications service requested.

The Minister of Communications issued a public statement in 2002 describing our future

obligations to assist in the continued development of communications services to the South African
population. The obligation will be a contribution to the Universal Service Fund, or USF, and ongoing
universal service obligations imposed on us through the generic terms of our license. In the past we
had to contribute to the USF R10 million per annum escalated by inflation from 1997. Beginning in the
2005 financial year, such contribution is set at 0.2% of the prior year’s annual turnover derived from
the provision of telecommunications service that it is licensed to provide. Vodacom paid R45 million in
June 2005 for this contribution pursuant to its license. Vodacom’s contribution to the USF is on the
same basis as Telkom.

New social obligations were imposed with Vodacom’s new 1800MHz license and third generation

spectrum license whereby Vodacom must provide and distribute 2.5 million SIM cards and 125,000
handsets over a period of five years to underserviced persons in underserviced areas and internet
access to 5,000 schools and 140 institutions for persons with disabilities over an eight-year and three-
year period, respectively. Vodacom’s plan with respect to the implementation of these obligations is
still pending ICASA’s approval. Once the implementation plan is approved, Vodacom intends to
commence with a roll-out. The Department of Communications has assisted in the identification of
certain beneficiaries within various government departments and the license stipulates that roll-out
can only commence upon approval of the implementation plans by ICASA. The implementation plans
were submitted to ICASA in August 2005, but approval has not yet been received. The provision of
internet usage is expected to be charged at a 50% discount rate as provided by the
Telecommunications Act.

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The training of the community services telephone operators in business skills received significant

attention during the 2006 and 2005 financial years. During the 2006 financial year, Vodacom funded
the training of community services telephone operators in areas such as growth management, while
focusing on financial management and marketing in the 2005 financial year. Vodacom’s future
universal service obligations will also consist of a contribution to the USF, and possible new universal
access obligations.

Regulatory accounts

Under the Telecommunications Act and our public switched telecommunications service license,

we are required to report and account to ICASA, our retail and wholesale activities using a specific
accounting methodology set out in a Chart of Accounts and Cost Allocation Manual, or COA/CAM.
The adoption of this methodology by us requires the aggregating and disaggregating of general ledger
accounts in a different manner than we prepare accounts in accordance with IFRS.
These accounts are known as the regulatory financial statements. It also requires a reconciliation of
our regulatory accounts with our annual financial statements. We were required to put the necessary
accounting and management information systems, which would have enabled us to prepare such
reports and accounts, in place by May 7, 2002, subject to ICASA issuing the COA/CAM regulations.
The regulations, however, were only published on July 19, 2002. The regulations required the first
submission of our regulatory financial statements to take place by September 30, 2003.
Following negotiations, ICASA agreed to postpone the deadline for the submission of audited
regulatory financial statements on an historic cost basis to September 30, 2004 and on a current cost
basis, including LRIC statements, to June 30, 2005. Telkom submitted audited historic cost reports on
September 30, 2004. Telkom was not able to provide audited regulatory financial statements by
June 30, 2005 and requested ICASA for an extension to provide audited regulatory financial
statements on a current cost basis until September 30, 2005 and on a LRIC basis until
September 30, 2006. Telkom submitted its current cost regulatory financial statements to ICASA on
September 30, 2005. Telkom proceeded with the final phase of implementing the complete regulatory
financial statements and has implemented a cost model that will calculate the long run incremental
cost of the network services on March 31, 2006. The current cost regulatory financial statements with
reports indicating the long run incremental cost for the 2006 financial year are therefore expected to
be submitted to ICASA on September 30, 2006.The COA/CAM regulations also require us to develop
procedures manuals that set out how we will implement the COA/CAM accounting methodology in
practice. The procedures manual for the accounting separation on an historical basis was approved
by ICASA on June 30, 2004, while the procedures manual for the conversion to the current cost basis
was submitted to ICASA on July 5, 2005 and the procedure manual for accounting on a LRIC basis
was submitted to ICASA on March 31, 2006 for their approval.

Carrier pre-selection

The Telecommunications Act mandated that fixed-line operators were required to implement

carrier pre-selection, which will enable customers to choose and vary their fixed-line
telecommunications carrier for long distance and international calls. Regulations were only published
on June 24, 2005 for the implementation of carrier pre-selection in two phases. In phase one, call-by-
call carrier pre-selection must be implemented and must be provided by an operator within two
months of it being requested by another operator. In phase two, fully automatic pre-selection must be
implemented and must be provided by an operator within ten months of it being requested by another
operator. Telkom had already conditioned its exchanges to handle call-by-call carrier pre-selection by
December 31, 2003. Telkom will not be able to fully implement carrier pre-selection until the SNO-T’s
interconnection systems and the inter-operator process and systems to support carrier pre-selection
become available, however, Telkom does not believe that it will be able to implement automatic carrier
pre selection within ten months of it being requested. Regulations indicate that the system set-up
costs may be recovered as part of the prescribed annual review of fees and charges, but no further

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detail is available. We are currently engaged with ICASA to define the manner in which such costs
could be recovered. In addition, we may not be able to implement these requirements in a timely
manner, which could result in our business being disrupted and cause our net profit to decline and the
implementation of these requirements will likely further increase competition and cause our churn
rates to increase.

Slamming, which is the transfer of a user from one operator to another without such user’s

knowledge or authorization, is to be prohibited. There is a risk that the procedure to combat slamming
may not be effective and would result in further market share losses. Carrier pre-selection is not
applicable to mobile cellular operators.

Number portability

The Telecommunications Act mandated that number portability to enable customers to retain their

fixed-line and mobile telephone numbers if they switch between fixed-line operators or between
mobile operators be introduced. A framework number portability regulation was published at the end of
2004 that generically provides for the introduction of fixed-to-fixed and mobile-to-mobile number
portability. It is currently expected that Telkom will be required to provide “block” number portability in
the 2006 calendar year and individual number portability later, but within 12 months from being
requested by an operator. The full set of regulations for the implementation of fixed number portability,
however, have not yet been published. Telkom has received a request from SNO-T to implement both
block and individual number portability and discussions on the implementation of the required inter
operator systems are under way. Telkom will not be able to determine the time required to implement
number portability until the functional specification regulations are published. On September 30, 2005,
ICASA published the number portability regulations and functional specifications for mobile number
portability which requires that mobile number portability must be implemented by June 30, 2006.
Vodacom is an active participant in the mobile industry body which was established to ensure a
smooth implementation of mobile number portability. This body is well established in its preparation for
the launch of mobile number portability and had discussed the request for proposals for a vendor to
provide a centralized reference database solution to handle mobile number portability. ICASA and the
cellular operators have been in consultation over the last ten months to agree to the functional and
technical specifications to ensure compliance with the Telecommunications Act. As a result, mobile
number portability is expected to be implemented in the 2007 financial year.

The set-up and per-operator costs are typically the largest cost components of implementing

number portability. Similar to carrier pre-selection, there is a risk of not fully recovering system set-up
costs. In addition, we may not be able to implement these requirements in a timely manner, which
could result in our business being disrupted and cause our net profit to decline and the
implementation of these requirements will likely further increase competition and cause our churn
rates to increase.

Unbundling the local loop

While the Telecommunications Act provided that we were not to be required to unbundle our local

loop for a period of two years after the issue of a license to SNO-T, it is envisioned that as the
industry is further liberalized, operators such as us with existing facilities and access lines, will be
obliged to make these available to new entrants. SNO-T is entitled to lease our telecommunications
facilities for a period of two years after being licensed. Furthermore, although it is not our
interpretation, the relevant provisions may be interpreted that SNO-T or other operators may have
shared access to the local loop, which is understood to mean access to the higher bandwidth for
xDSL applications beyond such two years. The foregoing is an exception to the generic provision that
the local loop will not be unbundled during the first two years of SNO-T’s license. The Electronic
Communications Act provides that ICASA may prescribe a framework for the unbundling of Telkom’s
local loop. The Minister of Communications has announced that she planned to issue policy directives

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with respect to the time period for the unbundling of Telkom’s local loop and the sharing of access to
Telkom’s undersea cables and has formed a committee to evaluate the unbundling of Telkom’s local
loop.

Legislative developments

Electronic Communications Act

In March 2005, the Minister of Communications tabled a Convergence Bill in Parliament to

promote convergence and establish the legal framework for convergence in the broadcasting,
broadcasting signal distribution and telecommunications sectors that repealed the
Telecommunications Act, however, all existing licenses are to remain valid until converted to new
licenses in accordance with the new licensing regime and regulations made under the
Telecommunications Act are also to remain in force until new regulations required are made to fully
implement the provisions of the Electronic Communications Act. The bill, renamed the Electronic
Communications Bill, was passed by the Parliament of South Africa in December 2005 and was
signed by the President of South Africa on April 18, 2006. The Electronic Communications Act came
into effect on July 19, 2006.

The Electronics Communications Act aims to supplement or replace current sector specific

legislation and change the market structure from a vertically integrated, infrastructure based, market
structure to a horizontal, service based, technology neutral, market structure with a number of
separate licenses being issued for different areas, and to clarify the different roles of ICASA and the
Minister of Communications in policy development, licensing and regulations. The main aspects
addressed by the Electronic Communications Act are:

• the policy making powers of the Minister of Communications;

• the regulation making, licensing and radio frequency spectrum control powers of ICASA;

• the licensing framework for communications and broadcasting services;

• the power of ICASA to intervene where special market conditions exist, such as significant

market power or essential facilities;

• the obligations of licensees to interconnect and lease telecommunications facilities, and the

powers of ICASA to enforce such obligations; and

• transitional provisions to address the conversion of existing licenses to the new licenses

envisioned in the Electronic Communications Act.

Policy making

The Minister of Communications may make policies and issue policy directions to ICASA except in

respect of the granting, amendment or withdrawal of communications or broadcasting licenses.
ICASA, in exercising its functions, must consider policies made or policy directions issued by the
Minister.

Regulations

ICASA may, subject to public consultation, make regulations on any matter as provided in the

Electronic Communications Act, and any such regulation may declare any contravention thereof to be
an offense. ICASA must, among other things, make regulations relating to the granting of licenses,
radio frequency spectrum management, allocation of numbers, interconnection, facilities leasing, the
declaration of essential communications facilities and the identification of relevant markets for the
purpose of determining the existence of significant market power. ICASA may also make regulations
to impose special obligations on licensees found to have significant market power in a relevant
market.

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Licensing framework

The types of licenses that can be granted are:

• electronic communications network services for the provision of communications infrastructure

for the own use of the licensee or for the use of other licensees, including broadcasters;

• electronic communications services for the conveyance of communications over electronic

communications networks, but excluding broadcasting services;

• broadcasting services for the unidirectional broadcasting of television or sound material; and

• radio frequency spectrum licenses.

ICASA may make regulations prescribing that certain services may be provided without a license.

The Electronic Communications Act provides that licenses for electronic communications network

services, electronic communications services and broadcasting services can be issued as individual
licenses or as class licenses. Individual licenses are required for electronic communications network
services and commercial and public broadcasting services that are of provincial or national scope, for
electronic communications services for voice telephony utilizing numbers from the national numbering
plan, for any service where a state entity owns more than 25% of the share capital of the licensee,
and for any service that ICASA finds to have significant impact on socio-economic development.
ICASA may only accept and consider applications for individual electronic communications network
service licenses following a policy direction issued by the Minister of Communications. The granting
of individual licenses is subject to an extensive process of evaluation that includes public hearings.
The granting of class licenses is subject to a simple process of registration. We expect that the new
licensing framework will result in the market becoming more horizontally integrated and will
substantially increase competition in our fixed-line business. In addition, the process of converting our
licenses to the new licensing framework may be lengthy and complex and could result in the
imposition of additional obligations and limitations in connection with the converted licenses, which
could disrupt our business operations and decrease our net profit.

Competition matters

The Electronic Communications Act replaces the concept of Major Operator status, which was

developed by ICASA through regulations, with that of significant market power in a market or market
segment. Factors in determining significant market power are, among others, dominance or control of
essential facilities. The Electronic Communications Act empowers ICASA to impose pro-competitive
conditions on operators found to have significant market power in such markets or market segments
that have ineffective competition, which may affect the manner in which facilities are leased and
interconnection is to be provided by such operators, and the charges thereof.

If we are found to have significant market power in any of the markets in which we operate, we

may be required to provide interconnection and facilities to our competitors at or near the LRIC of
those services or facilities, and our operating revenue and net profit could decline.

Where ICASA determines that a licensee has engaged or intends to engage in an act that is likely

to substantially prevent or lessen competition, ICASA may direct the licensee to cease or refrain from
engaging in such act and may impose penalties for failure to comply with such direction.

Interconnection

The Electronic Communications Act provides that any licensee, other than broadcasting service

licensees, must, on request, interconnect with any other licensee, unless such request is
unreasonable, and must enter into an interconnection agreement with the requesting party for this

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purpose. Where the parties are unable to reach an agreement, the Electronic Communications Act
confers on ICASA the power to intervene and propose, or impose, terms and conditions for the
interconnection agreement, or refer the matter to the Complaints and Compliance Committee, to be
established as provided in the proposed amendments to the ICASA Act described below, for
resolution. ICASA must review any interconnection agreement to determine whether it is consistent
with the regulations and, if the agreed terms are not consistent with the regulations, direct the parties
to agree on new terms and conditions.

Any dispute arising under an interconnection agreement can be referred by a party to the

Complaints and Compliance Committee for resolution, and any decision of the Complaints and
Compliance Committee is effective and binding on the parties, unless an order of a court of competent
jurisdiction is granted against the decision.

ICASA may exempt a licensee from the obligation to interconnect where such licensee has not

been found to have significant market power in the relevant market. ICASA must prescribe regulations
to facilitate the conclusion of interconnection agreements by stipulating interconnection agreement
principles. ICASA may prescribe a framework of wholesale interconnection rates to be charged in
circumstances where the existence of significant market power has been determined.

Facilities leasing

The Electronic Communications Act provides that an electronic communications network licensee

must, on request, lease electronic communications facilities to any other licensee, unless such
request is unreasonable, and must enter into a facilities leasing agreement with the requesting party
for this purpose. Where the parties are unable to reach an agreement, the Electronic Communications
Act confers on ICASA the power to intervene and propose, or impose, terms and conditions for the
facilities leasing agreement, or refer the matter to the Complaints and Compliance Committee for
resolution. ICASA must review any facilities leasing agreement to determine whether it is consistent
with the regulations and, if the agreed terms are not consistent with the regulations, direct the parties
to agree on new terms and conditions.

Any dispute arising under a facilities leasing agreement can be referred by a party to ICASA, and

the Complaints and Compliance Committee must resolve the dispute and any decision of the
Complaints and Compliance Committee is effective and binding on the parties, unless an order of a
court of competent jurisdiction is granted against the decision.

ICASA may exempt a licensee from the obligation to lease communications facilities where such

licensee has not been found to have significant market power in the relevant market. ICASA must
prescribe regulations to facilitate the conclusion of facilities leasing agreements by stipulating facilities
leasing agreement principles. ICASA may prescribe a framework of wholesale rates applicable to
specified electronic communications facilities in circumstances where the existence of significant
market power has been determined. As a result, Telkom’s local loop could be unbundled. The Minister
of Communications has announced that she planned to issue policy directives with respect to the time
period for the unbundling of Telkom’s local loop and the sharing of access to Telkom’s undersea
cables and has formed a committee to evaluate the unbundling of Telkom’s local loop.
Notwithstanding a finding of significant market power, ICASA may exempt, under certain
circumstances, an electronic communications network licensee from the obligation to lease fiber loops
and sub-loops serving residential premises. ICASA must prescribe a list of essential facilities,
including local loops and sub-loops and associated electronic communications facilities, and electronic
communications facilities connected to international electronic communications facilities such as
submarine cables and satellite earth stations.

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License conversion

All existing licenses are to remain valid until converted by ICASA in line with the new licensing

framework, which must be done within 24 months from the commencement date of the Electronic
Communications Act. As a result, Telkom’s licenses will be converted to new licenses in accordance
with the new licensing regime. Conversion is required to be on no less favorable terms than the
original license. However, as part of the conversion process, ICASA may grant rights and impose
obligations on the licensee, in order to ensure that the existing licenses comply with the Electronic
Communications Act. The process of converting our licenses to the new licensing framework may be
lengthy and complex and could result in the imposition of additional obligations and limitations in
connection with the converted licenses, which could disrupt our business operations and decrease our
net profit.

Existing Regulations

All existing regulations are to remain in force until repealed or amended by ICASA. However,

many of the existing regulations may be required to be amended and many additional regulations may
need to be made to fully implement the Electronic Communications Act. ICASA’s capacity may be
further strained by the workload that will be imposed on it by the Electronic Communications Act,
which creates further uncertainties in the regulatory arena and the ability of ICASA to effectively
fulfill its functions. We cannot predict the outcome or timing of any amendments or modifications
to applicable regulations or the interpretation thereof, the release of new regulations or their impact
on us.

ICASA Act Amendment Bill

A bill amending the ICASA Act, Act No. 13 of 2000, was passed by the Parliament of South Africa

and signed by the President and came into effect on July 19, 2006. The amendment to the ICASA Act
redefines and expands the powers of ICASA to control, in conjunction with the Electronic
Communications Act, the communications market. The main provisions of the ICASA Act amendments
are the removal of the power of the Minister to approve regulations made by ICASA, increased power
of ICASA to conduct enquires and to enforce its rulings and the establishment of a Complaints and
Compliance Committee to assist ICASA in hearings and making findings on complaints and
allegations of non–compliance with the Electronic Communications Act.

There are many linkages between the Electronic Communications Act and the proposed

amendments to the ICASA Act.

Licenses

Fixed-line telephone services

Public switched telecommunications services

On November 15, 1996, we were deemed to be the holder of a license to provide public switched

telecommunication services under the Telecommunications Act and on May 7, 1997, we were issued a
written license by the Minister for Posts, Telecommunications and Broadcasting to provide public
switched telecommunications services in South Africa for a minimum period of 25 years, which
included our exclusivity period of five years that ended on May 7, 2002.

Under this license we are authorized to provide, among other things, the following:

• national long distance telecommunications services;

• international telecommunications services;

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• local access telecommunications services;

• public pay telephone services;

• fixed-lines, infrastructure and facilities required to provide the above services;

• telecommunications facilities to be used by any person for the provision of value-added network

services;

• telecommunications facilities comprising fixed-lines to be used by operators for the provision of

mobile communications services and any other telecommunications services;

• telecommunications facilities to be used by any person for the provision of any private

telecommunications network, with the exception of certain private telecommunications networks
situated on a single piece of land or two or more contiguous pieces of land owned by the same
person, or maintained by Transnet or Eskom as authorized under the Telecommunications Act;

• connection to our network of any other licensed telecommunications system or service both

inside and outside of South Africa; and

• conveyance of signals to and from telecommunications systems and equipment connected to

our network, together with any switching or other services incidental to such conveyance.

Additionally, we are entitled under the Telecommunications Act to manufacture, sell, supply,

distribute and maintain certain telecommunication facilities and equipment, including customer
premises equipment and software, provided that ICASA consents to the commercial marketing,
distribution or sale of such facilities or equipment.

Furthermore, the 2001 amendment to the Telecommunications Act provides for fixed-mobile

services to be deemed a new public switched telecommunications service that may be provided with a
public switched telecommunications service license or an underserviced area license. A fixed-mobile
service is a service that permits a customer of the licensee to access the public switched
telecommunications network of the licensee and obtain telecommunications services from such
licensee from either a fixed point or while in motion within the local exchange area, but does not
permit or include call handover between cells. Our public switched telecommunications service license
has not yet been amended to include fixed-mobile services.

The license fee payable by us under this license amounts to 0.1% of our annual revenues

generated from the provision of the licensed public switched telecommunications services.

Our public switched telecommunications services license may be revoked by ICASA if we

repeatedly fail to comply with an order made by ICASA pursuant to the Telecommunications Act and
fail to correct the non-compliance within 90 days of being requested to comply, or if we are placed in
final liquidation or put under a provisional or final judicial management order.

We are also obliged to publish our charges and the manner which we adopt for determining those

charges in respect of the various telecommunications services provided by us. Provision is also made
for the protection of customer confidentiality and other information that we receive from our customers
in the course of providing telecommunications services to them. Bills to our customers must reflect the
type of service, the units for which charges are made, and at a minimum, the starting time of each
connection, the number called and the duration and number of units for each call. Our records must
identify for customers the basis for the amount charged for the use of our services and we are
required to retain such information to allow ICASA the ability to have an independent quality
assurance check performed to ensure that the billing process complies with the aforesaid
requirements.

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Our license also requires us to establish efficient procedures, taking into account predominant

regional languages and to provide assistance to customers with complaints during normal business
hours. Our procedures for dealing with customer complaints must include a procedure for referring
any disputes relating to such complaints to an affordable independent arbitration procedure instead of
a court. Finally, we are required, in consultation with ICASA, to prepare and publish a code of practice
that duly takes account of predominant regional languages, giving guidance to our customers in
respect of any disputes with or complaints from such customers relating to the provision of
telecommunications services.

ICASA has started a process to amend our PSTS license to bring it in line with the license issued

to SNO-T, as provided for in the Telecommunications Act. As a result of this process we expect that
quality of service targets will again be imposed on us with penalties if targets are not met. However,
under our existing license, such a review and amendment can, in some instances, only be effected
through a public comment process with our participation, and in other instances, only with our
consent. We cannot, however, predict the outcome of such a contemplated review. Should we apply
for our license to be amended to include the provision of fixed-mobile services, we expect that
additional service obligations could be imposed on us. Fixed-mobile service is a service provided by
the holder of a public switched telecommunications service license or an under-serviced area license
that permits a customer of the licensee to access the public switched telecommunications network of
the licensee and obtain telecommunications services from such license from either a fixed point or
while in motion within the local exchange area, but does not permit call handover between cells.

Other licenses

On November 15, 1996, we were deemed to be the holder of a license to provide value-added

network services under the Telecommunications Act and on May 7, 1997, we were issued a written
license by the Minister for Posts, Telecommunications and Broadcasting to provide value-added
network services on a non-exclusive basis for a period of 25 years.

Our value-added network service license may be revoked by ICASA if we repeatedly fail to

comply with an order made by ICASA and fail to correct the non-compliance within 90 days, or if we
are placed in final liquidation or under a provisional or final judicial management order.

On February 21, 1997, we were deemed to be the holder of a radio frequency spectrum license

to provide telecommunication services and facilities, and on May 7, 1997, we were issued a written
license by the Minister for Posts, Telecommunications and Broadcasting to use the relevant bands of
radio frequency spectrum. We use the radio spectrum for the provision of fixed links within our
network, both land based and satellite, and for wireless local loop applications. Where these bands
were licensed to us on a shared or non-exclusive basis, ICASA is to ensure that any other licenses
issued to other entities do not create harmful interference with our use of the radio frequency
spectrum. Our use of the radio frequency spectrum is subject to our compliance with the relevant
provisions of international telecommunications conventions, the radio regulations and the International
Telecommunications Union radio regulations agreed to or adopted by South Africa. We are only
authorized to use our assigned frequency bands for the provision of public switched
telecommunication services.

Our radio frequency spectrum license may be revoked by ICASA if we repeatedly fail to comply

with an order made by it and fail to correct the non-compliance within 90 days of being requested to
comply, or if we are placed in final liquidation or under a provisional or final judicial management
order. Additionally, our radio frequency license will terminate if our public switched telecommunication
services license is terminated.

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Under the Telecommunications Act each of Vodacom, MTN, Telkom and SNO-T are all entitled to

apply for, and acquire, licenses for the use of 1800MHz radio frequency spectrum and radio frequency
spectrum for the provision of third generation services. Cell C’s existing license already includes the
right to use radio frequency spectrum in the 1800 MHz band. Vodacom and MTN have obtained
licenses for the use of 1800 MHz radio frequency spectrum and radio frequency spectrum for the
provision of third generation services and Telkom has applied for such licenses.

Our Swiftnet subsidiary has been granted a telecommunications license and a radio frequency

spectrum license providing for:

• Swiftnet to construct, maintain and operate a national wireless data network and to provide

wireless data telecommunication services; and

• interconnection with our network.

Under our interconnection agreement with Swiftnet, we must charge Swiftnet those tariffs

recommended by ICASA and approved by the Minister of Communications.

Swiftnet is currently in violation of its license that requires it to have a 30% black economic

empowerment partner. ICASA has required Swiftnet to remedy the breach of its license, which expires
on August 24, 2006. Swiftnet has submitted a proposal and application in June 2006 to renew the
license. If not remedied, there is a risk of Swiftnet’s license being revoked or not renewed. Telkom, in
consultation with ICASA, is in the process of openly tendering to obtain a suitable black economic
enpowerment partner. ICASA is being kept informed of progress. See “–Other Regulatory Issues”
below.

Mobile cellular telephone services

On September 30, 1992, a multiparty implementation agreement was concluded between us,

Vodacom, MTN, the Postmaster-General and the South African Government dealing with the licensing
of Vodacom and MTN. Vodacom was issued with a mobile cellular telecommunications license in
South Africa in 1993 for a validity period of 15 years. This mobile cellular telecommunications service
license was confirmed and reissued in August 2002 pursuant to the Telecommunications Act.
Vodacom’s license is automatically renewable on the same terms and conditions should no notice of
termination be received five years prior to the expiration of the initial license term. Vodacom’s license
was thus automatically renewed until May 30, 2024.

On July 1, 1997, Vodacom was deemed to be the holder of a license to provide mobile cellular

telecommunications services in accordance with the Telecommunications Act, subject to the terms and
conditions of the written mobile cellular telecommunications license issued by the Postmaster-General
and the multiparty implementation agreement, and on August 19, 2002, Vodacom was issued a written
mobile cellular telecommunications service license by the Minister of Communications and ICASA,
pursuant to the Telecommunications Act, incorporating the terms and conditions of the original license
and agreement, subject to certain legislatively mandated changes. Under this license, Vodacom is
authorized to construct, maintain and use its public land mobile communications network for the
provision of mobile cellular telecommunications services, and to interconnect with our public switched
telecommunications network and the public land mobile communications networks of other licensed
mobile cellular telecommunications service providers. An initial license fee of R100,000,000 was
payable by Vodacom and an ongoing license fee of 5% of Vodacom’s audited net operational income
generated from the provision of the licensed services is payable by Vodacom quarterly in arrears.

Vodacom’s mobile cellular telecommunications license may be revoked by ICASA, with the

approval of the Minister of Communications, if Vodacom is placed in liquidation or under judicial
management, or if there is a change in the direct or indirect ownership of 25% of the issued voting
share capital of Vodacom in any one transfer or a change in the ownership of any of the issued voting
share capital of Vodacom that results in a change to the composition of one-quarter of Vodacom’s

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board of directors, in either case without ICASA’s prior written approval, Vodacom takes steps to
deregister itself or is deregistered, or Vodacom fails to pay the required license fee after due demand
by ICASA.

Vodacom’s use of its public land mobile communications network is authorized for the provision of

a GSM based national mobile cellular telecommunications service and the connection of fixed and
mobile terminal equipment using GSM cellular telephony technology. For the duration of this license,
Vodacom’s network must conform to the GSM specification standards and recommendations of the
International Telecommunications Union as adopted by South Africa, as well as with the GSM
specifications set by the European Technical Standards Institute, or ETSI.

Vodacom’s mobile cellular telecommunications license requires Vodacom to provide facilities to

enable a caller, free of charge, to communicate with an emergency organization as swiftly as
practicable and sets out certain customer service standards with which Vodacom is required to
comply. This license also requires Vodacom to use reasonable endeavors to ensure that certain
information is kept confidential. Vodacom is obliged to provide directory services and to liaise with
other licensees in that regard. Vodacom and its service providers are not entitled to show any undue
preference to any person or class of person and Vodacom must develop, publish and enforce
guidelines for use by its personnel when handling inquiries and complaints from customers to whom
it supplies telecommunications facilities. These guidelines must be included in its contracts with
service providers and must be published and available to customers. Vodacom’s license prescribes
that the guidelines must address the following areas of the provision of customer services:

• procedures for handling customer complaints;

• the time frame for handling customer complaints through such procedures;

• further recourse available to a customer who is dissatisfied with Vodacom’s complaint handling

procedures;

• procedures adopted by Vodacom to check the accuracy of a customer’s telephone account;

• procedures to be adopted by Vodacom to assist customers in disaster situations; and

• availability to customers of quality of service information relating to Vodacom’s network services.

Vodacom was also issued a radio frequency spectrum license simultaneously with its mobile

cellular telecommunications license permitting it to use the 890.2/935.2MHz to 900.0/945.0MHz radio
frequency spectrum for purposes of providing mobile cellular telecommunications services, valid for
the duration of Vodacom’s mobile telecommunications license of fifteen years. Vodacom was also
granted a license, effective July 1, 1995, for the use of an additional 1-2 MHz of GSM900MHz radio
frequency spectrum under its mobile cellular telecommunications license. Pursuant to the
Telecommunications Act, the three mobile cellular licensees were given the right, upon application,
to be granted licenses to use 1800MHz frequency spectrum on payment of fees as determined
by the Minister of Communications. Vodacom was awarded a permanent 1800MHz license on
October 29, 2004 and a 3G spectrum license on November 30, 2004. The license fee for the
1800MHz and 3G spectrum license is a R5 million access fee each per annum and R100,000 per
MHz pair. Vodacom has to date been allocated a total of 34 million numbers, including the full 072,
076, 082, as well as 0791, 2, 3 and 4 number ranges.

Vodacom was issued a license to provide value added network services on October 20, 1998.

On May 20, 2005, ICASA published new regulations for value added network service providers.
This set of regulations repeals the previous set of regulations under which Vodacom had to re-apply
for its VANS license on February 27, 2004. In terms of the new regulations, Vodacom shall be
deemed to have applied in accordance with the regulations. On August 26, 2005, ICASA re-issued
Vodacom’s value added network service license (VLS40/0034). Vodacom is obliged to keep and

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maintain statistics on complaints made to it by its customers. The statistics must be provided to
ICASA at least once every six months and ICASA may, after consultation with Vodacom, publish these
statistics.

Ownership Restrictions

Pursuant to the ownership regulations issued under the Telecommunications Act, 103 of 1996,

Telkom is a public switched telecommunications services licensee operating in a “concentrated
market,” which is a market where there are fewer than five licensees. Pursuant to these regulations,
no person who holds a direct or indirect 5% ownership interest in Telkom, other than the Government
of South Africa and passive institutional investors who do not participate in our management, is
entitled to hold a 5% or greater ownership interest in any other licensed operator providing the same
category of telecommunications services as Telkom in that concentrated market, such as the second
national operator. The same prohibition applies in relation to a person holding such an ownership
interest in both Vodacom and another mobile cellular telecommunications service licensee. In addition,
licensees such as Telkom and Vodacom are required to maintain accurate and detailed records
indicating the name, address, telephone number, e-mail address and other contact details of all
persons holding a direct or indirect ownership interest of 5% or more in the licensee, the number of
shares or other ownership interests owned of record by each such person, the identity of each such
person entitled to vote, and must annually file such information with ICASA. ICASA is entitled, at the
request of the licensee, to waive the licensee’s obligations with respect to maintaining certain of the
information where the licensee’s issued share capital is listed on the JSE or any other internationally
recognized securities exchange and the information is not kept in the ordinary course with respect to
such listed issued share capital and is not otherwise required by such exchanges. Under the same
regulations, licensees such as Telkom and Vodacom are required to obtain the prior written approval
of ICASA, in an application that is signed by the licensee, the transferor and the transferee, for any
transfer of a control interest in the licensee. A control interest in a licensee includes a direct or indirect:

• beneficial ownership of more than 25% of the issued share capital of that licensee;

• entitlement to vote a majority of the votes that may be cast at a general meeting of that

licensee;

• ability to appoint or veto the appointment of a majority of the directors of that licensee;

• holding company of that licensee; or

• ability to direct or cause the direction of the management and policies of that licensee in a way

similar to the foregoing.

The criterion to be used by ICASA in considering the application is whether the licensee will be

able to satisfy its obligations under its licenses and comply with the Telecommunications Act, 103 of
1996, and the regulations thereunder after the transfer concerned. Any transfer in violation of these
regulations is void.

Other Regulatory Issues

We are subject to the provisions of the Competition Act, 89 of 1998, which, together with

the Telecommunications Act regulates uncompetitive behavior in the communications industry in South
Africa. The Competition Commission and ICASA have come to an arrangement regarding
jurisdictional issues existing between the two regulators. Under the provision of these two Acts, we
may not act uncompetitively or unfairly discriminate against any person.

South Africa is a member of the World Trade Organization and is a signatory to the Basic

Agreement on Telecommunications. The commitments made by South Africa are embodied in the

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provisions of the Telecommunications Act in respect of the liberalization of the South African
telecommunications industry. The Electronic Communications Act consistently supports these
commitments.

RICA is a South African law that regulates the authorization for and actual lawful interception of

communications. The Act came into effect on September 30, 2005, with the exception of certain
sections requiring the collection of customer details and identity verification prior to providing mobile
cellular telecommunications services. The compliance date for these sections has not been
determined and will come into effect by presidential proclamation. RICA obligates service providers to
obtain and store customer details, including names, identity numbers, residential and business or
postal addresses and requires verification of customers’ details with reference to a certified copy of a
customer’s identity document and his or her actual identity document. Telkom has not completed the
implementation of all of these requirements and Vodacom may not be able to implement these
requirements by the time period in which it is required to implement them. Furthermore, the
implementation of RICA is expected to require significant costs resulting from its paper verification and
storage requirements and negatively impact the ability of Telkom and Vodacom to register customers
due to its burdensome registration process, which may not be practical and may require the
disconnection of customers for whom such information is unavailable. As a result, Telkom’s and
Vodacom’s business operations could be disrupted and their net profit could decline and they may be
liable for penalties to the extent they are not able to comply with RICA’s requirements.

In addition, commencing in June 2006, all licensees, including Telkom and Vodacom were

required to install equipment and implement procedures to allow lawful interception by law
enforcement agencies in South Africa, including the interception of communications and the
provisioning of call-related (billing) information. Telkom is currently in consultation with the Office of the
Interception Centre and the Department of Communication to adopt a phased approach for
compliance in the first quarter of the 2007 calendar year. To the extent that we are unable to comply
with all the requirements of RICA or are unable to substantially recover these costs of compliance, our
business operations could be disrupted and our net profit could decline and we may be liable for
penalties.

In certain South African judgments, we have been regarded as an organ of state. In addition,

some legislation, notably the South African Promotion of Administrative Justice Act, 3 of 2000, have
provisions that identify us as rendering a public service. As a result, some decisions that would
otherwise be normal business decisions in other listed companies need to go through a consultative
process with the Government before we can make them.

Our subsidiary Swiftnet is required, in terms of its license, to have at least 30% of its shares held

by black economic empowerment individuals or entities. Swiftnet is currently in breach of its license
requirement since Telkom owns 100% of Swiftnet. ICASA has required Swiftnet to remedy the breach
of its license, which expires on August 24, 2006. Swifnet has submitted a proposal and application in
June 2006 to renew the license. If not remedied, there is a risk of Swiftnet’s license being revoked or
not renewed. Telkom, in consultation with ICASA, is in the process of openly tendering to obtain a
suitable black economic empowerment partner. ICASA is being kept informed of progress.

The Broad-Based Black Economic Empowerment Act, No. 53 of 2003, or the B-BBEE Act, aims at

establishing a legislative framework for the promotion of black economic empowerment. Among other
things, it empowers the Minister of Trade and Industry to issue codes of good practice and to publish
sectorial transformation charters for that purpose. The codes of good practice aim to establish a
balanced scorecard on empowerment, which deals with equity ownership, management and control of
enterprises by black people, and employment, procurement, skills development, enterprise
development and other developmental intervention aimed at the empowerment of black people.
The Department of Trade and Industry has finalized a number of codes of good practice, and

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published others for public comment. Once all the codes are finalized, they will be gazetted

in terms of the B-BBEE Act, and will become mandatory on all organs of state, and will affect all

enterprises that, directly or indirectly, conduct business with organs of state, in that their
empowerment rating in terms of the codes, will determine their ability to conduct such business.

Sectorial transformation charters have a similar purpose to the codes of good practice, but are

voluntarily applied by enterprises in a sector, and not mandatory. However, the B-BBEE Act makes
provision for transformation charters to be gazetted, under certain circumstances, as a code of good
practice, applicable to the enterprises in the relevant sector and those conducting business with them.
The process to develop the Information Communication and Technology, or ICT, black economic
empowerment charter commenced on September 16, 2003. The ICT Charter seeks to establish a
framework for the promotion of transformation in the ICT sector through the establishment of a
balanced scorecard on empowerment. The scoring of the balanced scorecard will ultimately determine
the black economic empowerment status of a company intending to engage Government when
applying for a license in a regulated economic activity, entering into a public-private partnership, or
engaging in any economic activity in South Africa. As such this process is of vital importance to
Telkom and Vodacom. Telkom and Vodacom have been actively involved in the development of the
BEE Charter for the ICT sector. A final draft of the ICT charter has received Cabinet approval, but will
not be published as a voluntary charter and instead will be gazetted as a code, which can only be
done once the codes of good practice have been gazetted.

The codes of good practice require business to make use of suppliers complying with the black

economic empowerment requirements. If we are not able to meet the minimum requirements of the
codes of good practice or the ICT charter, whichever may be applicable, some of our business
customers may be required or elect to obtain all or some of their telecommunications services from
our competitors who may fulfill such requirements.

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ORGANIZATIONAL STRUCTURE

Our group operational structure is as follows:

Our business consists of two segments:

• a fixed-line segment; and

• a mobile segment.

Our fixed-line segment consists of our fixed-line business, which provides fixed-line access and

data communications services through Telkom; directory services through our 64.9% owned Telkom
Directory Services subsidiary; and wireless data services through our wholly owned Swiftnet
subsidiary. Our mobile segment consists of our 50% interest in Vodacom, our joint venture.

Fixed-Line

Mobile

Telkom SA Limited

Telkom Directory Services

(Pty) Limited

Swiftnet (Pty)

Limited

Vodacom Group

(Pty) Limited

50.0%

64.9%

100.0%

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PROPERTY, PLANT AND EQUIPMENT

Fixed-line

Our principal executive offices are located at Telkom Towers North, 152 Proes Street, Pretoria

0002, Republic of South Africa and comprised approximately 27,000 square meters of office space as
of March 31, 2006. In addition, our information technology center comprised approximately 22,000
square meters and our network operations center comprised approximately 24,000 square meters as
of March 31, 2006. Our executive offices are leased from the Telkom Retirement Fund under a lease
agreement which will expire on January 31, 2019. The total area of all our properties as of March 31,
2006 comprised approximately 2.5 million square meters consisting of approximately 1.5 million
square meters of owned, approximately 603,000 square meters of leased and approximately
403,000 square meters of other type properties. As of March 31, 2006, we leased approximately
171,000 square meters of office space pursuant to lease agreements. Except as stated to the contrary
below, our leases expire at various times ranging from one month to five years.

Our properties primarily consisted of 2,459 electronic telephone exchanges, 49 microwave

transmission towers, three satellite stations, 131 customer service branches, including Telkom Direct,
shops, 263 customer service centers, three information technology centers and one network
management center as of March 31, 2006.

Details of the principal immovable property leased and owned by our fixed-line business as of

March 31, 2006 are as follows:

Leased

Current

Type of

or

Monthly

Expiration

Property

Owned

Lessor

Lessee

Location

Rental

Date

Head office

Leased

Telkom

Telkom

152 Proes Street, Pretoria,

R5,001,366

Jan 31, 2019

Retirement Fund

South Africa

Office

Leased

Bridgeport/Lanor

Telkom

195 Nelson Mandela

R1,275,387

Jun 1, 2009

Joint Venture

Drive, Bloemfontein,
South Africa

Information

Leased

Telkom

Telkom

21 Teddington Street,

R1,077,572

Jan 31, 2019

technology center

Retirement Fund

Tygerberg, Bellville,
South Africa

Equipment related

Leased

Telkom

Telkom

178 Vermeulen Street,

R433,560

Jan 31, 2019

Retirement Fund

Pretoria, South Africa

Network operations

Owned

n/a

n/a

55 Oak Avenue, Highveld,

n/a

n/a

center

Centurion, South Africa

Information

Owned

n/a

n/a

91 Oak Avenue Highveld,

n/a

n/a

Technology,                                                                                          Centurion, South Africa

Technopark

National Business

Owned

n/a

n/a

61 Oak Avenue, Highveld,

n/a

n/a

Solutions Center

Centurion, South Africa

Hillbrow microwave

Owned

n/a

n/a

Claim Street, Hillbrow,

n/a

n/a

tower

Johannesburg, South Africa

Pretoria microwave

Owned

n/a

n/a

Devenish Street, Groenkloof,

n/a

n/a

tower

Pretoria, South Africa

Hartebeesthoek

Owned

n/a

n/a

Old Krugersdrop Road,

n/a

n/a

satellite station

On The Farm Hartebeesthoek,
South Africa

Electronic telephone

Owned

n/a

n/a

Sivewright Street, New

n/a

n/a

exchange

Doornfontein, Johannesburg,
South Africa

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Our leased and owned property facilities are managed pursuant to a management agreement with

TFMC, a company incorporated in South Africa, of Meersig Building, 48 West Avenue, Centurion. The
consideration paid to TFMC for management services in the year ended March 31, 2006 was R154
million. The management agreement terminates on March 31, 2011.

Mobile Communications

Vodacom’s principal executive offices are located at Vodacom Corporate Park, 082 Vodacom

Boulevard, Vodavalley, Midrand, 1685, Republic of South Africa. Vodacom’s South African properties
primarily consisted of 6,401 base transceiver stations, 280 base station controllers, 58 mobile
switching centers, including VLRs and gateways, a network management center and customer service
centers as of March 31, 2006. The total area of all of Vodacom’s properties, excluding its network and
retail outlets, was approximately 229,100 square meters as of March 31, 2006, consisting of
approximately 195,800 square meters of owned properties and approximately 33,300 square meters
of leased properties. Vodacom’s leases expire at various times on terms up to 15 years.

Vodacom leases transmission lines from Telkom under a lease agreement for the provision of its

backbone infrastructure.

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Item 5.

Operating and Financial Review and Prospects

OPERATING RESULTS

You should read the following discussion together with the consolidated financial statements of

the Telkom Group and Vodacom and the notes thereto included elsewhere in this annual report.
The Telkom Group and Vodacom have prepared their financial statements in accordance with IFRS,
which differs in certain respects from US GAAP. For a description of the principal differences between
IFRS and US GAAP relevant to the financial statements of the Telkom Group and Vodacom and a
reconciliation to US GAAP of net income and shareholders’ equity, see note 44 of the notes to the
audited consolidated financial statements of the Telkom Group as of and for each of the three years
in the period ended March 31, 2006 and note 45 of the notes to the audited consolidated financial
statements of Vodacom as of and for each of the three years in the period ended March 31, 2006.

Change in accounting policy and restatements

The Telkom Group’s consolidated financial information discussed below reflects the following

changes to the basis of preparation:

• the early adoption of revised IAS19, which is applicable for the financial year beginning on or

after January 1, 2006;

• the adoption of revised and new IAS16, IAS17, IAS24, IAS40, IFRS4 and IFRIC1, which are

applicable for financial years beginning on or after January 1, 2005;

• a voluntary change in accounting policy to recognize fixed-line installation and activation

revenues and related costs systematically over the expected duration of customer relationships
in line with other global communications companies, as opposed to the recognition of such
revenues and related costs when the installation and activation of customers occurs, the
method previously used in the Telkom Group’s consolidated financial statements for the
2005 and 2004 financial years (both methods are permitted under IAS18); and

• restatements for changes to the previous accounting methods for certain lease payments and

receipts under operating leases, and accounting disclosures for investment properties,
information technology software items and financial assets and liabilities previously reported
in the Telkom Group’s consolidated financial statements for the 2005 and 2004 financial years.

The restatements relate to the following areas:

• the recognition of expenses and income related to lease payments and receipts under operating

leases on a straight-line basis over the lease terms to ensure that the income statement
expenses and income are more representative of the time pattern of the operating lease costs
and benefits to the Telkom Group, as opposed to the previous recognition of the expenses and
income based on the amount paid or payable and received or receivable for each period;

• the recharacterization of Vodacom’s Vodaworld property from investment properties to property,

plant and equipment since the primary purpose of the property is to service and connect
Vodacom customers and the property therefore does not meet the criteria for investment
properties under IAS40;

• the reclassification of certain information technology software items from property, plant and

equipment to intangible assets and the related depreciation from depreciation to amortization
since the information technology software items are not considered an integral part of the
related hardware; and

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• the reclassification of certain other financial assets and liabilities, previously classified as

non-current, to current assets and current liabilities because they represent derivatives
classified as held for trading.

For a more detailed description of these items, please see note 2 of the notes to the audited

consolidated financial statements of the Telkom Group and note 23 of the notes to the audited
consolidated financial statements of Vodacom included in this annual report.

The Telkom Group has not amended, and does not intend to amend, its previously filed Annual

Reports on Form 20-F for the years affected by the change in accounting policy and restatements that
ended prior to the year ended March 31, 2006. For this reason, those prior Annual Reports and the
consolidated financial statements and applicable notes thereto, auditors’ reports and related financial
information contained in such reports should no longer be relied upon.

Executive summary of the Telkom Group results for the years ended March 31, 2006 and
March 31, 2005

Operating revenue increased by 10.3% to R47,625 million in the 2006 financial year and 6.4% to

R43,160 million in the 2005 financial year. Operating profit increased by 30.3% to R14,677 million in
the 2006 financial year and 20.6% to R11,261 million in the 2005 financial year.

Operating profit increased due to a 27.7% and a 19.3% increase in operating profit in our

fixed-line segment and a 36.9% and a 24.0% increase in operating profit in our mobile segment in the
2006 and 2005 financial years, respectively. The increases recorded in fixed-line operating profit were
due to higher revenue and a decline in operating expenses, while mobile operating profit increases
were primarily due to increases in operating revenue as a result of customer growth, partially offset
by increases in operating expenses.

Profit for the year attributable to equity holders of Telkom increased in the 2006 and 2005 financial

years due to the increases in operating profit in our fixed-line and mobile segments, lower finance
charges and, to a lesser extent, increases in investment income, partially offset by increases in taxes.
Finance charges decreased primarily due to lower interest expenses resulting from lower interest
bearing debt levels and net fair value and exchange gains on financial instruments in the 2006
financial year and lower exchange losses in the 2005 financial year. Investment income increased
primarily due to increased interest received associated with higher average balances in investments
and bank accounts.

Operating cash flows adequately covered capital expenditure requirements and allowed for further

debt to be repaid in the 2006 financial year. It also enabled the Telkom Group to maintain dividend
payments and repurchase shares, thus distributing controllable cash to shareholders.

Telkom Group capital expenditures increased to R7,506 million in the 2006 financial year from

R5,851 million in the 2005 financial year and R5,368 million in the 2004 financial year. Consolidated
capital expenditures in property, plant and equipment for the 2007 financial year are budgeted to be
approximately R10,265 million, of which R6,519 million is budgeted to be spent in the fixed-line
segment and the remaining R3,746 million, representing a 50% share of Vodacom’s total budgeted
capital expenditure of R7,492 million, is budgeted to be spent in the mobile segment.

Overview of our Business

We are the largest provider of public switched telecommunications services in South Africa,

providing fixed-line voice and data services. In addition, we participate in the South African mobile
communications market through our 50% interest in Vodacom, the largest mobile communications
network operator in South Africa based on total estimated customers. We also provide directory
services and wireless data services through our subsidiaries, Telkom Directory Services (Pty) Limited
and Swiftnet (Pty) Limited, respectively.

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We offer business, residential and payphone customers a wide range of services and products,

including:

• fixed-line voice services, including subscriptions and connections services, local, long distance,

fixed-to-mobile and international voice services, interconnection and hubbing communications
services, international voice over internet protocol services, subscription based value added
voice services and customer premises equipment rentals and sales;

• fixed-line data services, including domestic and international data transmission services, such

as point to point leased lines, ADSL services and packet based services, managed data
networking services, and internet access and related information technology services;

• directory and wireless data services through our Telkom Directory Services and Swiftnet

subsidiaries, respectively; and

• mobile communications services, including voice services, data services and value added

services and handset sales through Vodacom.

Acceleration of our fixed-line strategic focus

Our vision is to be a leading customer and employee centered ICT solutions service provider.

We are focused on balancing the needs of all stakeholders while seeking long term sustainable and
profitable growth. Our commitment to the socio-economic transformation of South Africa underpins
this strategy.

In seeking to sustain the creation of value in response to developments in our dynamic market

environment, our management has implemented certain shifts in our strategic emphasis. We are
increasing our focus on customers and employees, while continuing to balance the needs of all
stakeholders. We intend to focus on the following primary imperatives to support growth:

• Enhancing customer satisfaction through customer centricity;

• Retaining revenue and generating growth;

• Evolving our fixed-line network to a next generation network in order to support profitable

growth through prudent cost management;

• Engaging Telkom’s employees;

• Repositioning Telkom stakeholder management to create healthy relationships with all

stakeholders; and

• Capitalizing on the growing mobile communications market in South Africa and other African

markets through Vodacom.

Principal factors that affect our Results of Operations

Liberalization of the South African telecommunications market and increasing competition

Telkom is currently the only provider of public switched telecommunications services in South

Africa. In September 2004, the South African Minister of Communications granted an additional
license to provide public switched telecommunications services to a second national operator,
SNO-T, that is 30% owned by Transtel and Esitel, which are beneficially owned by the South African
Government, and other strategic equity investors, including 26% beneficially owned by TATA Africa
Holdings (Pty) Limited, a member of the TATA Group, a large Indian conglomerate with information

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and communications operations. ICASA issued this license on December 9, 2005, however, SNO-T is
not expected to commence business activities until the second half of the 2006 calendar year.
A process has also commenced to issue additional licenses to small business operators to provide
telecommunications services in underserviced areas with a teledensity of less than 5%. The Minister
of Communications has identified 27 of these underserviced areas. ICASA has issued licenses to
successful bidders in seven of them and has issued invitations to apply for licenses in the remaining 20.
It is expected that further licenses will be issued in the 2006 calendar year.

Our fixed-line business has faced competition for a number of years from mobile communications

network operators, including Vodacom, and with service providers in those areas that are fully
liberalized, such as the provision of value added network services. The current South African mobile
communications market consists of three mobile communications network operators, Vodacom, MTN
and Cell C. Cell C recently announced its intention to form a joint venture with the Virgin Group, which
we expect will further increase competition. We also compete with other service providers who use least
cost routing technology that enables fixed-to-mobile calls from corporate private branch exchanges to
bypass our network by being transferred directly to mobile networks. In recent periods, our fixed-line
business has experienced significant customer migration from our fixed-line services to mobile services,
as well as substitution of calls placed using mobile services rather than our fixed-line service.

In addition, our data services have faced increased competition from Sentech, which owns and

operates satellite transmission systems and in August 2003 launched a packaged, always-on,
bi-directional broadband service via satellite that allows users anywhere in South Africa to get
connected, regardless of whether landlines are available. In January 2004, Sentech also launched a
competing wireless high-speed internet access service offering. Similarly, Vodacom’s and MTN’s
3G networks now also enables customers to browse the internet on a high speed platform, which
provides increased competition for our data services.

We also face increased competition from mobile operators, value added network operators and

private network operators as a result of determinations by the South African Minister of
Communications in September 2004 and we expect that the new licensing framework to be
implemented in connection with the Electronic Communications Act will result in the market becoming
more horizontally integrated with a number of separate licenses being issued for electronic
communications network services, electronic communications services, broadcasting services and the
radio frequency spectrum and will substantially increase competition in our fixed-line business. We
expect that the introduction of number portability and carrier pre-selection could further enhance
competition and increase our churn rates.

As competition intensifies, the main challenges our fixed-line business faces are continuing to

improve customer loyalty through imposed services and maintaining our leadership in the South
African communications market. As a result of increasing competition, we anticipate a reduction in
overall average tariffs and market share and an increase in costs in our fixed-line business, which
could cause our growth rates, operating revenue and net profit to decline. Increased future
competition may also result in a reduction in Vodacom’s overall average tariffs, loss of market share
and an increase in its customer acquisition and retention costs. At the same time, we expect
competition to stimulate overall market demand for communications services. See Item 3. “Key
Information–Risk Factors–Risks Related to our Business–Increased competition in the South African
telecommunications market may result in a reduction in overall average tariffs and market share and
an increase in costs in our fixed-line business, which could cause our growth rates, operating revenue
and net profit to decline and our churn rate to continue” and Item 4. “Information on the
Company–Regulation and License Requirements”.

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South African fixed-line communications market

While South Africa features a highly developed financial and legal infrastructure at the core of its

economy, it also suffers from high levels of unemployment and income disparity. With respect to the
economically disadvantaged communities of the population, communications providers must compete
with other basic necessities for customers’ limited resources. In a number of areas of the country and
for particular communities, mobile services are the preferred alternative to fixed-line services, primarily
due to mobility. Although the fixed-line penetration rate in South Africa was only 10.0% as of
March 31, 2006, due to the diverse rural geography and demographic factors in South Africa, we do
not expect fixed-line penetration rates to increase significantly in the near term. In the 2006 and 2005
financial years, our total fixed access lines decreased primarily due to a decrease in the number of
residential postpaid PSTN lines, partially offset by an increase in ISDN channels, business postpaid
PSTN lines and, in the 2005 financial year, prepaid PSTN lines. Postpaid residential PSTN lines were
adversely impacted by customer migration to mobile and higher bandwidth products such as ADSL
and, in the 2005 financial year, our prepaid PSTN service, and lower connections, partially offset by
lower disconnections in the 2005 financial year. Similarly, traffic declined in both the 2006 and 2005
financial years, being adversely affected by the increasing substitution of calls placed using mobile
services rather than our fixed line services and dial up internet traffic being substituted by our ADSL
service, as well as the decrease in the number of residential postpaid PSTN lines and increased
competition in our payphone business. During the same period, ISDN channels and ADSL services
have increased, driven by increased demand for higher bandwidth and functionality. In light of these
market conditions, we will seek to maintain existing customers in the face of increasing competition
and increase sales of data products while utilizing existing capacity, largely through increased sales of
our prepaid and bundled products.

South African mobile communications market

South Africa has experienced significant growth in the number of mobile users since GSM mobile

services were launched in the country in 1994. The penetration rate for mobile users increased from
an estimated 2.4% at March 31, 1997 to an estimated 71% at March 31, 2006. As a result, Vodacom’s
South African revenue increased 17.3% and 24.1% in the 2005 and 2006 financial years, respectively.
While we believe the mobile penetration rate will continue to increase, we do not expect that it will
continue to grow at the same high rates that it has experienced in the recent past. Consequently,
Vodacom is placing increased focus on customer retention and maintaining its market leadership by
providing innovative value added services and data products and superior customer service in
addition to its previous focus on customer acquisition, as well as selective growth in other African
countries. In furtherance of this strategy, in the 2005 financial year, Vodacom signed an alliance with
its shareholder, Vodafone, which gives Vodacom access to Vodafone’s branded products and
services, global research and development and access to Vodafone’s marketing and buying powers.
In addition, Vodacom launched the first commercial 3G network in South Africa in
December 2004. Vodacom also launched Vodafone Mobile Connect Cards, 3G/GPRS/HSDPA
datacards providing fast, secure access to corporate networks from computers, Vodafone live!, with
global and local content, picture and video messaging and downloads, Mobile TV and BlackBerry®. In
addition, Vodacom recently launched 3G with HSDPA, giving its customers access to global high
speed broadband communications.

A large part of the growth in mobile services was due to the success of prepaid services.

Approximately 87.5% of Vodacom’s South African mobile customers were prepaid customers
at March 31, 2006 and 92.1% of all gross connections were prepaid customers in the 2006 financial

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year. Vodacom expects the number of prepaid mobile users to continue to grow at a greater rate than
contract mobile users. The increasing number of prepaid users, who tend to have lower average
usage, and the lower overall usage as the lower end of the market is penetrated have resulted in
decreasing overall average revenue per customer. As a result, total South African ARPU decreased
to R139 per month in the 2006 financial year from R163 per month in the 2005 financial year and
R177 per month in the 2004 financial year. South African contract ARPU decreased to R572 per
month in the 2006 financial year from R624 per month in the 2005 financial year and R634 per
month in the 2004 financial year. South African prepaid ARPU decreased to R69 per month in the
2006 financial year from R78 per month in the 2005 and R90 per month in the 2004 financial year.
In the 2006 and 2005 financial years, contract and prepaid customer ARPU were also negatively
impacted by the high growth in Vodacom’s hybrid contract product, Family Top Up, which contributed
to the migration of higher spending prepaid customers, who tend to spend less than existing contract
customers, to contracts.

Tariffs

We made significant progress in rebalancing our fixed-line tariffs. Telkom’s tariff rebalancing

program was historically aimed at better aligning its fixed-line traffic charges with underlying costs and
international norms. As a result of its efforts, the ratio of tariffs for long distance calls to all destinations
over 200 km compared to tariffs for local calls declined from 13.2:1 as of March 31, 1997 to 2.7:1 as
of March 31, 2002. In the future, Telkom expects that its tariff rebalancing will focus more on the
relationship between the actual costs and tariffs of subscriptions and connections and traffic in order
to more accurately reflect underlying costs.

Regulations made under the Telecommunications Act impose a price cap on a basket of Telkom’s

services and a sub-basket of those services provided to residential customers, including leased lines
up to and including lines of 2 Mb/s of capacity and the rental and installation of business exchange
lines. Approximately 80% of Telkom’s operating revenue in the year ended March 31, 2005 was
included in this basket, compared to approximately 66% of Telkom’s operating revenue in the year
ended March 31, 2006. The reason for the decrease was due to a change in methodology of the
amount included in the basket for purposes of our filing with ICASA in the 2006 financial year to
exclude the mobile termination fees for fixed-to-mobile calls. Our tariffs for these services are filed
with ICASA for approval. Revenue generated from services for which we had exclusivity may not be
used to subsidize competitive services. Effective from August 1, 2005 through July 31, 2008, the
annual permitted increase in revenues from both the whole basket and the residential sub-basket was
lowered from 1.5% to 3.5% below inflation and ADSL products and services have been added to the
basket. In addition, the price of no individual service within the residential sub-basket can be
increased by more than 5% above inflation except where specific approval has been received from
ICASA. Draft regulations have also been published for comment on the pricing and provision of ADSL
services, which would, among other things, prohibit Telkom from charging a monthly rental for
providing ADSL service and limit Telkom to charging only an installation fee for such service.

ICASA approved a 2.2% increase in the overall tariffs for services in the basket effective January 1,

2004, a 0.2% increase in the tariff for the services in the basket effective January 1, 2005 and a 3.0%
reduction in the overall tariffs for services in the basket effective September 1, 2005. In line with
Telkom’s strategy of delivering excellent service to customers at competitive prices, on June 5, 2006
Telkom announced average price reductions on its regulated basket of products and services of 2.1%,
effective August 1, 2006. As a result, from August 1, 2006, the following price changes will be effective:

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• ADSL rental

24% average decrease

• Local call charges

No change

• Long distance call charges

10% decrease

• International call charges

10% average decrease

• Data products

9% average decrease

• Subscription: analog line rental

8% average increase

See Item 3. “Key Information–Risk Factors–Risks Related to Regulatory and Legal Matters–Our

tariffs are subject to approval by the regulatory authorities, which may limit our flexibility in pricing and
could reduce our net profit. Vodacom’s revenue and net profit could decline if wholesale price controls
are imposed on it.” and Item 4. “Information on the Company–Business Overview–Fixed-line
Communications–Fees and Tariffs–Tariff Rebalancing” and Item 4. “Information on the
Company–Regulation and License Requirements.”

Vodacom’s and Telkom’s increasing interconnection payments

Vodacom and Telkom have experienced a significant change in the traffic mix as mobile customers

have increased relative to fixed-line customers. This resulted in an increasing percentage of calls from
Vodacom’s network terminating on other mobile networks rather than our fixed-line network.
Vodacom’s interconnection payments have increased and its margins have decreased because the cost
of terminating calls on other mobile networks is higher than the cost of terminating calls on Telkom’s
fixed-line network. As a result, Vodacom’s South African net interconnect revenue has been declining in
recent years. Similarly, Telkom has incurred increased payments to other operators as a result of the
growth in interconnection traffic for fixed-line calls terminating on mobile networks. If mobile customers
continue to increase and there is little or no growth in fixed-line customers, this trend could continue and
Vodacom’s and Telkom’s margins and net profit could decline.

Vodacom’s acquisitions

In recent years, Vodacom has purchased a number of the previously independent service

providers and consolidated its sales and distribution operations into Vodacom Services Provider
Company. On March 1, 2004, Vodacom purchased 51% of Smartphone, acquiring an additional
2.5 million prepaid customers. On April 16, 2004, Smartphone, Vodacom’s 51% owned subsidiary,
purchased an 85.75% equity stake in Smartcom for R77.2 million, acquiring an additional 40,000
contract customers. On February 1, 2005, Vodacom acquired the contract customer base, dealer
agreements and five employees of Tiscali for R40.1 million. The net goodwill arising on this business
combination amounted to R9.8 million. As of March 31, 2006, 97.4% of Vodacom’s total customer
base, 83.5% of its contract customer base and 99.3% of its prepaid customer base in South Africa
was managed by exclusive service providers or controlled directly by Vodacom.

Vodacom acquired a 51% stake in Cointel for approximately R84.3 million on August 1, 2005.

Cointel’s core business is providing value added and m-commerce services to the telecommunications
industry.

An offer to acquire the cellular business of Africell, an exclusive Vodacom dealer in South Africa,

was accepted on April 6, 2006. The acquisition is subject to a number of conditions including approval
by the South African Competition Commission.

127

Volatility of the Rand

The value of the Rand as measured against the US Dollar has historically fluctuated significantly.

During the three years ended March 31, 2006, however, the value of the Rand as measured against the
Dollar has increased from R7.90 per $1.00 as of March 31, 2003 to R6.32 per $1.00 as
of March 31, 2004, R6.22 per $1.00 as of March 31, 2005 and R6.15 per $1.00 as of March 31, 2006.
Telkom’s policy is to hedge its foreign denominated debt and operating and capital expenditures.
Vodacom’s policy is to hedge its foreign denominated commitments for operating and capital
expenditures for its South African operations. Currency exchange hedges are not always available in
other African countries or are not available on commercially acceptable terms. Decreases in the value
of the Rand as measured against other currencies could increase the future cost in Rand terms of
future foreign denominated debt, future foreign denominated financing costs and future foreign
denominated operating and capital expenditures. Fair value adjustments on financial instruments are
recorded in the Telkom Group’s consolidated financial statements in the period they occur pursuant to
IAS39–Recognition and Measurement of Financial Instruments. The effect of the application of this
standard increased our consolidated profit before tax by R113 million in the 2006 financial year, and
decreased our consolidated profit before tax by R9 million and R776 million in the 2005 and 2004
financial years, respectively. Future exchange rate and financial market volatility may continue to
materially impact our future results due to the large volume of foreign exchange contracts entered into
by us to cover our foreign currency denominated debt, financing and operating costs and capital
expenditures.

Theft, vandalism, network fraud, payphone fraud and non-licensed operators

We have historically experienced significant cable theft, theft of solar panels and wireless

communications equipment, vandalism of payphones, network fraud, such as non-licensed calls, and
payphone fraud in our fixed-line business. Theft and vandalism have caused our fixed-line fault rates
to increase and the repair time on our network and the downtime associated with such faults and
network fraud and payphone fraud have resulted in lost operating revenue and significant costs. We
have also lost operating revenue to non-licensed operators providing telecommunications services in
South Africa. If we are unable to continue to minimize theft, vandalism, network fraud and payphone
fraud, or if we continue to lose operating revenue to non-licensed operators in our fixed-line business,
our fixed-line fault rates could increase and our operating revenue and net profit could decline.

Capital expenditures

Historically, our fixed line capital expenditures were aimed primarily at modernizing our network

and rolling out lines in order to comply with our license obligations and prepare for competition. As we
seek to implement our current strategy in the face of a significantly more competitive environment due
to the entry of SNO-T and the further liberalization of the South African communications market as a
result of the enactment of the Electronic Communications Act, we expect to shift our capital
expenditure focus as we seek to evolve our fixed-line network to an internet protocol-based next
generation network and increase investment in our employees. As a result, we expect that our fixed-
line capital expenditures in the 2007 financial year will be spent primarily in the following areas:

• Maintenance of current service levels and growth, including:

• the creation of new infrastructure to accommodate existing and new customers;

• focusing on intelligent villages, gated communities and security complexes;

• increasing our international network capacity;

• supporting the growing leased business system market; and

• supporting our business solution and e-business product growth.

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• Improvements to current networks, including to:

• upgrade and rehabilitate our fixed-line network;

• prevent theft and fraud; and

• evolve our fixed-line network for bandwidth flexibility.

• Enhancing customer centricity, including:

• reducing the current network utilization in order to maintain spare capacity; and

• pre-provision infrastructure to satisfy customer expectations.

• Next generation network, including:

• offering new products and services, based on broadband;

• remaining competitive in a fast growing market;

• migrating to a network with reduced network infrastructure;

• retaining revenues for products, services and features delivered on our current network;

• optimizing the use of resources invested in both legacy and new technologies; and

• migrating to next generation operating support systems.

• Regulatory and legal to comply with regulatory obligations related to:

• lawful interception and carrier pre-selection; and

• number portability and statutory compliance.

Our consolidated capital expenditures in property, plant and equipment for the 2007 financial year

is budgeted to be approximately R10.3 billion, of which approximately R6.5 billion is budgeted to be
spent in our fixed-line segment and approximately R3.8 billion is budgeted to be spent in our mobile
segment, which is our 50% share of Vodacom’s budgeted capital expenditure of approximately
R7.6 billion. Our capital expenditures are continuously examined and evaluated against the perceived
economic benefit and may be revised in light of changing business conditions, regulatory
requirements, investment opportunities and other business factors. See “–Liquidity and Capital
Resources–Capital Expenditures.”

Employee related expenses

Employee related expenses are a significant component of our total fixed-line operating expenses.

The number of Telkom employees declined by approximately 31,236 positions from March 31, 1997
through March 31, 2006. At March 31, 2006, we had 25,575 Telkom employees. We spent
R88 million, R961 million and R302 million in the years ended March 31, 2006, 2005 and 2004,
respectively, on our workforce reduction program. In October 2002, Telkom and its recognized trade
unions agreed to embark on a process of implementing alternative strategies and approaches to avoid
and minimize job losses and to create new career opportunities for Telkom employees. Telkom has
placed a moratorium on employee reductions until March 31, 2007, subject to certain conditions,
including re-training and re-skilling, “follow-the-job” initiative, flexibility and mobility of employees and
voluntary separation packages at the discretion and initiative of Telkom. During the 2007 financial
year, Telkom entered into a three-year long-term agreement on wages and benefits with the
recognized unions, including extending the moratorium on employee reductions until March 31, 2007.
We will evaluate future workforce reductions based on business and operational requirements,
however, we currently expect that the number of employees may increase in the future, which may
result in increased employee expenses.

Results of Operations

Our operating structure comprises two segments, fixed-line and mobile. Our fixed-line segment

provides fixed-line voice and data communications services through Telkom; directory services
through our 64.9% owned subsidiary, Telkom Directory Services; and wireless data services through
our wholly-owned subsidiary, Swiftnet. Our mobile segment consists of our 50% interest in Vodacom.

129

We proportionately consolidate Vodacom’s results into the Telkom Group’s consolidated financial

statements. This means that we include 50% of Vodacom’s results in each of the line items in the
Telkom Group’s consolidated financial statements and in the period-to-period discussion below.
We fully consolidate our Telkom Directory Services and Swiftnet subsidiaries in the Telkom Group’s
consolidated financial statements.

Year ended March 31, 2006 compared to year ended March 31, 2005 and year ended
March 31, 2004

Consolidated results

The following table shows information related to our operating revenue, operating expenses, operating
profit, profit for the year, profit margin, EBITDA and EBITDA margin for the periods indicated.

Telkom Group’s segmental results

Year ended March 31,

2004

2005

2006

2005/2004

2006/2005

ZAR

%

ZAR

%

ZAR

%

% change

% change

RESTATED

RESTATED

(in millions, except percentages)

Operating revenue

40,582

100.0

43,160

100.0

47,625

100.00

6.4

10.3

Fixed-line

31,004

76.4

31,457

72.9

32,749

68.8

1.5

4.1

Mobile

11,428

28.2

13,657

31.6

17,021

35.7

19.5

24.6

Intercompany eliminations

(1,850)

(4.6)

(1,954)

(4.5)

(2,145)

(4.5)

5.6

9.8

Other income

(1)

255

100.0

280

100.0

480

100.0

9.8

71.4

Fixed-line

230

90.2

255

91.1

430

89.6

10.9

68.6

Mobile

25

9.8

34

12.1

50

10.4

36.0

47.1

Intercompany eliminations

–

–

(9)

(3.2)

–

–

–

–

Operating expenses

31,499

100.0

32,179

100.0

33,428

100.0

2.2

3.9

Fixed-line

24,510

77.8

23,691

73.6

22,937

68.6

(3.3)

(3.2)

Mobile

8,839

28.1

10,451

32.5

12,636

37.8

18.2

20.9

Intercompany eliminations

(1,850)

(5.9)

(1,963)

(6.1)

(2,145)

(6.4)

6.1

9.3

Operating profit

(2)

9,338

100.0

11,261

100.0

14,677

100.0

20.6

30.3

Fixed-line

6,724

72.0

8,021

71.2

10,242

69.8

19.3

27.7

Mobile

2,614

28.0

3,240

28.8

4,435

30.2

23.9

36.9

Operating profit margin (%)

23.0

26.1

30.8

13.5

18.0

Fixed-line

21.7

25.5

31.3

17.5

22.7

Mobile

22.9

23.7

26.1

3.5

10.1

Profit for the year

attributable to equity
holders of Telkom

4,589

100.0

6,751

100.0

9,182

47.1

36.0

Profit margin (%)

11.3

15.6

19.3

38.1

23.7

EBITDA

(2) (3)

16,586

100.0

17,549

100.0

20,553

100.0

5.8

17.1

Fixed-line

12,707

76.6

12,753

72.7

14,646

71.3

0.4

14.8

Mobile

3,879

23.4

4,796

27.3

5,907

28.7

23.6

23.2

EBITDA margin (%)

40.9

40.7

43.2

(0.5)

6.1

(

1)

Other income includes profit on disposal of investments, property, plant and equipment and intangible assets.

(2)

Total operating profit and EBITDA and mobile operating profit and EBITDA in the 2005 financial year include our 50% share of
Vodacom’s impairment of R268 million in respect of assets in Mozambique and a reversal of Vodacom’s impairment loss of
R53 million in the 2006 financial year due to an increase in the fair value of the assets.

(3)

Total EBITDA and mobile EBITDA represent profit for the year before taxation, finance charges, investment income and
depreciation, amortization, impairments and Telkom’s write-offs. See footnote 8 in Item 3. “Key Information–Selected Historical
Consolidated Financial and Other Data of the Telkom Group” and footnote 4 in Item 3. “Key Information–Selected Historical
Consolidated Financial and Other Data of Vodacom Group” for a reconciliation of EBITDA of the Telkom Group and Vodacom,
respectively, to net profit. Fixed-line EBITDA represents operating profit before depreciation, amortization, impairments and

130

write-offs. We believe that EBITDA provides meaningful additional information to investors since it is widely accepted by
analysts and investors as a basis for comparing a company’s underlying operating profitability with that of other companies as it
is not influenced by past capital expenditures or business acquisitions, a company’s capital structure or the relevant tax regime.
This is particularly the case in a capital intensive industry such as communications. It is also a widely accepted indicator of a
company’s ability to service its long-term debt and other fixed obligations and to fund its continued growth. EBITDA is not a
US GAAP or IFRS measure. You should not construe EBITDA as an alternative to operating profit or cash flows from operating
activities determined in accordance with US GAAP or IFRS or as a measure of liquidity. EBITDA is not defined in the same
manner by all companies and may not be comparable to other similarly titled measures of other companies unless the
definition is the same. In addition, the calculation of EBITDA for the maintenance of our covenants contained in our TL20 bond
is based on accounting policies in use, consistently applied, at the time the indebtedness was incurred. As a result, EBITDA for
purposes of those covenants is not calculated in the same manner as it is calculated in the above table.

EBITDA can be reconciled to operating profit as follows:

Year ended March 31,

2004

2005

2006

ZAR

ZAR

ZAR

RESTATED RESTATED

(in millions)

Fixed-line
EBITDA

12,707

12,753

14,646

Depreciation, amortization, impairments and write-offs

(5,983)

(4,732)

(4,404)

Operating profit

6,724

8,021

10,242

Mobile
EBITDA

3,879

4,796

5,907

Depreciation, amortization and impairments

(1,265)

(1,556)

(1,472)

Operating profit

2,614

3,240

4,435

Operating revenue

Operating revenue increased in the years ended March 31, 2006 and 2005 due to increased

operating revenue in both our mobile and fixed-line segments. Vodacom’s operating revenue
increased in the 2006 financial year primarily due to strong customer growth and a continued
improvement in market share as well as increased data revenues and equipment sales.
Vodacom’s operating revenue increased in the 2005 financial year primarily due to strong customer
growth and the inclusion of 100% of Vodacom Congo’s results. The increase in fixed-line operating
revenue in the 2006 financial year was primarily due to continued growth in data revenue, higher
subscriptions and connections revenue, higher fixed-to-mobile traffic revenue and higher
interconnection revenue, partially offset by lower average long distance and international outgoing
traffic tariffs and lower local and long distance traffic. The increase in fixed-line operating revenue in
the 2005 financial year was primarily due to continued growth in data services, higher subscriptions
and connections tariffs and higher interconnection revenue from domestic mobile operators, partially
offset by a decrease in traffic, lower average long distance and international outgoing tariffs and lower
interconnection revenue from international operators. Fixed-line operating revenue accounted for
68.8%, 72.9% and 76.4% of our consolidated operating revenue before intercompany eliminations in
the years ended March 31, 2006, 2005 and 2004, respectively.

Other income

Other income includes profit on the disposal of investments, property, plant and equipment and

intangible assets. The increase in fixed-line other income in the 2006 financial year was primarily due
to the realization of profits on the sale of investments held by our consolidated special purpose entity
used to fund post retirement medical benefit obligations. The increase in fixed-line other income in the
2005 financial year was primarily due to the profit on the sale of our equity investment in New Skies
Satellite N.V., a satellite company.

Operating expenses

Operating expenses increased in the years ended March 31, 2006 and March 31, 2005 as a

result of increased operating expenses in our mobile segment, partially offset by decreases in
operating expenses in our fixed-line segment in both years. The increase in mobile operating

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expenses in the 2006 financial year was primarily due to increased selling, general and administrative
expenses to support the expansion of 3G, growth in Vodacom’s South African and African operations
and increased competition and as a result of increased cost of equipment for increased handset sales
and maintenance of the GSM infrastructure and billing systems, increased payments to other network
operators due to higher outgoing traffic and the increased percentage of outgoing traffic terminating
on other mobile networks, higher employee costs as a result of increased headcount, average 6%
annual salary increases, the inclusion of a provision for long-term incentives for executives and an
increase in the provision for bonus schemes due to increased profits, increased operating leases and
increased services rendered, partially offset by decreased depreciation, amortization and impairments.
The increase in mobile operating expenses in the 2005 financial year was primarily due to increased
selling, general and administrative expenses as a result of an increase in selling, distribution and
other expenses, incentive costs, regulatory and license fees and marketing expenses to support the
launch of 3G, growth in Vodacom’s South African and other African operations and increased
competition, increased payments to other network operators due to higher outgoing traffic and the
increased percentage of outgoing traffic terminating on other mobile networks, increased depreciation,
amortization and impairments and higher staff costs associated with increased headcount, salaries
and employee deferred bonus incentive accrued to support the growth in operations. In addition,
operating leases increased in the 2005 financial year while services rendered decreased in the 2005
financial year.

The decrease in fixed-line operating expenses in the 2006 financial year was primarily attributable

to lower employee expenses and reduced depreciation, amortization, impairments and write-offs,
partially offset by higher payments to other network operators, services rendered, selling, general and
administrative expenses and operating leases. Employee expenses decreased primarily due to reduced
workforce reduction expenses, lower headcount and increased employee related expenses capitalized,
partially offset by salary increases and related benefits. Depreciation, amortization, impairments and
write-offs decreased primarily as a result of an increase in the useful lives of certain assets, partially
offset by ongoing investment in telecommunications network equipment and data processing
equipment. Payments to other network operators increased primarily due to higher call volumes from
our fixed-line network to the mobile networks and increased international outgoing traffic arising from
our reduced tariffs. Services rendered increased primarily due to increased property management
expenses at TFMC and increased payments to consultants, partially offset by the nonrecurrence of fees
paid to Thintana Communications. Selling, general and administrative expenses increased primarily
due to increased other expenses resulting from higher costs of sales and higher marketing costs,
partially offset by lower materials and maintenance expenses and, to a lesser extent, reduced bad
debts. Operating leases increased primarily due to the impact of the straightlining of lease payments,
an increase in vehicle operating costs and higher building lease costs following new lease agreements,
partially offset by a reduction in the number of vehicles in our fleet.

The decrease in fixed-line operating expenses in the 2005 financial year was primarily due to

lower depreciation, amortization, impairments and write-offs, services rendered, payments to other
network operators and operating leases, partially offset by higher employee expenses and selling,
general and administrative expenses. Depreciation, amortization, impairments and write-offs were
lower primarily due to the increase in the useful life of certain assets, the non-recurring accelerated
depreciation of certain assets in the 2004 financial year and certain assets being fully depreciated in
the 2004 financial year. Services rendered were lower due to decreased property management
expenses resulting from space optimization and general efficiencies and reduced fees paid to
Thintana Communications. Payments to other network operators decreased primarily due to lower
international tariffs and a decrease in the Rand value of international settlement rates due to the
strengthening of the Rand against the SDR, the notional currency in which international rates are
determined, and, to a lesser extent, a reduction in calls from our fixed-line network to the mobile

132

networks and internationally, partially offset by higher mobile settlement rates. The lower operating
leases were primarily due to the continued reduction of our vehicle fleet size, the continued relocation
of employees from leased properties to owned properties and improvements in overall space
utilization. Employee expenses increased primarily due to higher workforce reduction expenses,
salary increases and overtime, partially offset by the lower headcount and related benefits and higher
employee costs capitalized. Selling, general and administrative expenses increased primarily due to
increased other expenses, which were significantly impacted in the 2004 financial year as a result of
the reversal in the 2004 financial year of the R325 million provision for the Telcordia dispute, higher
materials and maintenance expenses and higher marketing costs, partially offset by lower bad debts
and a more favorable exchange rate.

Operating profit

Operating profit increased in both the 2006 and 2005 financial years due to increases in fixed-line

operating profit as a result of higher revenue and a decline in operating expenses and increases in
mobile operating profit primarily as a result of increased mobile operating revenue due to customer
growth, partially offset by increases in operating expenses. As a result, the fixed-line operating profit
margin increased from 21.7% in the 2004 financial year to 25.5% in the 2005 financial year and
31.3% in the 2006 financial year and the mobile operating profit margin increased from 22.9% in the
2004 financial year to 23.7% in the 2005 financial year and 26.1% in the 2006 financial year.

Investment income

Investment income consists of interest received on short term investments and bank accounts and

income received from our investments. Investment income increased 13.4% to R397 million in the
2006 financial year and 8.7% to R350 million in the 2005 financial year from R322 million in the 2004
financial year primarily due to increased interest received as a result of higher average balances in
investment and bank accounts.

Finance charges

Finance charges include interest paid on local and foreign borrowings, amortized discounts on

bonds and commercial paper bills, fair value gains and losses on financial instruments and foreign
exchange gains and losses.

The following table sets forth information related to our finance charges for the periods indicated.

Finance Charges

Year ended March 31,

2004

2005

2006

2005/2004

2006/2005

ZAR

ZAR

ZAR

% change

% change

(in millions, except percentages)

Interest expense

2,488

1,686

1,346

(32.2)

(20.2)

Local loans

2,253

1,515

1,506

(32.8)

(0.6)

Foreign loans

303

281

9

(7.3)

(96.8)

Finance charges capitalized

(68)

(110)

(169)

(61.8)

(53.6)

Net fair value and exchange losses on financial
instruments

776

9

(113)

(98.8)

n/a

Fair value adjustments on derivative instruments

1,144

(103)

(170)

(109.0)

(65.0)

Foreign exchange (gains) losses

(368)

112

57

(130.4)

(49.1)

Total finance charges

3,264

1,695

1,233

(48.1)

(27.3)

133

Finance charges decreased in the year ended March 31, 2006 and 2005 due to reduced interest

expense as a result of lower interest bearing debt levels. In the 2006 financial year, the foreign
exchange and fair value gain was R113 million primarily due to currency movements and unrealized
gains relating to investments by our consolidated special purposes entity used to fund post retirement
medical benefit obligations. In the 2005 financial year, the lower net fair value and exchange losses
was a result of fair value gains on derivative instruments for foreign loans and foreign goods and
services purchased due to the strengthening of the Rand, offset in part by foreign exchange losses
due to the volatility of the Rand.

Taxation

Our consolidated tax expense increased 46.7% to R4,520 million in the year ended

March 31, 2006 and 77.3% to R3,082 million in the year ended March 31, 2005 from R1,738 million
in the year ended March 31, 2004. The increases in both the 2006 and 2005 financial years were
primarily due to the increase in our pre-tax income.

The following table sets forth information related to our effective tax rate for the Telkom Group,

Telkom Company and Vodacom for the periods indicated:

Year ended March 31,

2004

2005

2006

2005/2004

2006/2005

ZAR

ZAR

ZAR

% change

% change

(percentages)

Effective tax rate
Telkom Group

27.2

31.1

32.7

14.3

5.1

Telkom Company

15.6

20.6

25.0

32.1

21.4

Vodacom

36.1

40.2

37.5

11.4

(6.7)

The increase in the effective tax rate for the Telkom Group and Telkom in the 2006 financial year

was mainly due to secondary tax on companies payable in respect of dividends paid by Telkom
Company, partially offset by the lower effective rate of Vodacom. The lower effective tax rate for
Vodacom in the 2006 financial year was mainly attributable to the decrease in the South African
statutory tax rate from 30% to 29%, effective April 1, 2005. The higher effective tax rate for the Telkom
Group and Telkom in the year ended March 31, 2005 was primarily due to the reversal of a non-
deductible expenditure in the prior year as a result of the reversal of the Telcordia provision in the
2004 financial year and lower deferred tax on Secondary Taxation on Companies credits in the 2005
financial year. In addition, the Telkom effective tax rate was impacted in the 2005 financial year by the
receipt of approximately R1.9 billion in dividends from our subsidiaries and Vodacom joint venture,
which increased Telkom’s net income but was not taxable to Telkom. The Telkom Group and Telkom
were in a tax paying position for the 2005 financial year and provisional taxes of R1.5 billion were paid
by September 2005. The higher tax expense for Vodacom in the 2005 financial year was largely as a
result of the Secondary Taxation on Companies paid on the dividends declared by Vodacom and
unutilized tax losses in Vodacom Mozambique.

Minority interests

Minority interests in the income of subsidiaries increased 67.5% to R139 million in the year

ended March 31, 2006 primarily due to an increase in profits at Vodacom Tanzania, the allocation of a
R35 million VAT refund to minority interests of Smartphone as required by the purchase agreement,
an increase in profits at Smartphone, profits of Cointel as well as a 19.2% increase in the profits at
our Telkom Directory Services subsidiary. Minority interests in the income of subsidiaries increased
20.3% to R83 million in the year ended March 31, 2005 primarily due to a 35.6% increase in profits at
Vodacom Tanzania and a 12.7% increased in profits in our Telkom Directory Services subsidiary.

134

Profit for the year attributable to equity holders of Telkom

Profit for the year attributable to equity holders of Telkom increased in the 2006 and 2005 financial

years primarily due to increased operating profit in our fixed-line segment as well as in our mobile
segment. The increases were bolstered by lower interest expense and lower net fair value and
exchange losses on financial instruments in those years and, to a lesser extent, increased investment
income, partially offset by increased taxes.

Fixed-line segment

The following is a discussion of the results of operations from our fixed-line segment before

eliminations of intercompany transactions with Vodacom. Our fixed-line segment is our largest
segment based on revenue and profit contribution.

Fixed-line operating revenue

Our fixed-line operating revenue is derived principally from fixed-line subscriptions and

connections; traffic, which comprises local and long-distance traffic, fixed-to-mobile traffic, international
outgoing traffic and international voice over internet protocol services; and interconnection, which
comprise terminating and hubbing traffic. We also derive fixed-line
operating revenue from our data business, which includes data transmission services, managed
data networking services and internet access and related information technology services and our
wireless data services and directory businesses.

The following table shows operating revenue for our fixed-line segment broken down by major

revenue streams and as a percentage of total revenue for our fixed-line segment and the percentage
change by major revenue stream for the periods indicated.

Fixed-line operating revenue

Year ended March 31,

2004

2005

2006

2005/

2006/

% of

% of

% of

2004

2005

ZAR

revenue

ZAR

revenue

ZAR

revenue

% change % change

(in millions, except percentages)

RESTATED

RESTATED

Subscriptions and connections

5,117

16.5

5,385

17.1

5,803

17.7

5.2

7.8

Traffic

18,313

59.1      17,760

56.5     17,563

53.6

(3.0)

(1.1)

Local

5,910

19.1

5,746

18.3

5,753

17.6

(2.8)

0.1

Long-distance

3,770

12.2

3,577

11.4

3,162

9.7

(5.1)

(11.6)

Fixed-to-mobile

7,321

23.6

7,302

23.2

7,647

23.4

(0.3)

4.7

International outgoing

1,312

4.2

1,135

3.6

1,001

3.1

(13.5)

(11.8)

Interconnection

1,643

5.3

1,546

4.9

1,654

5.1

(5.9)

7.0

Data

5,028

16.2

5,784

18.4

6,649

20.3

15.0

15.0

Directories and other services

903

2.9

982

3.1

1,080

3.3

8.7

10.0

Fixed-line operating revenue

31,004

100.0       31,457

100.0     32,749

100.0

1.5

4.1

Fixed line operating revenue increased in the 2006 financial year primarily due to continued

growth in data revenue, higher subscriptions and connections revenue, higher fixed-to-mobile traffic
revenue and higher interconnection revenue, partially offset by lower average long distance and
international outgoing traffic tariffs and lower local and long distance traffic. The increase in fixed-line
operating revenue in the 2005 financial year was primarily due to continued growth in data revenue,
higher subscriptions and connections tariffs and higher interconnection revenue from domestic mobile
operators, partially offset by a decline in traffic, as well as lower average long distance and
international outgoing tariffs and lower interconnection revenue from international operators.

135

Fixed-line operating revenue was adversely impacted in both the 2006 and 2005 financial years

due to a decrease in the number of residential postpaid PSTN lines primarily as a result of customer
migration to mobile and higher bandwidth products such as ADSL and, in the 2005 financial year, our
prepaid PSTN service, and lower connections, offset in part by lower disconnections in the 2005
financial year, and was positively impacted by an increase in ISDN channels, ADSL services, business
postpaid PSTN lines and, in the 2005 financial year, prepaid PSTN lines. In addition, traffic was
adversely affected in both years by the increasing substitution of calls placed using mobile services
rather than our fixed-line service and dial-up traffic being substituted by our ADSL service,
as well as the decrease in the number of residential postpaid PSTN lines and increased competition in
our payphones business. As a result, traffic declined 2.9% and 4.8% in the 2006 and 2005 financial
years. Revenue per fixed access line increased 1.0% to R5,304 in the 2006 financial year primarily
due to higher subscriptions and connections tariffs, fixed-to-mobile traffic revenue and interconnection
revenue, partially offset by lower average long distance and international outgoing traffic tariffs and
lower local and long distance traffic. Revenue per fixed access line decreased 1.7% to R5,250 in the
2005 financial year from R5,341 in the 2004 financial year primarily due to the decline in traffic, as
well as lower average long distance and international outgoing tariffs.

Subscriptions and connections. Revenue from subscriptions and connections consists of revenue

from connection fees, monthly rental charges, value added voice services and the sale and rental of
customer premises equipment for postpaid and prepaid PSTN lines, including ISDN channels and
private payphones. Subscriptions and connections revenue is principally a function of the number and
mix of residential and business lines in service, the number of private payphones in service and the
corresponding charges. The following table sets forth information related to our fixed-line subscription
and connection revenue during the periods indicated.

Fixed-line subscription and connection revenue

Year ended March 31,

2004

2005

2006

2005/2004

2006/2005

ZAR

ZAR

ZAR

% change

% change

RESTATED RESTATED

Total subscriptions and connections revenue

(ZAR millions, except percentages)

5,117

5,385

5,803

5.2

7.8

Total subscription access lines (thousands,

except percentages)

(1)

4,520

4,567

4,551

1.0

(0.4)

Postpaid

PSTN

(2)

3,048

3,006

2,996

(1.4)

(0.3)

ISDN channels

601

664

693

10.5

4.4

Prepaid PSTN

856

887

854

3.6

(3.7)

Private payphones

15

10

8

(33.3)

(20.0)

(1)

Total subscription access lines are comprised of PSTN lines, including ISDN lines and private payphones, but excluding
internal lines in service and public payphones. Each analog PSTN line includes one access channel, each basic ISDN
line includes two access channels and each primary ISDN line includes 30 access channels.

(2)

Excluding ISDN channels. PSTN lines are provided using copper cable, DECT and fiber.

Revenue from subscriptions and connections increased in the years ended March 31, 2006 and

2005 mainly due to increased tariffs as well as an increase in the number of ISDN, business postpaid
PSTN lines and, in the 2005 financial year, prepaid PSTN lines, partially offset by lower residential
postpaid PSTN lines and, in the 2006 financial year, prepaid PSTN lines. The average monthly prices
for subscriptions increased by 6.3% on January 1, 2005 and 6.0% on September 1, 2005. Additionally,
there was an increase in revenue from the rental of customer premises equipment and voice
enhanced services in both the 2006 and 2005 financial years as a result of tariff increases and an
increase in the penetration of voice enhanced services.

136

The decrease in the number of residential postpaid PSTN lines in service in both the 2006 and

2005 financial years was primarily as a result of customer migration to mobile and higher bandwidth
products such as ADSL and, in the 2005 financial year, our prepaid PSTN service and lower
connections, partially offset by lower disconnections in the 2005 financial year. The increase in the
number of postpaid ISDN channels was driven by increased demand for higher bandwidth and
functionality. The decrease in prepaid PSTN lines in the 2006 financial year was primarily due to
continued migration to mobile services. In addition, we relaxed our credit policies which lead to fewer
migrations of our postpaid customers to prepaid service in the 2006 financial year. The increase in
prepaid lines in the 2005 financial year was mainly due to our increased marketing efforts for our
prepaid telephone services, particularly to first-time residential customers with poor or no credit
histories, and postpaid customers encouraged to migrate to prepaid services due to late payments
and credit difficulties.

For a discussion of our connection and rental fees, see Item 4. “Information on the

Company–Business Overview–Fixed-line communications–Fees and tariffs–Subscription and
connection tariffs” and for a discussion of the number of customers during the periods, see Item 4.
“Information on the Company–Business Overview–Fixed-line communications–Products and services.”

Traffic. Traffic revenue consists of revenue from local, long distance, fixed-to-mobile and

international outgoing calls and international voice over internet protocol services. Traffic revenue is
principally a function of tariffs and the volume, duration and mix between relatively more costly
domestic long distance, international and fixed-to-mobile calls and relatively less costly local calls.

The following table sets forth information related to our fixed-line traffic revenue for the periods

indicated.

Fixed-line traffic revenue

Year ended March 31,

2004

2005

2006

2005/2004

2006/2005

ZAR

ZAR

ZAR

% change

% change

Local traffic revenue (ZAR millions, except

percentages)

5,910

5,746

5,753

(2.8)

0.1

Local traffic (millions of minutes, except
percentages)

(1)

20,547

19,314

18,253

(6.0)

(5.5)

Long distance traffic revenue (ZAR millions,

except percentages)

3,770

3,577

3,162

(5.1)

(11.6)

Long distance traffic (millions of minutes,
except percentages)

(1)

4,616

4,453

4,446

(3.5)

(0.2)

Fixed-to-mobile traffic revenue (ZAR millions,

except percentages)

7,321

7,302

7,647

(0.3)

4.7

Fixed-to-mobile traffic (millions of minutes,
except percentages)

(1)

3,980

3,911

4,064

(1.7)

3.9

International outgoing traffic revenue

(ZAR millions, except percentages)

1,312

1,135

1,001

(13.5)

(11.8)

International outgoing traffic (millions of minutes,
except percentages)

(1)

427

415

515

(2.8)

24.1

International voice over internet protocol (millions
of minutes, except percentages)

(2)

25

89

83

256

(6.7)

Total traffic revenue (ZAR millions, except

percentages)

18,313

17,760

17,563

(3.0)

(1.1)

Total traffic (millions of minutes, except
percentages)

(1)

29,595

28,182

27,361

(4.8)

(2.9)

Average total monthly traffic minutes per average
Monthly access line (minutes)

(3)

526

496

482

(5.7)

(2.8)

137

(1)

Traffic, other than international voice over internet protocol traffic, is calculated by dividing total traffic revenue by the
weighted average tariff during the relevant period. Traffic includes internet traffic.

(2)

International voice over internet protocol traffic is based on the traffic reflected in invoices.

(3)

Average monthly traffic minutes per average monthly access line are calculated by dividing the total traffic by the
cumulative number of monthly access lines in the period.

Traffic revenue declined in the 2006 financial year primarily due to a decline in lower average long

distance and international outgoing traffic tariffs and lower local and long distance traffic, partially
offset by increased local traffic tariffs, fixed to mobile traffic revenue and international outgoing traffic.
Traffic revenue declined in the 2005 financial year primarily due to a decline in traffic and lower
average long distance and international outgoing tariffs, partially offset by increased local and fixed-to-
mobile tariffs.

ICASA approved a 2.2% increase in the overall tariffs for services in the basket for which there is

a price cap effective January 1, 2004, a 0.2% increase in the overall tariffs for services in the basket
effective January 1, 2005 and a 3.0% reduction in the overall tariffs for services in the basket effective
September 1, 2005. Traffic was adversely affected in both the 2006 and 2005 financial years by the
increasing substitution of calls placed using mobile services rather than our fixed-line service and dial-
up traffic being substituted by our ADSL service, as well as the decrease in the number of residential
postpaid PSTN lines and increased competition in our payphone business.

For a discussion of our traffic tariffs, see Item 4. “Information on the Company–Business

Overview–Fixed-line communications–Fees and tariffs–Traffic tariffs” and for a discussion of our traffic
during the periods discussed, see Item 4. “Information on the Company–Business Overview–Fixed-
line communications–Products and Services–Traffic.”

Local traffic revenue was flat in the 2006 financial year. Increased revenue attributable to

increased average local traffic tariffs was partially offset by lower traffic resulting primarily from internet
call usage being substituted by our ADSL service and the substitution of calls placed using mobile
services. Local traffic revenue declined in the 2005 financial year mainly due to lower traffic resulting
primarily from internet call usage being substituted by our ADSL service. In addition, we increased
penetration of discount and calling plans to stimulate usage in the 2005 and 2006 financial years and
to counteract mobile substitution, which effectively lowers the cost to the customer. The decline in
local traffic revenue in the 2005 financial year was partially offset by increased average local traffic
tariffs. The price of local peak calls increased by 5.3% to 40 SA Cents per minute (VAT inclusive) on
January 1, 2005. On September 1, 2005, we decreased the price of local peak calls after the first unit
by 5.0% to 38 SA cents per minute (VAT inclusive).

Long distance traffic revenue decreased in the 2006 and 2005 financial years mainly due to a

decrease in average long distance tariffs and lower long distance traffic. We decreased our fixed-line
long distance traffic tariffs by 10% on January 1, 2005 and by a further 10% on September 1, 2005.

Revenue from fixed-to-mobile traffic consists of revenue from calls made by our fixed-line

customers to the three mobile networks in South Africa and is primarily a function of fixed-to-mobile
tariffs and the number, the duration and the time of calls. Fixed-to-mobile traffic revenue increased in
the 2006 financial year primarily due to increased traffic as well as a marginal increase in average
tariffs, partially offset by higher discounts offered to customers in order to retain traffic on our network.
The increase in fixed-to-mobile traffic in the 2006 financial year was primarily due to the introduction
our CellSaver product, which offers discounts to larger customers on fixed-to-mobile calls. Fixed-to-
mobile traffic revenue decreased in the 2005 financial year primarily due to lower fixed-to-mobile traffic
and increased discounts on fixed-to-mobile calls to combat mobile substitution, partially offset by
increased fixed-to-mobile tariffs. Fixed-to-mobile traffic decreased in the 2005 financial year primarily
as a result of an increase in the number of mobile customers, resulting in increased mobile-to-mobile
traffic and less fixed-to-mobile traffic, particularly in our payphone segment.

138

Revenue from international outgoing traffic consists of revenue from calls made by our fixed-line

customers to international destinations and from international voice over internet protocol services and
is a function of tariffs and the number, duration and mix of calls to destinations outside
South Africa. In the 2006 and 2005 financial year, international outgoing traffic revenue declined
primarily as a result of a decrease in the average international outgoing tariffs. The decrease in the
2006 financial year was partially offset by a significant increase in international outgoing traffic
primarily as a result of the reduced tariffs. International outgoing traffic declined in the 2005 financial
year primarily due to increased competition from callback operators. The average tariffs to all
international destinations decreased by 28% on January 1, 2005 with rates of R1.70 per minute
(VAT inclusive) for major destinations like the United States, United Kingdom and Australia.

Interconnection. We generate revenue from interconnection services for traffic from calls made

by other operators’ customers that terminate on or transit through our network. Revenue from
interconnection services includes payments from domestic mobile and international operators
regardless of where the traffic originates or terminates. The following table sets forth information
related to interconnection revenue for the periods indicated.

Interconnection revenue

Year ended March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

Interconnection revenue (ZAR millions,

except percentages)

1,643

1,546

1,654

(5.9)

7.0

Domestic mobile interconnections
Interconnection revenue from domestic mobile

operators (ZAR millions, except percentages)

697

748

760

7.3

1.6

Domestic mobile interconnection traffic

(millions of minutes, except percentages)

(1)

2,159

2,206

2,299

2.2

4.2

International interconnection
Interconnection revenue from international

operators (ZAR millions, except percentages)

946

798

894

(15.6)

12.0

International interconnection traffic (millions of

minutes, except percentages)

(2)

1,188

1,318

1,355

10.9

2.8

(1)

Domestic mobile-to-fixed interconnection traffic, other than international outgoing mobile traffic, is calculated by dividing
total domestic mobile-to-fixed interconnection traffic revenue by the weighted average domestic mobile-to-fixed
interconnection traffic tariffs during the relevant period. International outgoing mobile traffic is based on the traffic
registered through the respective exchanges and reflected in international interconnection invoices.

(2)

International interconnection traffic is based on the traffic registered through the respective exchanges and reflected on
invoices.

Interconnection revenue from domestic mobile operators includes revenue for call termination and

international outgoing calls from domestic mobile networks, as well as access to other services, such
as emergency services and directory enquiry services. Interconnection revenue from domestic mobile
operators increased in the 2006 and 2005 financial years mainly due to increased traffic from
domestic mobile operators and tariff increases for call termination, partially offset by lower tariffs on
mobile international outgoing calls. Domestic mobile interconnection traffic increased in the years
ended March 31, 2006 and 2005 primarily due to an overall increase in mobile calls as a result of a
growing mobile market, partially offset by increased mobile-to-mobile calls bypassing our network.

Interconnection revenue from domestic mobile operators includes fees paid to our fixed-line

business by Vodacom of R464 million in the year ended March 31, 2006, R465 million in the year
ended March 31, 2005 and R417 million in the year ended March 31, 2004. Fifty percent of these
amounts were attributable to our interest in Vodacom and were eliminated from the Telkom Group’s
revenue on consolidation. We expect interconnection revenue to increase as a result of the entrance
of SNO-T in the future and the further liberalization of the South African telecommunications industry,
which may partially mitigate declines in revenue in other areas.

139

Interconnection revenue from international operators includes amounts paid by foreign operators

for the use of our network to terminate calls made by customers of such operators and payments from
foreign operators for interconnection hubbing traffic through our network to other foreign networks.
Interconnection revenue from international operators increased in the year ended March 31, 2006
primarily due to an increase in international interconnection traffic terminating on our network and the
recognition of disputed international interconnection terminating traffic revenue from the 2005 financial
year following the resolution of a dispute in the 2006 financial year. However, the traffic minutes
relating to the disputed traffic revenue was not transferred from the 2005 financial year to the 2006
financial year. These increases were partially offset by lower international interconnection settlement
rates and a decrease in the Rand value of international settlement rates due to the strengthening of
the Rand against the SDR, the notional currency in which international rates are determined, volume
discounts and a settlement preventing an illegal operator from carrying international incoming traffic.
Interconnection revenue from international operators decreased in the year ended March 31, 2005
primarily due to lower international settlement rates and a decrease in the Rand value of international
settlement rates due to the strengthening of the Rand against the SDR and lower traffic transiting
through our network to other foreign networks due to aggressive competition in the international
market. The decrease in the 2005 financial year was partially offset by an increase in international
interconnect traffic terminating on our network mainly as a result of increased activity of call back
operators in the market.

Data. Data services comprise data transmission services, including leased lines and packet based

services, managed data networking services and internet access and related information technology
services. In addition, data services include revenue from ADSL, which we launched in August 2002.
Revenue from data services is mainly a function of the number of subscriptions, tariffs, bandwidth and
distance. The following table sets forth information related to revenue from data services for the
periods indicated.

Data services revenue

Year ended March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

RESTATED RESTATED

Data services revenue (ZAR millions, except

percentages)

5,028

5,784

6,649

15.0

15.0

Leased lines and other data revenue

(1)

4,119

4,748

5,282

15.3

11.2

Leased line facilities revenues from mobile operators

909

1,036

1,367

14.0

31.9

Number of managed network sites (at period end)

9,061

11,961

16,887

32.0

41.2

Internet dial-up subscribers (at period end)

142,208 202,410 228,930

42.3

13.1

Internet ADSL subscribers (at period end)

8,559

22,870

53,997

167.2

136.1

Internet satellite subscribers (at period end)

192

1,427

1,981

n/a

38.9

Total ADSL subscribers (at period end)

(2)

20,145

58,278 143,509

189.3

146.2

(1)

Leased lines and other data revenue includes all data services revenue other than leased line facilities revenue from
mobile operators.

(2)

Excludes Telkom internal ADSL services of 249, 254 and 168 as of March 31, 2006, 2005 and 2004, respectively.

Our data services revenue increased in the 2006 financial year primarily due to increased revenue

from leased line facilities from mobile operators, data connectivity service, including ADSL connectivity
and SAIX, internet access, and managed data networks, including UPN Supreme. These increases
were partially offset by decreased tariffs for leased line facilities from mobile operators and data
connectivity services. Our data services revenue increased in the 2005 financial year primarily due

140

to the increased data connectivity, including ADSL service, increased internet services, increased
penetration of leased lines in corporate and business markets, increased demand for bandwidth with
higher capacity and, to a lesser extent, increased numbers of customers using managed data
networking services. Revenue from leased line facilities from mobile operators increased in the year
ended March 31, 2006 and 2005 primarily due to the roll-out of third generation and universal mobile
telecommunications system products by the mobile operators.

Operating revenue from our data services included R845 million, R562 million and R466 million

in revenue received by our fixed-line business from Vodacom in the years ended March 31, 2006,
2005 and 2004, respectively. Fifty percent of these amounts were attributable to our interest in
Vodacom and were eliminated from the Telkom Group’s revenue on consolidation.

For a discussion of our data services, see Item 4. “Information on the Company–Business

Overview–Fixed-line communications–Products and services–Data communications services.”

Directories and other services. Revenue from directories and other services consists primarily

of advertising revenue from our subsidiary, Telkom Directory Services, and, to a substantially lesser
degree, wireless data services revenue from our subsidiary, Swiftnet, and other miscellaneous
revenue, including revenue from the sale of materials. Revenue from directories and other services
increased in the years ended March 31, 2006 and 2005 primarily due to increases in directory
services revenue from Telkom Directory Services as a result of annual tariff increases, increased
marketing efforts resulting in increased spending on advertising by existing customers and additional
advertising revenue from new customers.

Fixed-line operating expenses

The following table shows the operating expenses of our fixed-line segment broken down by

expense category as a percentage of total revenue and the percentage change by operating expense
category for the periods indicated.

Fixed-line operating expenses

Year ended March 31,

2004

2005

2006

% of

% of

% of

2005/2004 2006/2005

ZAR

revenue

ZAR

revenue

ZAR

revenue

% change % change

(in millions, except percentages)

Employee expenses

(1)

6,743

21.7

7,285

23.2

6,470

19.8

8.0

(11.2)

Payments to other network

operators

6,063

19.6

5,896

18.7

6,150

18.8

(2.8)

4.3

Selling, general and

administrative expenses

(2)

2,640

8.5

3,046

9.7

3,086

9.4

15.4

1.3

Services rendered

2,202

7.1

1,976

6.3

2,050

6.3

(10.3)

3.7

Operating leases

879

2.8

756

2.4

777

2.4

(14.0)

2.8

Depreciation, amortization,
impairments and write-offs

5,983

19.3

4,732

15.0

4,404

13.4

(20.9)

(6.9)

Fixed-line operating
expenses

24,510

79.1

23,691

75.3

22,937

70.0

(3.3)

(3.2)

(1)

Employee expenses include workforce reduction expenses of R88 million, R961 million and R302 million in the years
ended March 31, 2006, 2005 and 2004, respectively.

(2)

In the year ended March 31, 2003, we recorded a R117 million gain related to the R325 million provision for potential
liabilities related to Telkom’s arbitration with Telcordia in terms of IAS21 and IAS39 in finance charges as a result of the
strengthening of the Rand. In addition, we included a provision for interest of R40 million related to Telcordia in finance
charges in the year ended March 31, 2003 and a provision for legal fees of R58 million related to Telcordia is included
in services rendered in the year ended March 31, 2003. In the year ended March 31, 2004, all of these provisions were
reversed.

141

Fixed-line operating expenses decreased in the 2006 financial year primarily due to lower

employee expenses and reduced depreciation, amortization, impairments and write-offs, partially
offset by higher payments to other network operators, services rendered, selling, general and
administrative expenses and operating leases. Employee expenses decreased primarily due to
reduced workforce reduction expenses, lower headcount and increased employee related expenses
capitalized, partially offset by salary increases and related benefits. Depreciation, amortization,
impairments and write-offs decreased primarily as a result of an increase in the useful lives of certain
assets, partially offset by ongoing investment in telecommunications network equipment and data
processing equipment. Payments to other network operators increased primarily due to higher call
volumes from our fixed-line network to the mobile networks and increased international outgoing traffic
arising from our reduced tariffs. Services rendered increased primarily due to increased property
management expenses at TFMC and increased payments to consultants, partially offset by the
nonrecurrence of fees paid to Thintana Communications. Selling, general and administrative expenses
increased primarily due to increased other expenses resulting from higher costs of sales and higher
marketing costs, partially offset by lower materials and maintenance expenses and, to a lesser extent,
reduced bad debts. Operating leases increased primarily due to the impact of the straightlining of
lease payments, an increase in vehicle operating costs and higher building lease costs following new
lease agreements, partially offset by a reduction in the number of vehicles in our fleet.

Fixed-line operating expenses decreased in the 2005 financial year primarily due to lower

depreciation, amortization, impairments and write-offs, services rendered, payments to other network
operators and operating leases, partially offset by higher employee expenses and selling, general and
administrative expenses. Depreciation, amortization, impairments and write-offs were lower primarily
due to the increase in the useful life of certain assets, the non-recurring accelerated depreciation of
certain assets in the 2004 financial year and certain assets being fully depreciated in the 2004
financial year. Services rendered were lower due to decreased property management expenses
resulting from space optimization and general efficiencies and reduced fees paid to Thintana
Communications. Payments to other network operators decreased primarily due to lower international
tariffs and a decrease in the Rand value of international settlement rates due to the strengthening of
the Rand against the SDR, the notional currency in which international rates are determined, and, to a
lesser extent, a reduction in calls from our fixed-line network to the mobile networks and
internationally, partially offset by higher mobile settlement rates. The lower operating leases were
primarily due to the continued reduction of our vehicle fleet size, the continued relocation of
employees from leased properties to owned properties and improvements in overall space utilization.
Employee expenses increased primarily due to higher workforce reduction expenses, salary increases
and overtime, partially offset by the lower headcount and related benefits and higher employee costs
capitalized. Selling, general and administrative expenses increased primarily due to increased other
expenses, which were significantly impacted in the 2004 financial year as a result of the reversal in
the 2004 financial year of the R325 million provision for the Telcordia dispute, higher materials and
maintenance expenses and higher marketing costs, partially offset by lower bad debts and a more
favorable exchange rate.

Employee expenses. Employee expenses consist mainly of salaries and wages for employees,

including bonuses and other incentives, benefits and workforce reduction expenses.

142

The following table sets forth information related to our employee expenses for the periods indicated.

Fixed-line employee expenses

Year ended March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

(ZAR millions, except percentages and number of employees)

Salaries and wages

(1)

4,795

4,785

4,592

(0.2)

(4.0)

Benefits

(1)

2,161

2,110

2,410

(2.4)

14.2

Workforce reduction expenses

302

961

88

218.2

(90.8)

Employee related expenses capitalized

(515)

(571)

(620)

10.9

8.6

Employee expenses

6,743

7,285

6,470

8.0

(11.2)

Number of full-time, fixed line employees
(at period end)

(1)

32,934

29,544

26,156

(10.3)

(11.5)

(1)

Includes expenses and number of employees of our Telkom Directory Services and Swiftnet subsidiaries.

Employee expenses decreased in the year ended March 31, 2006 primarily due to reduced

workforce reduction expenses, lower headcount and increased employee related expenses
capitalized, partially offset by salary increases and related benefits, including increased performance
incentives for the Telkom conditional share plan, and a change in the actuarial valuation of medical
benefits. Employee expenses increased in the year ended March 31, 2005 primarily due to higher
workforce reduction expenses, salary increases and overtime, partially offset by the lower headcount
and related benefits and higher employee costs capitalized. Salaries and wages decreased in the year
ended March 31, 2006 primarily due to a 11.5% reduction in the number of employees resulting from
our workforce reduction program, partially offset by a 7% increase in base salaries and wages in line
with collective bargaining agreements and an average 6% increase in salaries and wages for
management employees. Salaries and wages decreased in the year ended March 31, 2005 primarily
due to a 10.3% reduction in the number of employees in line with our workforce reduction program
and a reduction in part-time and temporary workers, to a substantial degree offset by an 8% increase
in base salaries and wages in line with collective bargaining agreements, an average 5% increase in
salaries and wages for management employees and overtime to manage the substantial increase in
the number of faults due to inclement weather. Benefits include allowances, such as bonuses,
company contributions to medical aid, pension and retirement funds, leave provisions, workmen’s
compensation and levies payable for skills development. Benefits increased in the 2006 financial year
due to increased performance incentives for the Telkom conditional share plan, a change in
assumptions used to calculate the actuarial valuation of medical benefits and increases in related
benefits associated with increased salaries and wages, partially offset by the reduced number of
employees. Benefits decreased in the 2005 financial year primarily due to the reduced number of
employees as a result of our workforce reduction program and related benefits. Workforce reduction
expenses include the cost of voluntary early retirement, termination severance packages offered to
employees and the cost of social plan expense to prepare affected employees for new careers outside
Telkom. Workforce reduction expenses decreased substantially in the year ended
March 31, 2006 due to the moratorium on voluntary severance packages taken in the 2006 financial
year. Workforce reduction expenses increased in the year ended March 31, 2005 due to the
substantially higher number of employees accepting enhanced voluntary severance packages, as
compared to the previous year, and the offering and acceptance of more enhanced packages
resulting in an increased average workforce reduction package per employee. An additional
245 employees left Telkom in the 2006 financial year as part of the conclusion of Telkom’s workforce
reduction initiatives for the 2005 financial year, compared to 5,041 employees in the 2005 financial
year and 1,633 employees in the 2004 financial year. For additional information related to our fixed-
line employee numbers, see Item 4. “Information on the Company–Business Overview–Fixed–line
communications–Employees.”

Employee related expenses capitalized include employee related expenses associated with
construction and infrastructure development projects. Employee related expenses capitalized
increased in the years ended March 31, 2006 and March 31, 2005 primarily due to increased capital
expenditures on projects during the year and, to a lesser degree, the higher labor demand on many
projects that are in the realization phase.

143

Payments to other network operators. Payments to other network operators include settlement

payments paid to the three South African mobile communications network operators for terminating
calls on their networks and to international network operators for terminating outgoing international
calls and traffic transiting through their networks.

The following table sets forth information related to our payments to other network operators for

the periods indicated.

Fixed-line payments to other network operators

Year ended March 31,

2004

2005

2006

2005/2004

2006/2005

ZAR

ZAR

ZAR

% change

% change

(in millions, except percentages)

Payments to mobile communications
network operators

5,041

5,059

5,231

0.4

3.4

Payments to international network operators

1,022

837

919

(18.1)

9.8

Payments to other network operators

6,063

5,896

6,150

(2.8)

4.3

Payments to other network operators increased in the 2006 financial year primarily due to higher

call volumes from our fixed-line network to the mobile networks, resulting from discounts offered,
including our CellSaver product, increased fixed-to-mobile calls by business customers due
to growth in the mobile market and increased international outgoing traffic arising from our reduced
tariffs. Payments to other network operators decreased in the 2005 financial year primarily due to
lower international tariffs and a decrease in the Rand value of international settlement rates due to the
strengthening of the Rand against the SDR, the notional currency in which international settlement
rates are determined, and, to a lesser extent, a reduction in calls from our fixed-line network to the
mobile networks and internationally, partially offset by the higher mobile settlement rates. Payments to
other network operators include payments made by our fixed-line business to Vodacom, which were
R2,855 million, R2,761 million and R2,764 million in the years ended
March 31, 2006, 2005 and 2004, respectively. Fifty percent of these amounts were attributable to our
interest in Vodacom and were eliminated from the Telkom Group’s expenses on consolidation.

Selling, general and administrative expenses. Selling, general and administrative expenses

include materials and maintenance costs, marketing expenditures, bad debts, theft and other
expenses, including obsolete stock and cost of sales.

The following table sets forth information related to our fixed-line selling, general and

administrative expenses for the periods indicated.

Fixed-line selling, general and administrative expenses

Year ended March 31,

2004

2005

2006

2005/2004

2006/2005

ZAR

ZAR

ZAR

% change

% change

(in millions, except percentages)

Materials and maintenance

1,623

1,726

1,617

6.3

(6.3)

Marketing

306

360

413

17.6

14.7

Bad debts

254

196

187

(22.8)

(4.6)

Other

(1)

457

764

869

67.2

13.7

Selling, general and administrative expenses

(1)

2,640

3,046

3,086

15.4

1.3

(1)

In the year ended March 31, 2003, we recorded a R117 million gain related to the R325 million provision for potential
liabilities related to Telkom’s arbitration with Telcordia in terms of IAS21 and IAS39 in finance charges as a result of the
strengthening of the Rand. In addition, we included a provision for interest of R40 million related to Telcordia in finance
charges in the year ended March 31, 2003 and a provision for legal fees of R58 million related to Telcordia is included in
services rendered in the year ended March 31, 2003. In the year ended March 31, 2004, all of these provisions were
reversed.

144

Selling, general and administrative expenses increased in the year ended March 31, 2006

primarily due to increased other expenses resulting from higher costs of sales and higher marketing
costs, partially offset by lower materials and maintenance expenses and, to a lesser extent, reduced
bad debts. Selling, general and administrative expenses increased in the year ended March 31, 2005
primarily due to increased other expenses, which were significantly impacted in the 2004 financial
year as a result of the reversal in the 2004 financial year of the R325 million provision for the Telcordia
dispute, higher materials and maintenance expenses and higher marketing costs, partially offset by
lower bad debts and a more favorable exchange rate. Materials and maintenance expenses include
stock write-offs, subcontractor payments and consumables required to maintain our network. Materials
and maintenance expenses decreased in the year ended March 31, 2006 primarily due to lower
custom duties, reduced repairs and maintenance on data and processing equipment and savings on
renegotiated maintenance contracts. Materials and maintenance expenses increased in the year
ended March 31, 2005 primarily as a result of higher custom duties, annual escalation on
maintenance contracts, bush-cutting projects and increased maintenance due to increased faults as a
result of inclement weather, partially offset by a more favorable exchange rate. Marketing expenses
increased in the year ended March 31, 2006 primarily due to increased sponsorships, higher market
research costs and increased advertising and media campaigns. Marketing expenses increased in the
year ended March 31, 2005 primarily as a consequence of extensive media campaigns and market
research. We expect marketing expenses to continue to increase in the future in response to
increased competition, including from SNO-T, and the further liberalization of the South African
communications industry generally.

Bad debt decreased in the years ended March 31, 2006 and March 31, 2005 resulting primarily

from improved credit management and credit vetting policies, targeted line roll-out and an improved
profiling of debtors. Bad debt as a percentage of revenue was 0.6%, 0.6% and 0.8% in the 2006,
2005 and 2004 financial years, respectively.

Other expenses include obsolete stock, cost of sales, subsistence and travel and an offset for bad

debts recovered. Other expenses increased in the year ended March 31, 2006 primarily due to higher
cost of sales for PC bundles, managed network sites, business solutions and PABX products, as well
as increased theft. Other expenses increased in the year ended March 31, 2005 primarily as a result
of the reversal of the R325 million provision for the Telcordia dispute in the 2004 financial year,
lowering expenses in that year. Excluding the reversal of the Telcordia provision, other expenses
decreased in the 2005 financial year primarily due to lower irrecoverable staff debt and lower costs of
sales of customer premises equipment.

Services rendered. Services rendered include payments in respect of the management of our

properties, such as TFMC, a facilities and property management company, consultants and security.
Consultants comprise fees paid to collection agents and to providers of other professional services,
such as Thintana Communications and external auditors. Security refers to services to safeguard the
network and contracts to ensure a safe work environment, such as guard services.

145

The following table sets forth information relating to services rendered expenses for the periods

indicated.

Fixed-line services rendered

Year ended March 31,

2004

2005

2006

2005/2004

2006/2005

ZAR

ZAR

ZAR

% change

% change

(in millions, except percentages)

Property management

1,164

1,068

1,107

(8.2)

3.7

Consultants, security and other

1,038

908

943

(12.5)

3.9

Services rendered

2,202

1,976

2,050

(10.3)

3.7

Property management increased in the year ended March 31, 2006 primarily as a result of

increased salary, wages, maintenance, rates and taxes at TFMC, which are passed through to us.
Property management decreased in the year ended March 31, 2005 primarily due to space
optimization and general efficiencies in maintenance, cleaning and utilities usage. Payments to
consultants increased in the year ended March 31, 2006 primarily due to regulatory and statutory
compliance, collection agency commissions, transport costs, HIV awareness costs and audit costs,
partially offset by the nonrecurrence of fees paid to Thintana Communications following the
termination of the strategic services agreement and reduced short term insurance costs. Payments to
consultants decreased in the year ended March 31, 2005 primarily resulting from lower fees paid to
Thintana Communications as a consequence of fewer key personnel, a more favorable exchange rate
and the termination of the strategic services agreement following the sale of Thintana
Communications’ shares in November 2004. Consultants, security and other payments include
expenses of R57 million and R154 million in the years ended March 31, 2005 and 2004, respectively,
for the strategic services provided by our previous strategic equity investor, Thintana Communications,
pursuant to our strategic service agreement. A part of these payments made to Thintana
Communications relate to capital projects and have been capitalized.

Operating leases. Operating leases include payments in respect of equipment, buildings and

vehicles. Operating leases increased in the year ended March 31, 2006 primarily due to the impact of
the straightlining of lease payments, an increase in vehicle operating costs and higher building lease
costs following new lease agreements, partially offset by a reduction in the number of vehicles in our
fleet from 10,458 vehicles as of March 31, 2005 to 9,708 vehicles as of March 31, 2006.
Operating leases decreased in the year ended March 31, 2005 primarily due to a reduction
in the number of vehicles in our fleet from 11,849 vehicles as of March 31, 2004 to 10,458 vehicles
as of March 31, 2005. Our space optimization program, which relocated employees from leased
premises to owned premises and improved overall space utilization, also contributed to the lower
lease expense in the 2005 financial year.

Depreciation, amortization, impairments and write-offs. Depreciation, amortization, impairments

and write-offs decreased in the year ended March 31, 2006 primarily as a result of an increase in the
useful life of certain assets, partially offset by ongoing investment in telecommunications network
equipment and data processing equipment. Depreciation, amortization, impairments and write-offs
decreased in the year ended March 31, 2005 primarily as a result of an increase in the useful life of
certain assets, the non-recurring accelerated depreciation of certain assets in the 2004 financial year
and certain assets nearing their useful lives in the 2004 financial year. We incurred a R149 million
impairment of Telkom’s satellite earth station at Hartebeespoort in the 2004 financial year. Excluding
this impairment, write-offs were relatively flat in the year ended March 31, 2005.

146

Mobile segment

Mobile is our fastest growing segment and encompasses all the operating activities of our 50%

joint venture investment in Vodacom, the largest mobile operator in South Africa with an approximate
58% market share as of March 31, 2006 based on total estimated customers in South Africa.
In addition to its South African operations, Vodacom has investments in mobile communications
network operators in Lesotho, Tanzania, the Democratic Republic of the Congo and Mozambique.

Vodacom’s operations outside of South Africa are at an earlier stage in their expansion and market

penetration than its operations in South Africa. As a result, Vodacom’s costs and capital expenditures
per customer for its other African operations are generally higher than for its South African operations.
Customers in other African countries increased significantly over the past three financial years to
approximately 4.4 million as of March 31, 2006 from approximately 2.6 million as of March 31, 2005
and approximately 1.5 million as of March 31, 2004. A substantial portion of the growth was from
prepaid services. Services outside of South Africa are mainly prepaid as these countries suffer from
poverty and also due to the lack of banking systems and credit histories.

The following table shows information related to our 50% share of Vodacom’s operating revenue

and operating profit broken down by Vodacom’s South African operations and operations in other
African countries for the periods indicated. All amounts in this table and the discussion of our mobile
segment that follows represent 50% of Vodacom’s results of operations unless otherwise stated and
are before the elimination of intercompany transactions with us.

Mobile operating revenue and profits

Year ended March 31,

2004

2005

2006

% of

% of

% of

2005/2004 2006/2005

ZAR

revenue

ZAR

revenue

ZAR

revenue

% change % change

RESTATED

RESTATED

(in millions, except percentages)

Operating revenue

11,428    100.0

13,657

100.0

17,021  100.0

19.5

24.6

South Africa

10,675

93.4

12,520

91.7

15,535

91.3

17.3

24.1

Other African countries

753

6.6

1,137

8.3

1,486

8.7

51.0

30.7

Operating profit

(1)

2,614    100.0

3,240

100.0

4,435  100.0

23.9

36.9

South Africa

2,585

98.9

3,338

103.0

4,291

96.8

29.1

28.6

Other African countries

29

1.1

(98)

(3.0)

144

3.2

n/a

n/a

EBITDA

(1) (2)

3,879    100.0

4,796

100.0

5,907  100.0

23.6

23.2

(1)

Mobile operating profit and mobile EBITDA in the 2005 financial year include our 50% share of Vodacom’s impairment
of R268 million in respect of assets in Mozambique and a reversal of Vodacom’s impairment loss of R53 million in the
2006 financial year due to an increase in the fair value of the assets.

(2)

Our mobile EBITDA comprises our 50% share of Vodacom’s EBITDA, which represents mobile net profit before taxation,
finance charges, investment income and depreciation, amortization and impairments. See footnote 4 in Item 3.
“Key Information–Selected Historical Consolidated Financial and Other Data of Vodacom” for a reconciliation of EBITDA
of Vodacom to net profit. See footnote 2 in the table under “Operating and Financial Review and Prospects–Results of
Operations–Year ended March 31, 2006 compared to year ended March 31, 2005 and year ended March 31, 2004 –
Consolidated results” for a reconciliation of mobile EBITDA to operating profit. We believe that EBITDA provides
meaningful additional information to investors since it is widely accepted by analysts and investors as a basis for
comparing a company’s underlying operating profitability with that of other companies as it is not influenced by past
capital expenditures or business acquisitions, a company’s capital structure or the relevant tax regime. This is particularly
the case in a capital intensive industry such as communications. It is also a widely accepted indicator of a company’s
ability to service its long-term debt and other fixed obligations and to fund its continued growth. EBITDA is not
a US GAAP or IFRS measure. You should not construe EBITDA as an alternative to operating profit or cash flows from
operating activities determined in accordance with US GAAP or IFRS or as a measure of liquidity. EBITDA is not defined
in the same manner by all companies and may not be comparable to other similarly titled measures of other companies
unless the definition is the same.

147

Mobile operating revenue

Vodacom derives revenue from mobile services as well as other related or value added goods

and services. Vodacom’s revenue is mainly in the form of airtime charges, primarily airtime payments
from customers registered on Vodacom’s network; data products and services; interconnection
revenue from other operators for the termination of calls on Vodacom’s network and national roaming
revenue from Cell C; revenue from equipment sales, including sales of handsets and accessories; and
revenue from international services, including airtime charges for the use of Vodacom’s network
through roaming of customers from other international networks and Vodacom customers who roam
abroad.

The following table shows our 50% share of Vodacom’s revenue broken down by major revenue

type and as a percentage of total operating revenue for our mobile segment and the percentage
change by revenue type for the periods indicated.

Mobile operating revenue

Year ended March 31,

2004

2005

2006

% of

% of

% of

2005/2004 2006/2005

ZAR

revenue

ZAR

revenue

ZAR

revenue

% change % change

(in millions, except percentages)

Airtime

6,369

55.7

8,096

59.3

10,043

59.0

27.1

24.0

Data

520

4.6

670

4.9

1,019

6.0

28.8

52.1

Interconnection

2,892

25.3

2,962

21.7

3,348

19.7

2.4

13.0

Equipment sales

1,138

10.0

1,344

9.8

1,993

11.7

18.1

48.3

International airtime

330

2.9

444

3.3

486

2.9

34.5

9.5

Other sales and services

179

1.5

141

1.0

132

0.7

(21.2)

(6.4)

Mobile operating revenue

11,428 100.0

13,657

100.0

17,021 100.0

19.5

24.6

The following table sets forth non-financial operational data of Vodacom for the periods indicated.

The amounts stated for customers and traffic minutes reflect 100% of Vodacom’s customers and
traffic minutes.

Year ended March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

South Africa
Customers (thousands) (at period end)

(1)

9,725

12,838

19,162

32.0

49.3

Contract

1,420

1,872

2,362

31.8

26.2

Prepaid

8,282

10,941

16,770

32.1

53.3

Community services

23

25

30

8.7

20.0

Total inactive mobile customers (%)

(at period end)

(2)

n/a

7.9

8.7

n/a

10.1

Contract

n/a

1.5

2.4

n/a

60.0

Prepaid

n/a

9.0

9.6

n/a

6.7

Traffic minutes (millions of minutes)

(3)

12,172

14,218

17,066

16.8

20.0

Outgoing

7,647

9,231

11,354

20.7

23.0

Incoming (Interconnection)

4,525

4,987

5,712

10.2

14.5

Average MOU (minutes)

(4)

96

84

74

(12.5)

(11.9)

Contract

263

226

206

(14.1)

(8.8)

Prepaid

56

52

49

(7.1)

(5.8)

Community services

3,061

3,185

2,327

4.1

(26.9)

ARPU (ZAR)

(5)

177

163

139

(7.9)

(14.7)

Contract

634

624

572

(1.6)

(8.3)

Prepaid

90

78

69

(13.3)

(11.5)

Community services

2,155

2,321

1,796

7.7

(22.6)

148

Year ended March 31,

2005/2004

2006/2005

2004

2005

2006 % change % change

Churn (%)

(6)

36.6

27.1

17.7

(26.0)

(34.7)

Contract

10.1

9.1

10.0

(9.9)

9.9

Prepaid

41.3

30.3

18.8

(26.6)

(38.0)

Other African countries
Customers (thousands) (at period end)

(1)

1,492

2,645

4,358

77.3

64.8

Lesotho

80

147

206

83.8

40.1

Tanzania

684

1,201

2,091

75.6

74.1

Democratic Republic of the Congo

670

1,032

1,571

54.0

52.2

Mozambique

58

265

490

356.9

84.9

ARPU

(5)

Lesotho (ZAR)

125

92

78

(26.4)

(15.2)

Tanzania (ZAR)

128

81

67

(36.7)

(17.3)

Democratic Republic of the Congo (ZAR)

150

98

86

(34.7)

(12.2)

Mozambique (ZAR)

110

52

36

(52.7)

(30.8)

Churn (%)

(6)

Lesotho

65.1

17.3

22.3

(73.4)

28.9

Tanzania

30.0

29.6

28.5

(1.3)

(3.7)

Democratic Republic of Congo

20.2

23.1

28.1

14.4

21.6

Mozambique

0.3

11.3

32.2

n/a

185.0

(1)

Customer totals are based on the total number of customers registered on Vodacom’s network, which have not been
disconnected, including inactive customers, as of the end of the period indicated.

(2)

Vodacom’s inactive customers are defined as all customers registered on Vodacom’s network for which no revenue
generating activity has been recorded for a period of three consecutive months. In the 2005 financial year, a software
error was identified in the calculation of inactive customers. Vodacom has corrected inactive customers as of
March 31, 2005. Information for prior years is unavailable.

(3)

Vodacom’s traffic comprises total traffic registered on Vodacom’s network, including bundled minutes, outgoing
international roaming calls and calls to free services, but excluding national and incoming international roaming calls.
Vodacom has changed the calculation of traffic in the 2006 financial year to exclude packet switch data traffic. Traffic has
been recalculated for the 2005 and 2004 financial years.

(4)

Vodacom’s average MOU is calculated by dividing the average monthly minutes during the period by the average monthly
total reported customer base during the period. MOU excludes calls to free services, bundled minutes and data minutes.

(5)

ARPU is calculated by dividing the average monthly revenue during the period by the average monthly total reported
customer base during the period. ARPU excludes revenues from equipment sales, other sales and services and revenues
from national and international users roaming on Vodacom’s networks.

(6)

Churn is calculated by dividing the average monthly total number of disconnections during the period by the average
monthly total reported customer base during the period. Vodacom’s contract customers are disconnected when they
terminate their contract, or their service is disconnected due to non-payment. Prepaid customers in South Africa were
disconnected if they did not recharge their vouchers after being in time window lock for six months for periods prior to
November and December 2002, for four months for periods from November and December 2002 until April 2003 and for
three months from April 2003 until December 2003. Time window lock occurs when a customer’s paid active time window,
or access period, expires. In December 2003, Vodacom changed the deactivation rule for prepaid customers in South
Africa to align itself with European and industry standards. From December 2003, prepaid customers in South Africa are
disconnected from its network if they record no revenue generating activity within a period of 215 consecutive days.
For other African countries, each subsidiary has its own disconnection rule to disconnect inactive prepaid customers.
Vodacom Lesotho disconnects its prepaid customers at the expiration of time window lock of 210 days. Vodacom
Tanzania, Vodacom DRC and Vodacom Mozambique disconnect their prepaid customers if they record no revenue
generating activity within a period of 215 consecutive days. See “Item 4.“Information on theCompany–Business Overview–Mobile communications” and “Information on the Company–History and development ofthe Company–Recent Developments–Vodacom’s change in South African definition of active customers”.

149

Vodacom’s operating revenue increased in the year ended March 31, 2006 as a result of strong

customer growth and a continued improvement in market share as well as increased data revenues
and equipment sales. Vodacom’s operating revenue increased in the year ended March 31, 2005
primarily due to strong customer growth and the inclusion of 100% of Vodacom Congo’s results.
Vodacom’s equipment sales increased in the 2006 and 2005 financial years primarily due to the
growth of Vodacom’s customer base and the continued uptake of new handsets in South Africa
as a result of cheaper Rand-prices of new handsets and the added functionality of new phones based
on new technologies.

Our 50% share of Vodacom’s revenue from operations outside of South Africa increased

to R1,486 million for the year ended March 31, 2006 from R1,137 million in the year ended
March 31, 2005 and R753 million in the year ended March 31, 2004. The increase in Vodacom’s
operating revenue from other African countries in the 2006 financial year was primarily due to
substantial increases in the number of customers in Vodacom’s operations in Tanzania and the
Democratic Republic of the Congo, partially offset by lower ARPU resulting from the higher volume of
lower spending prepaid customers, and the strength of the Rand, which resulted in lower foreign
currency denominated revenue. The increase in Vodacom’s operating revenue from other African
countries in the 2005 financial year was primarily due to significant customer growth and the inclusion
of 100% of Vodacom Congo’s results, partially offset by declining ARPU and Rand-based revenue due
to the strengthening of the South African Rand against the U.S. Dollar and Tanzanian Shilling.
Revenue from Vodacom’s other African countries as a percentage of Vodacom’s total mobile operating
revenue increased to 8.7% in the year ended March 31, 2006 from 8.3% in the year ended March 31,
2005 and 6.6% in the year ended March 31, 2004.

A large part of the growth in mobile services was due to the success of prepaid services.

Approximately 87.5% of Vodacom’s South African mobile customers were prepaid customers at March
31, 2006 and approximately 92.1% of all gross connections were prepaid customers in the 2006
financial year. Vodacom expects the number of prepaid mobile users to continue to grow at a greater
rate than contract mobile users. The increasing number of prepaid users, who tend to have lower
average usage, and the lower overall usage as the lower end of the market is penetrated have
resulted in decreasing overall average revenue per customer. As a result, total South African ARPU
decreased to R139 per month in the 2006 financial year from R163 per month in the 2005 financial
year and R177 per month in the 2004 financial year. South African contract ARPU decreased to
R572 per month in the 2006 financial year from R624 per month in the 2005 financial year and
R634 per month in the 2004 financial year. South African prepaid ARPU decreased to R69 per month
in the 2006 financial year from R78 per month in the 2005 financial year and R90 per month in the
2004 financial year. In the 2006 and 2005 financial years, contract and prepaid customer ARPU were
also negatively impacted by the high growth in Vodacom’s hybrid contract product, Family Top Up,
which contributed to the migration of higher spending prepaid customers, who tend to spend less
than existing contract customers, to contracts.

Service providers in South Africa generally subsidize handsets when a contract customer enters

into a new contract or renews an existing contract depending on the airtime and tariff plan and type of
handset purchased. Subsidized handset sales give customers an incentive to switch operators to
obtain new handsets and have contributed to churn. Handsets for prepaid customers are not
subsidized by Vodacom as these users have the freedom of switching operators and contribute to
churn. Vodacom is more vulnerable to churn than other mobile communications providers in South
Africa since it has the largest number of customers in South Africa.

The cost to acquire contract customers in a highly developed market is high. Vodacom has

therefore implemented upgrade and retention policies over the last few years and has strived to
maintain a high level of incentives to service providers in order to reduce churn. Vodacom’s churn rate
for contract customers in South Africa increased to 10.0% in the 2006 financial year from 9.1% in the
2005 financial year mainly due to the migration of payphone operators which are contract customers
to community services. Vodacom’s churn rate for contract customers in South Africa was 10.1% in the

150

2004 financial year. Vodacom’s churn rate for prepaid customers in South Africa decreased to 18.8%
in the 2006 financial year from 30.3% in the 2005 financial year and 41.3% in the 2004 financial year.
The reduction in prepaid churn in South Africa in the 2006 financial year was primarily due to a
combination of innovative products and services and loyalty initiatives. The decrease in prepaid churn
in South Africa in the 2005 financial year was also a result of a change in business rules. Prepaid
customers in South Africa were disconnected if they did not recharge their vouchers after being in
time window lock for six months for periods prior to November and December 2002, for four months
for periods from November and December 2002 until April 2003 and for three months from April 2003
until December 2003. Time window lock occurs when a customer’s paid active time window, or access
period, expires. In December 2003, Vodacom changed the deactivation rule for prepaid customers in
South Africa to align itself with European and industry standards. From December 2003, prepaid
customers in South Africa are disconnected from its network if they record no revenue generating
activity within a period of 215 consecutive days. For a discussion of Vodacom’s churn rate, see Item
4. “Information on the Company–Business Overview–Mobile communications–South
Africa–Customers.” Prepaid churn is adversely impeded by an increasingly competitive market, lower
barriers to entry for prepaid customers in South Africa and the volatile nature of the prepaid customer
base.

Airtime. Vodacom derives airtime revenue from connection and monthly rental fees and airtime

usage fees paid by Vodacom’s contract customers for use of its mobile networks. Airtime revenue also
includes fees paid by Vodacom’s prepaid phone customers for prepaid starter phone packages and
airtime recharge vouchers utilized, which entitle customers to receive unlimited incoming calls for 365
days. Airtime revenue depends on the total number of customers, traffic volume, mix of prepaid and
contract customers and tariffs.

Vodacom’s airtime revenue increased in the year ended March 31, 2006 primarily due to

continued customer growth, partially offset by an overall continued decline in ARPU resulting from the
effect of growth in lower spending prepaid customers. Vodacom’s airtime revenue increased in the
year ended March 31, 2005 primarily due to customer growth and the inclusion of 100% of Vodacom
Congo’s results. As Vodacom’s primary market in South Africa continues to mature and Vodacom
continues to connect more marginal customers in its South African operations, Vodacom expects that
growth in airtime in South Africa will continue to slow. Total customers increased 51.9% and 38.0% in
the years ended March 31, 2006 and 2005, respectively, primarily due to strong prepaid customer
growth in South Africa and significant customer growth in Vodacom’s operations outside of South
Africa, particularly in Tanzania and the Democratic Republic of the Congo in the 2006 financial year.
New products, packages and services also had a role in Vodacom’s customer growth in the 2006 and
2005 financial years. For a discussion of Vodacom’s customers and traffic see Item 4. “Information on
the Company–Business Overview–Mobile communications–South Africa–Customers” and Item 4.
“Information on the Company–Business Overview–Mobile communications–South Africa–Traffic.”

Data revenue. Vodacom derives data revenue from mobile data, including short messaging

services, or SMSs, and multimedia messaging services, or MMSs, general packet radio services,
or GPRS, and third generation services, or 3G. Vodacom’s mobile data revenue increased in the year
ended March 31, 2006 primarily due to continued significant growth in SMS usage and, to a lesser
extent, new data initiatives such as Vodafone Mobile Connect Cards, Vodafone live!, Mobile TV and
BlackBerry®. Vodacom’s mobile data revenue increased in the year ended March 31, 2005 primarily
due to increased SMS usage.

Vodacom introduced SMS only roaming and a number of promotional offerings such as free MMS

and SMS in the 2004 financial year. Vodacom’s SMS traffic increased to approximately
3.5 billion SMSs in the year ended March 31, 2006 from approximately 2.4 billion SMSs in the year
ended March 31, 2005 and approximately 2.0 billion SMSs in the year ended March 31, 2004.
The number of MMS users increased to 867,119 as of March 31, 2006 from 328,974 as of

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March 31, 2005 and 61,374 as of March 31, 2004 and the number of GPRS users increased to
1,386,329 as of March 31, 2006 from 579,581 as of March 31, 2005 and 100,128 as of
March 31, 2004. The number of 3G active handsets increased to 179,576 as of March 31, 2006 from
10,878 as of March 31, 2005 and the number of Vodafone Mobile Connect Cards increased to
37,798 as of March 31, 2006 from 5,101 as of March 31, 2005. As of March 31, 2006 Vodacom
had 351,427 Vodafone live! and 12,903 Unique Mobile TV users on its network.

Interconnection. Vodacom generates interconnection revenue when a call originating from our

fixed-line network or one of the other mobile operators’ networks terminates on Vodacom’s network.
Interconnection revenue also includes revenue from Cell C for national roaming services. Vodacom
does not have a roaming agreement with MTN. Vodacom generates national roaming revenue when
its mobile network carries a call made from a Cell C customer. Interconnection revenue depends on
the volume of traffic terminating on Vodacom’s network, the interconnection termination rates payable
by ourselves and the other mobile operators to Vodacom and national roaming rates.

Vodacom’s interconnection revenue increased in the years ended March 31, 2006 and March 31,

2005 primarily due to an increase in the number of calls terminating on Vodacom’s network as a result
of the increased number of Vodacom’s customers and South African mobile users generally. The
growth in the 2006 financial year was also attributable to the growth in the substitution of fixed-line
calls by mobile calls and incoming traffic resulting from an overall increase in the customer base of
other mobile operators and the resultant increase in national roaming revenue from Cell C. Adding to
the growth in interconnection revenue in the 2005 financial year was an overall increase in Cell C’s
customer base and the resultant increase in national roaming revenue as well as increased
interconnection revenue from Vodacom’s other African operations. The increases were partially offset
by a reduced number of fixed-line calls from Telkom’s network terminating on Vodacom’s network.
Interconnection revenue in our mobile segment included R1,409 million, R1,364 million and
R1,367 million in the years ended March 31, 2006, 2005 and 2004, respectively, for calls received
from our fixed-line business, which were eliminated from the Telkom Group’s revenue on
consolidation.

Equipment sales. Vodacom generates revenue from equipment sales primarily from the sale of

mobile phones and accessories. Vodacom purchases handsets for itself and for external service
providers in bulk at purchase discounts in order to lower the cost of handset subsidization for contract
customers. Equipment sales revenue fluctuates based on whether external providers and Vodacom’s
other African operators source equipment from Vodacom in South Africa or purchase equipment from
third party suppliers.

Vodacom’s equipment sales increased in the 2006 and 2005 financial years primarily due to the

growth of Vodacom’s customer base and the continued uptake of new handsets in South Africa as a
result of cheaper Rand-prices of new handsets and the added functionality of new phones based on
new technologies such as 3G enabled phones, camera phones and color screens. Sales of the
Vodafone live! handset increased significantly to 510,283 handsets in the 2006 financial year.

International airtime. International airtime revenues are predominantly from international calls by

Vodacom customers, roaming revenue from Vodacom’s customers making and receiving calls while
abroad and revenue from international customers roaming on Vodacom’s networks. International
airtime increased 9.5% to R486 million in the year ended March 31, 2006 primarily as a result of an
increase in customers resulting in increased traffic, marginally offset by lower international tariffs due
to country rezoning. International airtime increased 34.5% to R444 million in the year ended
March 31, 2005 from R330 million in the year ended March 31, 2004 primarily as a result of increases
in international airtime from Vodacom Congo and Vodacom South Africa, as well as an increase in
roaming partners. The increase in South African international airtime was offset in part by the
strengthening of the Rand against the trade-weighted basket of international currencies in the

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2005 financial year.

Other. Other revenue includes, among other things, revenue from non-core operations.

Vodacom’s other sales and services revenue decreased 6.4% to R132 million in the 2006 financial
year primarily due to lower breakage income as a result of a reduction in the occurrence of
unactivated starter packs which do not contain an expiration date and lower repair income, partially
offset by higher revenue at Cointel. Vodacom’s other sales and services revenue decreased 21.2% to
R141 million in the 2005 financial year from R179 million in the 2004 financial year primarily as a
result of the reallocation of value-added services revenue, which was previously included under other
sales and services, to airtime connection and access. The decrease in the 2005 financial year was
offset marginally by other sales and services revenue received in Smartcom.

Mobile operating expenses

The following is a discussion of our mobile segment’s operating expenses which are comprised

of our 50% interest in Vodacom’s operating expenses. Vodacom’s operating expense line items are
presented in accordance with the line items reflected in the Telkom Group’s consolidated operating
expenses which are different from the operating expense line items contained in Vodacom’s
consolidated financial statements.

The following table shows our 50% share of Vodacom’s operating expenses and the percentage

change for the periods indicated.

Mobile operating expenses

Year ended March 31,

2004

2005

2006

2005/2004

2006/2005

ZAR

ZAR

ZAR

% change

% change

RESTATED RESTATED

(in millions, except percentages)

Employee expense

666

826

1,019

24.0

23.4

Payments to other network operators

1,495

1,826

2,317

22.1

26.9

Selling, general and administrative expenses

5,076

5,891

7,328

16.1

24.4

Services rendered

65

45

65

(30.8)

44.4

Operating leases

272

307

435

12.9

41.7

Depreciation, amortization and impairments

1,265

1,556

1,472

23.0

(5.4)

Mobile operating expenses

8,839

10,451

12,636

18.2

20.9

Mobile operating expenses increased in the 2006 financial year primarily due to increased selling,

general and administrative expenses to support the expansion of 3G, growth in Vodacom’s South
African and African operations and increased competition and as a result of increased cost of
equipment for increased handset sales and maintenance of the GSM infrastructure and billing
systems, increased payments to other network operators due to higher outgoing traffic and the
increased percentage of outgoing traffic terminating on other mobile networks, higher employee costs
as a result of increased headcount, average 6% annual salary increases, the inclusion of a provision
for long-term incentives for executives and an increase in the provision for bonus schemes due to
increased profits, increased operating leases and increased services rendered, partially offset by
decreased depreciation, amortization and impairments. Mobile operating expenses increased in the
2005 financial year primarily due to increased selling, general and administrative expenses as a result
of an increase in selling, distribution and other expenses, incentive costs, regulatory and license fees
and marketing expenses to support the launch of 3G, growth in Vodacom’s South African and other
African operations and increased competition, increased payments to other network operators due to
higher outgoing traffic and the increased percentage of outgoing traffic terminating on other mobile
networks, increased depreciation, amortization and impairments and higher staff costs associated with
increased headcount, salaries and employee deferred bonus incentive accrued to support the growth

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in operations. In addition, operating leases increased in the 2005 financial year while services
rendered decreased in the 2005 financial year.

Employee expenses. Employee expenses consist mainly of salaries and wages of employees

as well as contributions to employee pension, medical aid funds and benefits and the deferred bonus
incentive scheme.

Vodacom’s employee expenses increased in the year ended March 31, 2006 primarily as a result

of a 9.3% increase in the number of employees to support the growth in operations, 6% annual salary
increases, the inclusion of a provision for long-term incentives for executives and an increase in the
provision for bonus schemes due to increased profits. Vodacom’s employee expenses increased in
the year ended March 31, 2005 primarily as a result of an 8.3% increase in the number of employees
to support the growth in operations, an 8.0% average annual group-wide salary increase and higher
deferred bonus incentive accrual associated with Vodacom’s increased net profit.

Total headcount in Vodacom’s South African operations increased 9.8% to 4,305 employees as of

March 31, 2006 and 1.8% to 3,919 employees as of March 31, 2005 from 3,848 employees as of
March 31, 2004. Total headcount in Vodacom’s other African countries increased 7.4% to
1,154 employees as of March 31, 2006 and 41.1% to 1,074 employees as of March 31, 2005
from 761 employees as of March 31, 2004. Total headcount excludes outsourced employees.
Employees seconded to other African countries are included in the number of employees of other
African countries and excluded from Vodacom South Africa’s number of employees.
Employee productivity in South Africa and other African countries, as measured by customers per
employee, increased 38.9% to 4,308 customers per employee as of March 31, 2006 and 27.4% to
3,101 customers per employee as of March 31, 2005 from 2,434 customers per employee as of
March 31, 2004.

Payments to other network operators. Payments to other network operators consist mainly of

interconnection payments made by Vodacom’s South African and other African operations for
terminating calls on other operators’ networks. Vodacom’s payments to other network operators
increased significantly in the years ended March 31, 2006 and 2005 as a result of increased outgoing
traffic in line with increased customer growth and the increasing percentage of outgoing traffic
terminating on the other mobile networks rather than Telkom’s fixed-line network as the cost of
terminating calls on other mobile networks is higher than calls terminating on Telkom’s fixed-line
network. As the mobile communications market continues to grow in South Africa, Vodacom expects
that interconnection charges will continue to increase and adversely impact Vodacom’s profit margins.

Payments to other network operators in our mobile segment included R232 million, R233 million

and R209 million in the years ended March 31, 2006, 2005 and 2004, respectively, for interconnection
fees paid to our fixed-line segment, which were eliminated from the Telkom Group’s operating
expenses on consolidation.

Selling, general and administrative expenses. Selling, general and administrative expenses

include customer acquisition and retention costs, packaging, distribution, marketing, regulatory license
fees, bad debts and various other general administrative expenses, including accommodation,
information technology costs, office administration, consultant expenses, social economic investment
and insurance.

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The following table sets forth information related to our 50% share of Vodacom’s selling, general

and administrative expenses for the periods indicated.

Mobile selling, general and administrative expenses

Year ended March 31,

2004

2005

2006

2005/2004

2006/2005

ZAR

ZAR

ZAR

% change

% change

RESTATED RESTATED

(in millions, except percentages)

Selling, distribution and other

4,426

5,140

6,416

16.1

24.8

Marketing

351

384

488

9.4

27.1

Regulatory and license fees

275

335

406

21.8

21.2

Bad debts

24

32

18

33.3

(43.8)

Selling, general and administrative expenses

5,076

5,891

7,328

16.1

24.4

Vodacom’s selling, general and administrative expenses increased in the years ended

March 31, 2006 and 2005 primarily due to an increase in selling, distribution and other expenses,
incentive costs, regulatory and license fees and marketing expenses to support the launch and
expansion of 3G, growth in Vodacom’s South African and African operations and increased
competition.

Selling, distribution and other expenses include cost of goods sold, commissions, customer

acquisition and retention expenses, distribution expenses and insurance. The increase in selling,
distribution and other expenses in the 2006 and 2005 financial years was primarily due to an increase
in customer connections, competition and revenue. The increase in the 2006 financial year was also
due to the increased cost of equipment as a result of increased handset sales and maintenance of the
GSM infrastructure and billing systems as well as due to the full year inclusion of the Vodafone global
alliance fee. The increase in the 2005 financial year was also due to the inclusion of 100% of
Vodacom Congo and the full year inclusion of Vodacom Mozambique and Smartphone.

The increase in marketing expenses in the 2006 financial year was mainly due to promoting new

technologies, including 3G and Vodafone live!, and further promoting the Vodacom brand in all
operations. The increase in marketing expenses in the 2005 financial year was mainly due to the
marketing expense incurred with respect to the Vodafone alliance, the launch of Vodacom’s
3G network, BlackBerry® and Vodafone live! and continued marketing of Vodacom Mozambique. The
increases in regulatory and license fees during the reporting periods were directly related to the
increase in operating revenues and corresponding payments under Vodacom’s existing licenses.

Services rendered. Services rendered include consultancy services for technical, administrative

and managerial services, audit fees, legal fees and communication and information technology costs.
Services rendered increased in the year ended March 31, 2006 primarily due to higher consultancy
costs relating to facility management and special projects as well as higher audit costs resulting from
scope changes. Services rendered decreased in the year ended March 31, 2005 primarily due to the
cost associated with the Nigeria investment in the 2004 financial year.

Operating leases. Operating leases include payments in respect of rentals of GSM transmission

lines as well as office accommodation, office equipment and motor vehicles. The increase in
Vodacom’s operating leases in the years ended March 31, 2006 and 2005 was primarily due
to an increase in the lease of transmission lines. Operating leases in our mobile segment included
R423 million, R281 million and R233 million in the years ended March 31, 2006, 2005 and 2004,
respectively, for operating lease payments to our fixed-line segment, which were eliminated from
the Telkom Group’s operating expenses on consolidation.

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Depreciation, amortization and impairments. The decrease in Vodacom’s depreciation,

amortization and impairments in the year ended March 31, 2006 was primarily due to lower
depreciation and amortization, resulting from the change in the useful lives of certain assets and a
reversal of a portion of the prior year impairment of Vodacom Mozambique’s assets resulting from
an increase in the fair value, partially offset by higher depreciation as a result of the network and
3G roll-out. The significant increase in Vodacom’s depreciation, amortization and impairments in the
2005 financial year was primarily due to the R268 million impairment of Vodacom Mozambique’s
assets in terms of IAS36, increased expenditure on infrastructure resulting from the introduction of
3G and the amortization of intangible assets in Smartphone. Additionally, because of the
strengthening of the Rand against the U.S. dollar in the years ended March 31, 2006 and 2005,
depreciation on foreign denominated capital expenditure in Vodacom’s other African operations have
been translated at a lower exchange rate than in the past, which resulted in a relatively lower
depreciation charge in Vodacom’s other African operations. Amortization of intangibles was lower in
the year ended March 31, 2006 due to some of the customer bases being fully amortized in the
previous year. Amortization of intangibles doubled in the year ended March 31, 2005 due to the
reclassification of software, that does not form an integral part of hardware, from property, plant and
equipment to intangible assets, in accordance with IAS38 following the adoption of the revised IAS16.

LIQUIDITY AND CAPITAL RESOURCES

Group Liquidity and Capital Resources

Cash flows

The following table shows information regarding our consolidated cash flows for the periods

indicated.

Year ended March 31,

2004

2005

2006

2005/2004

2006/2005

ZAR

ZAR

ZAR

% change

% change

RESTATED RESTATED

(in millions, except percentages)

Cash flows from operating activities

13,884

15,711

9,506

13.2

(39.5)

Cash flows used in investing activities

(5,423)

(6,306)

(7,286)

16.3

15.5

Cash flows used in financing activities

(6,481)

(9,897)

(258)

52.7

(97.4)

Net increase/(decrease) in cash and cash

equivalents

1,980

(492)

1,962

(124.8)

498.8

Effect of foreign exchange rate differences

(21)

(3)

(8)

(85.7)

166.7

Net cash and cash equivalents at the beginning
of the year

837

2,796

2,301

234.1

(17.7)

Net cash and cash equivalents at the end

of the year

2,796

2,301

4,255

(17.7)

84.9

Cash flows from operating activities

Our primary sources of liquidity are cash flows from operating activities and borrowings.

We intend to fund our expenses, indebtedness and working capital requirements from cash
generated from our operations and from capital raised in the markets. The decrease in cash flows
from operating activities in the 2006 financial year was primarily due to the substantially higher
dividends and taxation paid, as well as increased cash paid to suppliers, partially offset by higher cash
receipts from customers. The increase in cash flows from operating activities in the 2005 financial
year was primarily due to higher cash receipts from customers and lower finance charges, offset in
part by higher taxation, increased cash paid to suppliers and dividends paid.

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Cash flows used in investing activities

Cash flows used in investing activities relate primarily to investments in our fixed-line network and

our 50% share of Vodacom’s investments in its mobile networks in South Africa and other African
countries. The increase in cash flows used in investing activities in the 2006 and 2005 financial year
was primarily due to higher capital expenditure in our fixed-line and mobile segments, partially offset
by increased proceeds on disposal of property, plant and equipment and intangible assets and
investments in the 2006 financial year.

Cash flows used in financing activities

Cash flows from financing activities are primarily a function of borrowing activities. In the 2006

financial year, loans and finance lease repaid and shares repurchased and cancelled exceeded loans
raised and the decrease in financial assets by R258 million. On April 11, 2005, we repaid
Euro 500 million of our 7.125% unsecured Euro bond that was issued on April 12, 2000 by issuing
commercial paper bills ranging in maturities from one month to one year, with yields of between
7.00% and 7.51% and by issuing a further R600 million 10.5% unsecured local bond (TL06) due
October 31, 2006 at a yield to maturity of 8.18%. In addition, we repaid a net of R2,720 million of
commercial paper bills and utilized R1,502 million for the share buy-back. Cash inflows from maturing
financial assets amounted to R4,544 million in the 2006 financial year.

In the 2005 financial year, loans and finance lease repaid, the increase in financial assets

and the purchase of treasury shares, exceeded loans raised by R9,897 million. We repaid a
R2,299 million 13% unsecured local bond due May 31, 2004 and a net of R1,445 million of
commercial paper bills and utilized R1,710 million for the repurchase of Telkom shares. We further
increased our interest-bearing investments by R4,303 million by placing excess cash in short-term
repurchase agreements. Vodacom entered into a US$ 180 million, medium term loan for Vodacom
Congo to replace Vodacom Group’s share of extended credit facilities relating to Vodacom Congo of
US$16.3 million and Euro 38.8 million, which were repaid during the year. Telkom’s 50% share of the
Vodacom debt is included in Telkom’s consolidated financial statements.

In the 2004 financial year, loans and finance leases repaid, the purchase of treasury shares

and the increase in interest bearing investments exceeded loans raised by R6,481 million. We repaid
a R4,311 million 10.75% unsecured local bond due September 30, 2003 and a R1,201 million
13% unsecured local bond due May 31, 2004. A net R67 million of commercial paper bills was repaid
and we also settled R140 million of repurchase agreements and bills of exchange of R1,978 million.
Vodacom repaid R920 million of shareholder loans in the 2004 financial year. Vodacom Congo (RDC)
s.p.r.l., a subsidiary of Vodacom, entered into a Euro revolving credit facility of 11.5 million Euro
(R186.9 million) and Vodacom Tanzania Limited, a subsidiary of Vodacom, repaid $4 million and
TSH4,388 million (R56 million) in the 2004 financial year. Telkom’s 50% share of the Vodacom debt is
included in Telkom’s consolidated financial statements.

Working capital

We had negative consolidated working capital of R3.0 billion as of March 31, 2006 compared to

negative consolidated working capital of R2.3 billion as of March 31, 2005 and R3.2 billion as of
March 31, 2004. Negative working capital arises when current liabilities are greater than current
assets. The increased negative working capital in the 2006 financial year resulted primarily from
maturing short term repurchase agreements, the proceeds of which were used in part for the payment
of increased ordinary dividends, the payment of a special dividend and the payment of increased
taxation. The decrease in negative working capital in the 2005 financial year was primarily due to
increased cash generated from operations. In the 2005 financial year, we increased our interest-
bearing investments to facilitate the payment of dividends and taxes payable in the 2006 financial

157

year. Telkom is of the opinion that the Telkom Group’s cash flows from operations, together with
proceeds from liquidity available under credit facilities and in the capital markets, will be sufficient to
meet the Telkom Group’s present working capital requirements for the twelve months following the
date of this annual report. We intend to fund current liabilities through a combination of operating cash
flows, new borrowings and borrowings available under existing credit facilities. We had
R9.5 billion available under existing credit facilities as of March 31, 2006.

See Item 3. “Key Information–Risk Factors–Risks Related to Our Business–We have negative

working capital, which may impair our operating and financial flexibility and require us to defer capital
expenditures and we may not be able to pay dividends and our operations and financial condition
could be adversely affected.”

Capital expenditures and investments

The following table shows the Telkom Group’s investments in property, plant and equipment

excluding intangibles, including our 50% share of Vodacom’s investments, for the periods indicated.

Year ended March 31,

2004

2005

2006

ZAR

ZAR

ZAR

(in millions)

Group capital expenditure
Fixed-line

3,862

4,104

4,935

Base expansion and core network

1,632

1,902

2,534

Network evolution

668

729

926

Efficiencies and improvements

1,201

1,177

1,080

Company support and other

361

296

395

Mobile

1,506

1,747

2,571

Total investment in property, plant and equipment and

intangibles

5,368

5,851

7,506

Our capital expenditure of approximately R4.9 billion ($802 million) on fixed-line capital

expenditure in the year ended March 31, 2006, was lower than the budgeted fixed-line capital
expenditure for the 2006 financial year of R5.0 billion largely due to unplanned delays and a more
favorable exchange rate. The 20.2% increase in fixed-line capital expenditure in the 2006 financial
year was primarily due to higher expenditure for access line deployment in selected high growth
residential areas, technologies to support the continued growth in our data services business and the
ongoing rehabilitation of our access network and increasing the efficiencies and redundancies in our
transport network in line with our planned migration to an internet protocol next generation network.
The 47.2% increase in mobile capital expenditure in the 2006 financial year reflects the increased
investment in South Africa in network infrastructure due primarily to the increased customer base and
higher traffic and to further support 3G technologies.

Historically, our fixed line capital expenditures were aimed primarily at modernizing our network

and rolling out lines in order to comply with our license obligations and prepare for competition.
As we seek to implement our current strategy in the face of a significantly more competitive
environment due to the entry of SNO-T and the further liberalization of the South African
communications market as a result of the enactment of the Electronic Communications Act, we expect
to shift our capital expenditure focus as we seek to evolve our fixed-line network to an internet
protocol-based next generation network and increase investment in our employees. As a result, we
expect that our fixed-line capital expenditures in the 2007 financial year will be spent primarily in the
following areas:

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• Maintenance of current service levels and growth;

• Improvements to current networks;

• Enhancing customer centricity;

• Next generation network; and

• Regulatory and legal to comply with regulatory obligations.

See “–Principal factors that affect our Results of Operations–Capital Expenditures.”

Our consolidated capital expenditures in property, plant and equipment for the 2007 financial year

is budgeted to be approximately R10.3 billion, of which approximately R6.5 billion is budgeted to be
spent in our fixed-line segment and approximately R3.8 billion is budgeted to be spent in our mobile
segment, which is our 50% share of Vodacom’s budgeted capital expenditure of approximately
R7.6 billion. Our capital expenditures are continuously examined and evaluated against the perceived
economic benefit and may be revised in light of changing business conditions, regulatory
requirements, investment opportunities and other business factors. See “Liquidity and Capital
Resources–Capital Expenditures.”

We spent approximately R4.1 billion ($660 million) on fixed-line capital expenditure in the

year ended March 31, 2005, which was lower than budgeted fixed-line capital expenditure for the
2005 financial year of R4.6 billion largely due to more stringent investment criteria for capital
investment in our fixed-line segment and savings resulting from the relative strength of the Rand
against the US Dollar and Euro. The 6.2% increase in fixed-line capital expenditure in the
2005 financial year was primarily due to the earlier implementation of softswitch technology, the
deployment of technologies to support our growing data services business, continued rehabilitation
of the access network, increasing the efficiencies and redundancies in the transport network and
expenditure for access line deployment in selected high growth residential areas. The 20.9% increase
in mobile capital expenditure in the 2005 financial year was primarily due to increased investment in
network infrastructure due to the increased customer base and higher traffic and to support
Vodacom’s investment in 3G technologies.

Contingent liabilities

On May 7, 2002, the South African Value Added Network Services Association, an association of

value added network service providers, or VANS providers, filed complaints against Telkom at the
Competition Commission of the Republic of South Africa under the South African Competition Act,
89 of 1998, alleging, among other things, that Telkom was abusing its dominant position in
contravention of the Competition Act, 89 of 1998, and that it was engaged in price discrimination.
The Competition Commission found, among other things, that several aspects of Telkom’s conduct
prima facie contravened the Competition Act, 89 of 1998, and referred certain of the complaints to the
Competition Tribunal for adjudication. The complaints deal with Telkom’s alleged refusal to provide
telecommunications facilities to certain VANS providers to construct their networks, refusal to lease
access facilities to VANS providers, provision of bundled and cross subsidized competitive services
with monopoly services, discriminatory pricing with regard to leased line services and alleged refusal
to peer with certain VANS providers. Telkom has brought an application in the South African High
Court challenging the Competition Tribunal’s jurisdiction to adjudicate this matter. The Competition
Commission has opposed the application. These matters and the amount of Telkom’s liability are not
expected to be finalized within the next financial year. If these complaints are upheld, however, Telkom
could be required to cease these practices and fined an amount of up to 10% of Telkom’s annual
turnover, excluding the turnover of subsidiaries and joint ventures, for the financial year prior to the
complaint date, or be ordered to divest itself of the relevant business. Telkom is currently unable to
predict the amount that it may eventually be required to pay. If Telkom is required to cease these
practices, divest itself of the relevant business or pay significant fines, Telkom’s business and financial
condition could be materially adversely affected and its revenue and net profit could decline.

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Telcordia instituted arbitration proceedings against Telkom in March 2001 seeking to recover

approximately $130 million for monies outstanding and damages, plus costs and interest at a rate of
15.5% per year. The arbitration proceedings relate to the cancellation of an agreement entered into
between Telkom and Telcordia during June 1999 for the development and supply of an integrated end-
to-end customer assurance and activation system by Telcordia. In September 2002, a partial award
was issued by the arbitrator in favor of Telcordia. Telkom subsequently filed an application in the
South African High Court to review and set aside the partial award. On November 27, 2003,
the South African High Court set aside the partial award and issued a cost order in favor of Telkom.
On May 3, 2004, the South African High Court dismissed an application by Telcordia for leave to
appeal and ordered Telcordia to pay the legal costs of Telkom. On November 29, 2004, the Supreme
Court of Appeals granted Telcordia leave to appeal. Telcordia has since filed a notice of appeal.
The appeal is set down for hearing from October 30, 2006 to November 3, 2006. Telcordia also
petitioned the United States District Court for the District of Columbia to confirm the partial award,
which petition was dismissed, along with a subsequent appeal. Following the dismissal of the appeal,
Telcordia filed a similar petition in United States District Court of New Jersey. The United States
District Court of New Jersey also dismissed Telcordia’s petition, reaffirming the decision of the
United States District Court of Columbia. Telcordia has since appealed this dismissal. Telkom is
currently unable to predict when the dispute will be resolved or the amount that it may eventually be
required to pay Telcordia, if any, and has reversed all of its provisions for estimated liabilities, including
interest and legal fees. As a result, as of March 31, 2006, Telkom had no provision for this claim. If
Telcordia recovers substantial damages from Telkom, Telkom would be required to fund such
payments from cash flows or drawings on its existing credit facilities, which could cause its
indebtedness to increase and its net profit to decline.

In December 2005, the Internet Service Providers Association, or ISPA, an association of internet

service providers, or ISPs, filed complaints against Telkom at the Competition Commission regarding
alleged anti-competitive practices on the part of Telkom. A maximum administrative penalty of up to
10%, calculated with reference to Telkom’s annual turnover, excluding the turnover of subsidiaries and
joint ventures, for the financial year prior to the complaint date, may be imposed if it is found that
Telkom has committed a prohibited practice as set out in the Competition Act, 1998 (as amended).
The complaints deal with the cost of access to SAIX, the prices offered by TelkomInternet, the alleged
delay in provision of facilities to ISPs and the alleged favorable installation timelines offered to
TelkomInternet customers. The Competition Commission has formally requested Telkom to provided it
with certain records of orders placed for certain services, in an attempt to first investigate the latter
aspects of the complaint. These matters and the amount of Telkom’s liability are not expected to be
finalized within the next financial year. Telkom is currently unable to predict the amount that it may
eventually be required to pay. If Telkom is required to cease these practices, divest itself of the relevant
business or pay significant fines, Telkom’s business and financial condition could be materially
adversely affected and its revenue and net profit could decline.

See Item 3. “Key Information–Risk Factors–Risks Related to Regulatory and Legal Matters–We

are parties to a number of legal and arbitration proceedings, including complaints before the South
African Competition Commission. If we lose these legal and arbitration proceedings, we could be
prohibited from engaging in certain business activities and could be required to pay substantial
penalties and damages, which could cause our revenue and net profit to decline and have a material
adverse impact on our business and financial condition” and Item 8. “Financial Information–
Consolidated Financial Statements and Other Financial Information–Legal Proceedings.” See also
note 36 to the notes to the audited consolidated financial statements of the Telkom Group and note 35 to
the notes to the audited consolidated financial statements of Vodacom included herein for additional
information related to contingent liabilities of the Telkom Group and Vodacom, respectively.

160

Employee benefit special purpose entity

We had liabilities of R2,607 million, R2,430 million and R2,420 million in the years ended

March 31, 2006, 2005 and 2004, respectively, in respect of post retirement medical aid obligations
for current and retired employees. We set up a special purpose entity in the 2002 financial year for the
purpose of funding these post retirement medical benefit obligations. This special purpose entity is
purely used as a financing tool as we still retain our obligation to provide post retirement medical aid
benefits to retired employees. As a result, it does not meet the definition of a plan asset in terms of
IAS19 – Employee Benefits. Our interest in the special purpose entity is by way of equity, and this
entity is fully consolidated in the Telkom Group’s financial statements. The cumulative value of the
funds in this special purpose entity was R2,819 million, R2,208 million and R1,370 million as of
March 31, 2006, 2005 and 2004, respectively.

Subsequent to March 31, 2006, an addendum to the annuity policy contract was signed, which

transferred a part of the post-retirement medical liability to an annuity fund. This will change the
presentation of the liability and asset as the annuity policy will meet the definition of a plan asset in
terms of IAS19, which requires that the liability be reduced by the fair value of the plan asset. The
effect of this on the annual financial statements is expected to be a reduction in investments as well as
liabilities. The amount of the reduction would have been approximately R1,731 million as of March 31,
2006 had this arrangement been in place as of that date.

Off-balance sheet transactions

We did not have any off-balance sheet transactions during the year ended March 31, 2006.

Contractual obligations

The following table sets forth the Telkom Group’s contractual obligations as of March 31, 2006:

Payments due by period

Less than

1-3

3-5

More than

Total

1 year

years

years

5 years

(In ZAR millions)

Long-Term Debt Obligations

12,414

3,426

4,581

1,793

2,614

Capital(Finance) Lease Obligations

1,272

45

180

141

906

Operating Leases

Buildings

890

240

395

245

10

Rental receivable on buildings

(180)

(56)

(76)

(46)

(2)

Transmission and data lines

131

28

57

45

1

Vehicles

996

498

498

–

Equipment

35

20

15

–

–

Sport and marketing contracts

567

149

253

165

–

Forward Exchange Contracts
– To buy

2,761

2,761

–

–

–

– To sell

(1,342)

(1,067)

(275)

–

–

Other Long-Term Liabilities

Reflected on the Company’s Balance Sheet
under IFRS

19,848

656

1,438

1,629

16,125

Total

37,392

6,700

7,066

3,972

19,654

161

Telkom has renewed its full maintenance lease agreement for its vehicles with Debis Fleet

Management (Pty) Limited, a company incorporated in South Africa, as of April 1, 2005.
The original master lease agreement was for a period of five years and expired on March 31, 2005.
The agreement has been extended for a further period of 3 years until March 31, 2008.

Funding sources

To date, we have financed our operations primarily from cash flows from operations and by

borrowings in the South African and international capital markets. Access to international capital
markets and its associated cost of funding depends in part on our credit ratings. We maintain an
active dialog with the principal credit rating agencies who review our ratings periodically. Standard &
Poor’s International Ratings, LLC, a division of McGraw-Hill Companies Inc. has rated our foreign debt
BBB, and Moody’s Investors Services Inc., has rated our foreign currency long term issuer rating
Baa1 as of March 31, 2006. Moody’s Investors Service has increased our foreign currency long term
issuer rating to A3 on May 24, 2006. We have not solicited a rating on our local Rand denominated
debt due to our long standing relationships with Rand denominated investors. As of March 31, 2006,
92.3% of our debt was local debt, compared to 66.4% as of March 31, 2005 and 73.4% as of
March 31, 2004. Our Rand denominated debt bears interest at rates ranging from 10 basis points to
60 basis points above treasuries and the effective interest rate for the year ended March 31, 2006
was 13.9%. Fixed rate debt represented approximately 92.0% of our total consolidated debt as of
March 31, 2006.

The following table sets forth our consolidated indebtedness, including finance leases as of
March 31, 2006.

Interest

Outstanding

Nominal amount

Maturing

payment

Interest

as of March

outstanding as of

Year ended March 31,

After

dates

rate (%)

31, 2006

March 31, 2006

2007

2008

2009

2010

2011

2011

ZAR

ZAR

ZAR

ZAR

ZAR

ZAR

ZAR

ZAR

(in millions)

TELKOM
Bonds
10% statutorily guaranteed

March

local bond due not later

31,

than March 31, 2008

September

(TK01)

(1) (2) (3)

30,

10

4,230

4,689

108

4,581

–

–

–

–

10.5% unsecured local

April 30,

10.5

2,103

2,100

2,100

–

–

–

–

–

bond due October 31, October 31

2006 (TL06)

(1) (4)

6% unsecured local

February

6

1,214

2,500

–

–

–

–

–

2,500

bond due February 24

22,

2020 (TL20)

(5)

Zero coupon unsecured loan

stock due September 30,
2010 (PP02)

(6)

–

–

230

430

–

–

–

–

430

–

Zero coupon unsecured

loan stock due June 15,
2010 (PP03)

(7)

–

–

730

1,350

–

–

–

–

1,350

–

Finance leases

n/a

11.3 – 37.72

867

867

5

10

16

1

11

824

Repurchase agreements

n/a

–

–

–

–

–

–

–

–

–

Commercial paper

–

–

429

430

430

–

–

–

–

–

Zero coupon unsecured

commercial paper bills
with a maturity not later
than April 11, 2006. The
average discount rate on
these commercial paper
bills is 7.0% per annum.

162

Interest

Outstanding

Nominal amount

Maturing

payment

Interest

as of March

outstanding as of

Year ended March 31,

After

dates

rate (%)

31, 2006

March 31, 2006

2007

2008

2009

2010

2011

2011

ZAR

ZAR

ZAR

ZAR

ZAR

ZAR

ZAR

ZAR

(in millions)

Bank facilities
R600 million unsecured

overdraft facility with

To be

ABSA Bank Limited,

mutually

Not

Not

repayable on demand

–

agreed

utilized

utilized

–

–

–

–

–

–

R4 billion unsecured

overdraft facility with
The Standard Bank of

To be

South Africa Limited,

mutually

Not

Not

repayable on demand

–

agreed

utilized

utilized

–

–

–

–

–

–

R500 million unsecured

overdraft facility with

To be

FirstRand Bank Limited,

mutually

Not

Not

repayable on demand

–

agreed

utilized

utilized

–

–

–

–

–

–

R150 million unsecured

overdraft facility with
Commerzbank AG,

Prime

Not

Not

repayable on demand

–

Rate

utilized

utilized

–

–

–

–

–

–

$35 million unsecured short-

term loan facility with
Calyon Corporate and

To be

Investment bank, various

mutually

Not

Not

repayment dates

–

agreed

utilized

utilized

–

–

–

–

–

–

R500 million unsecured

overnight revolving credit
facility with HSBC Bank plc
and R500 million unsecured

To be

short-term facility with

mutually

Not

Not

HSBC Bank plc

–

agreed

utilized

utilized

–

–

–

–

–

–

R62.75 million unsecured

To be

short-term facility with

mutually

Not

Not

Standard Chartered Bank

–

agreed

utilized

utilized

–

–

–

–

–

–

Various bank loans

(3)

–

Various

85

85

3

–

12

70

Bank overdraft and other
short-term debt

–

–

–

–

–

–

–

–

–

Total Telkom

–

9,888

12,451

2,646

4,591

16

1

1,803

3,394

VODACOM

(8)

$8.4 million shareholders

Loan with Planetel
Communications Limited

(9)

–

LIBOR+5%

21

21

–

–

–

–

21

$10 million shareholders

loan with Caspian
Construction Company

(9)

–

LIBOR+5%

25

25

–

–

–

–

25

$15.6 million/Euro 7.8 and

TSH 5,703.8 million project
finance for Vodacom
Tanzania Limited

–

6–14.5%

92

92

92

–

–

–

–

–

$180 million medium-term

loan to Vodacom
International Limited

–

LIBOR+0.6%

557

557

557

–

–

–

–

–

$37.0 million preference

shares by Vodacom Congo
(R.D.C) s.p.r.l.

(10)

–

4%

114

114

114

–

–

–

–

–

Various finance leases

(11)

–

12.1–16.9%

405

405

41

58

96

49

81

80

Various other short-term loans

–

Various

21

21

21

–

–

–

–

–

Bank overdrafts and other

short-term debt

–

–

693

693

693

–

–

–

–

–

Total Vodacom

(8)

–

–

1,928

1,928

1,518

58

96

49

81

126

TOTAL

–

–

11,816

14,379

4,164

4,649

112

50

1,884

3,520

(1)

Listed on the Bond Exchange of South Africa.

(2)

Open ended bond issue, and number of bonds issued varies from time to time. As of March 31, 2006, R4,689 million of
these bonds were in issue.

(3)

R4,315 million of Telkom’s indebtedness outstanding as of March 31, 2006 was guaranteed by the Government of the
Republic of South Africa.

(4)

1,500 of these bonds were issued on October 31, 2001 at a yield to maturity of 10.87%, and a further 600 of these bonds
were issued on April 11, 2005 at a yield to maturity of 8.18%.

163

(5)

2,500 of these bonds were issued on February 22, 2000 at a yield to maturity of 15.00%. The TL20 bond was listed on
the Bond Exchange of South Africa with effect from April 1, 2005.

(6)

Issued on February 25, 2000. Original amount issued was R430 million. The yield to maturity of this instrument issued by
Telkom is 14.37%.

(7)

Issued on June 15, 2000. Original amount issued was R1,350 million. The yield to maturity of this instrument is 15.175%.

(8)

Represents Telkom’s 50% share of Vodacom’s indebtedness.

(9)

Repayable on approval of at least 60% of the shareholders of Vodacom Tanzania Limited.

(10) The preference shares are redeemable, but only after the first three years from date of issuance, and only on the basis

that the shareholders are repaid simultaneously and in proportion to their shareholding.

(11) Secured by land and buildings.

We expect to repay the indebtedness and other obligations in the above table with cash flows

from operations, new capital raised in the markets and/or existing or new credit facilities. Telkom’s
special purpose entity established to fund post retirement medical benefits obligations indirectly held
R45 million in nominal value of Telkom’s 10.5% unsecured local bond due October 31, 2006 (TL06)
and 312,559 of Telkom’s ordinary shares as of March 31, 2006.

The funds raised through the issuances of the above indebtedness were used for the extension

and modernization of our communications networks, the provision of additional communications
services and for general working capital purposes.

The debt instruments in the above table do not contain any restrictive covenants except a number

of the instruments contain provisions limiting our ability to create liens. Some of our debt contains
cross default provisions. In addition, our R2.5 billion 6% local bonds due February 24, 2020 contain
financial maintenance covenants requiring the Telkom Group to maintain the following ratios:

• EBITDA to net interest expense ratio of no less than 3.5:1; and

• net interest bearing debt to EBITDA ratio of no greater than 2.0:1 in the 2003 financial year,

increasing to 3.0:1 in the years thereafter.

The above ratios are calculated semi-annually based on accounting policies in use at the time

the indebtedness was incurred. Because the above ratios are calculated based on accounting policies
in use at the time the indebtedness was incurred, EBITDA for purposes of the ratios is not calculated
in the same manner as it is calculated elsewhere in this document. The covenants will be effective for
so long as the initial subscriber holds at least 70% in nominal value of the bonds. We were in
compliance with the above ratios during the year ended March 31, 2006.

All debt incurred by Telkom prior to 1991 is guaranteed by the Government of the Republic of

South Africa pursuant to Section 35 of the South African Exchequer Act, 66 of 1975. The Government
of the Republic of South Africa does not guarantee debt incurred thereafter or Vodacom’s debt. As of
March 31, 2006, R4.3 billion of our total debt of R11 billion was guaranteed by the Government of the
Republic of South Africa.

No loans have been furnished by Telkom or any of its subsidiaries for the benefit of any director or

any member of our senior management team as of March 31, 2006.

Telkom’s policy is to hedge its exposure to foreign exchange rate fluctuations. Currency exchange

hedges are not always commercially available in other African countries. Interest rate risk is converted
to Rands and managed per our policy and control manual which stipulates guidelines on exposure to
fixed and floating rate debt. Telkom’s philosophy is to target a fixed/floating debt ratio of at least 65%
fixed, adjusted to market conditions considering the interest rates at that time. If interest rates are low,
Telkom will establish a higher than 65% fixed/floating debt ratio and when interest rates are high,
Telkom seeks to establish the ratio closer to a 65% fixed/floating debt ratio.

164

Critical accounting policies and estimates

The consolidated financial statements of the Telkom Group and of Vodacom have been prepared in

accordance with IFRS, which differs in certain respects from US GAAP. The significant differences
between IFRS and US GAAP and the effects on net income and shareholders’ equity, relating to the
consolidated financial statements of the Telkom Group are described in note 44 to the Telkom Group’s
consolidated financial statements included elsewhere in this annual report. The description of the
differences and the effects on net income and shareholders’ equity of Vodacom are included in note 45
of Vodacom’s consolidated financial statements included elsewhere in this annual report.
As further discussed in those financial statements, the most significant differences between IFRS and
US GAAP relating to the Telkom Group’s consolidated financial statements include revenue recognition,
sale and leaseback transactions, derivative financial instruments, goodwill and deferred income taxes
and for Vodacom they include derivative financial instruments, goodwill, joint venture accounting,
deferred bonus incentive schemes, property, plant and equipment and deferred income taxes.

The presentation of the results of operations, financial position and cash flows in the financial

statements of the Telkom Group is dependent upon and sensitive to the accounting policies, assumptions
and estimates that are used as a basis for the preparation of these financial statements. Management
has made certain judgments in the process of applying the Telkom Group’s accounting policies.

The preparation of financial statements requires the use of estimates and assumptions that affect

the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expenses during the
reporting periods. Although these estimates are based on management’s best knowledge of current
events and actions that the Telkom Group may undertake in the future, actual results ultimately may
differ from those estimates.

Property, plant and equipment and intangible assets

The useful lives of assets are based on management’s estimation. Management considers the

impact of changes in technology, customer service requirements, availability of capital funding and
required return on assets and equity to determine the optimum useful life expectation for each of the
individual items of property, plant and equipment. Due to the rapid technological advancement in the
telecommunications industry, the estimation of useful lives could differ significantly on an annual basis.
The impact of the change in the expected useful life of property, plant and equipment is described
more fully in note 5.6 of the consolidated financial statements of the Telkom Group.
The estimation of residual values of assets is also based on management’s judgment that the assets
will be sold and what their condition will be at that time.

For assets that incorporate both a tangible and intangible portion, management uses judgment to

assess which element is more significant to determine whether it should be treated as property, plant
and equipment or intangible assets.

Determination of impairments of property, plant and equipment, and intangible assets

Management is required to make judgments concerning the cause, timing and amount of

impairment. In the identification of impairment indicators, management considers the impact of
changes in current competitive conditions, cost of capital, availability of funding, technological
obsolescence, discontinuance of services and other circumstances that could indicate that an
impairment exists. The Telkom Group applies an impairment assessment to its separate cash
generating units. This requires management to make significant judgments concerning the existence
of impairment indicators, identification of separate cash generating units, remaining useful lives of
assets and estimates of projected cash flows and fair value less costs to sell. Management judgment
is also required when assessing whether a previously recognized impairment loss should be reversed.

165

Where impairment indicators exist, the determination of the recoverable amount of a cash

generating unit requires management to make assumptions to determine the fair value less costs to
sell and value in use. Key assumptions on which management has based its determination of fair
value less costs to sell include the existence of binding sale agreements, and for the determination of
value in use include projected revenues, gross margins, average revenue per unit, earnings multiples,
capital expenditure, expected customer bases and market share. The judgments, assumptions and
methodologies used can have a material impact on the fair value and ultimately the amount of any
impairment.

Financial assets

At each balance sheet date management assesses whether there are indicators of impairment

of financial assets, including equity investments. If such evidence exists, the estimated present value
of the future cash flows of that asset is determined. Management judgment is required when
determining the expected future cash flows. To determine whether impairment is prolonged,
management relies heavily on an assessment regarding the future prospects of the investee. In
measuring impairments, quoted market prices are used, if available, or projected business plan
information from the investee for those financial assets not carried at fair value.

Impairment of receivables

An impairment is raised for estimated losses on trade receivables that are deemed to contain

a collection risk. The impairment is based on an assessment of the extent to which customers have
defaulted on payments already due and an assessment of their ability to make payments based on
credit worthiness and historical write-off experience. Should the financial condition of our customers
change, actual write offs could differ significantly from the impairment.

Taxation

Management judgment is exercised when determining the probability of future taxable

profits which will determine whether deferred tax assets should be recognized or derecognized.
The utilization of deferred tax assets will depend on whether it is possible to generate sufficient
taxable income, taking into account any legal restrictions on the length and nature of the taxation
asset. When deciding whether to recognize unutilized taxation credits, management needs to
determine the extent that future payments are likely to be available for set-off. In the event that the
assessment of future payments and future utilization changes, the change in the recognized deferred
taxation must be recognized in profit or loss.

The tax rules and regulations in South Africa as well as the other African countries within

which the Telkom Group operates are highly complex and subject to interpretation. Additionally, for the
foreseeable future, management expects South African tax laws to further develop through
changes in South Africa’s existing tax structure as well as clarification of the existing tax laws
through published interpretations and the resolution of actual tax cases.

The growth of the Telkom Group, following its geographical expansion into other African countries

over the past few years, has made the estimation and judgment more challenging. The resolution of
taxation issues is not always within the control of the Telkom Group and it is often dependant on the
efficiency of the legal processes in the relevant taxation jurisdictions in which the Telkom Group
operates. Issues can, and often do, take many years to resolve. Payments in respect of taxation
liabilities for an accounting period result from payments on account and on the final resolution of open
items. As a result there can be substantial differences between the taxation charge in the income
statement and taxation payments. The Telkom Group entities are subject to evaluation, by the relevant
tax authorities, of their direct and indirect tax filings and in connection with such reviews, disputes can

166

arise with the taxing authorities over the interpretation or application of certain tax rules. These
disputes may not necessarily be resolved in a manner that is favorable for the Telkom Group.
Additionally the resolution of disputes could result in an obligation for the Tekom Group that exceeds
management’s estimate.

Employee benefits

The Telkom Group provides defined benefit plans for certain post-employment benefits. The

Telkom Group’s net obligation in respect of defined benefits is calculated separately for each plan by
estimating the amount of future benefits earned in return for services rendered. The obligations and
assets related to each of the post retirement benefits are determined through an actuarial valuation,
which relies heavily on assumptions as disclosed in note 28 to the Telkom Group’s consolidated
financial statements. The assumptions determined by management make use of information obtained
from the Telkom Group’s employment agreements with staff and pensioners, market related returns on
similar investments, market related discount rates and other available information. The assumptions
concerning the expected return on assets and expected change in liabilities are determined on a
uniform basis, considering long-term historical returns and future estimates of returns and medical
inflation expectations. In the event that further changes in assumptions are required, the future
amounts of post retirement benefits may be affected materially.

The discount rate used reflects the average timing of the estimated defined benefit payments.

The discount rate is based on zero coupon South African government bonds with a duration and
maturity of 20 years as reported by the Bond Exchange of South Africa. The discount rate
is expected to follow the trend of inflation.

Telkom provides equity compensation in the form of the Telkom conditional share plan to its

employees. The related expense and reserve are determined through an actuarial valuation, which
relies heavily on assumptions as disclosed in note 28 to the Telkom Group’s consolidated financial
statements. The assumptions include employee turnover percentages and whether specified
performance criteria will be met. Changes to these assumptions could affect the fair value of the
shares and compensation expense as calculated by the actuary.

Provisions and contingent liabilities

Management judgment is required when recognizing and measuring provisions and when

measuring contingent liabilities as set out in notes 26 and 36 of the Telkom Group’s consolidated
financial statements. The probability that an outflow of economic resources will be required to settle
an obligation must be assessed and a reliable estimate must be made of the amount of the obligation.
Provisions are discounted where the effect of discounting is material. The discount rate used is the
rate that reflects current market assessments of the time value of money and, where appropriate, the
risks specific to the liability, all of which require management judgment. The Telkom Group is required
to record provisions for legal contingencies when the contingency is probable of occurring and the
amount of the loss can be reasonably estimated. Liabilities provided for legal matters require
judgments regarding projected outcomes and ranges of losses based on historical experience and
recommendations of legal counsel. Litigation is however unpredictable and actual costs incurred could
differ materially from those estimated at the balance sheet date.

Asset retirement obligations

Management judgment is exercised when determining the present value of expected future

cashflows when the obligation to dismantle or restore sites arises, as well as the estimated useful life
of related assets.

167

Revenue recognition

To reflect the substance of each transaction, revenue recognition criteria are applied to each

separately identifiable component of a transaction. In order to account for multiple-element revenue
arrangements in developing its accounting policies, the Telkom Group considered the guidance
contained in the United States Financial Accounting Standards Board (FASB) Emerging Issues Task
Force No 00-21 Revenue Arrangements with Multiple Deliverables. Judgment is required to separate
those revenue arrangements that contain the delivery of bundled products or services into individual
units of accounting, each with its own earnings process, when the delivered item has stand-alone
value and the undelivered item has fair value. Further judgment is required to determine the relative
fair values of each separate unit of accounting to be allocated to the total arrangement consideration.
Changes in the relative fair values could affect the allocation of arrangement consideration between
the various revenue streams.

Judgment is also required to determine the expected customer relationship period.

Any changes in these assessments may have a significant impact on revenue and deferred

revenue.

Dealer incentives

Telkom provides incentives to its retail payphone card distributors as trade discounts. Incentives

are based on sales volume and value. Revenue for retail payphone cards is recorded as traffic
revenue, net of these discounts as the cards are used.

Vodacom acts as a principle in its relationship with its dealers and service providers. Dealers and

service providers are not permitted to purchase and resell Vodacom airtime, they simply pass on to
the customer, the airtime that arises from the customer’s use of the Vodacom network.

The role of the dealers and service providers is to undertake sales and marketing of airtime

services, including connection and renewal of contract customers and sales to pre paid customers,
and certain administrative services in relation to customers connected to the Vodacom network, such
as sales force and customer care and billing of individual customers for which they are compensated
by Vodacom. In effect, Vodacom has simply outsourced these functions, which they would otherwise
have performed internally, incurred and recorded as expenses, and the contract between Vodacom
and their dealers and service providers specifies what these functions are and how they will be
compensated by incentive commissions.

Vodacom pays amounts to its service providers and dealers for the ongoing administration of its

customers on a monthly basis.

The following incentive commissions are also paid by Vodacom to its dealers and service

providers:

Contract connection and retention incentive commissions

Contract products that may include deliverables such as a handset and 24 month service are

defined as arrangements with multiple deliverables. The arrangement consideration is allocated to
each deliverable, based on the fair value of each deliverable on a stand alone basis as a percentage
of the aggregated fair value of the individual deliverables. Revenue allocated to the identified
deliverables in each revenue arrangement and the cost and commissions paid to service providers
and dealers that are applicable to these identified deliverables are recognized based on the same
recognition criteria of the individual deliverable at the time the product or service is delivered.

168

Contract retention incentive commissions

These commissions are paid to service providers or dealers for all contract packages. Vodacom

calculates the incentive paid monthly and the expense is recognized in the period it is earned by the
service provider or dealer.

Prepaid incentive commissions

Prepaid products that may include deliverables such as a SIM card and airtime are defined as

arrangements with multiple deliverables. The arrangement consideration is allocated to each
deliverable, based on the fair value of each deliverable on a stand alone basis as a percentage of the
aggregated fair value of the individual deliverables. Revenue allocated to the identified deliverables in
each revenue arrangement and the cost and commissions paid to service providers and dealers that
are applicable to these identified deliverables are recognized on the same recognition criteria of the
individual deliverable at the time the product or service is delivered.

Distribution incentive commissions

These commissions are paid to service providers or dealers to maintain and increase their loyalty

to, and exclusivity with, Vodacom. These commissions are deferred and expensed over the
contractual relationship period.

Handset incentive commissions

These incentives are offered by Vodacom to dealers who purchase phones from Vodacom to

provide to customers, which are recorded as a net against revenue.

169

Item 6.

Directors, Senior Management and Employees

DIRECTORS AND SENIOR MANAGEMENT

Directors and Senior Management of Telkom

Directors of Telkom

The management of Telkom is vested in its board of directors, which consists of eleven members.

In accordance with Telkom’s articles of association, the Government, as the holder of the class A
ordinary share, and the Public Investment Corporation, as the beneficial holder of the class B ordinary
share, are entitled to appoint directors based on the percentage of the issued ordinary shares owned
by them. As of the date hereof, the Government is entitled to appoint five directors, including two
executive directors, and the Public Investment Corporation is entitled to appoint one executive
or non-executive director to Telkom’s board of directors. Telkom’s shareholders are entitled to appoint,
in a general meeting, that number of directors, if any, that are not appointed by the holder of the class
A ordinary share, the holder of the class B ordinary share or the board of directors. The shareholders
in a general meeting are not entitled to fill a vacancy created by a director appointed by either the
holder of the class A ordinary share or the class B ordinary share. If, as of March 4, 2011, the
class A ordinary share and class B ordinary share have not otherwise been converted into ordinary
shares under the terms of Telkom’s articles of association, they will be so converted and the rights of
the Government and the Public Investment Corporation as holders of the class A ordinary share and
class B ordinary share, respectively, including their rights to appoint members of Telkom’s board of
directors will be terminated.

The chief executive officer is Telkom’s most senior executive and the exercise of his authority is

subject to the authority and direction of the board of directors. Telkom’s articles of association provide
that the chief executive officer shall be an executive director nominated and appointed at least every
three years by the board of directors, after consultation with the Government, for so long as it is a
significant shareholder. Pursuant to Telkom’s articles of association, the board of directors is required
to meet at least once a quarter.

Significant Shareholder

Pursuant to Telkom’s articles of association, a significant shareholder is any person that holds

either a class A ordinary share or a class B ordinary share and at least 15% of Telkom’s issued
ordinary shares, subject to adjustment to reflect additional issuances of ordinary shares by Telkom
after March 4, 2003, provided that the percentage will not be lower than 10%.

Sale of Thintana shares and current shareholding

Thintana Communications sold a 14.9% interest in Telkom to South African and certain

international institutional investors in June 2004. Following the completion of this sale, Thintana
Communications beneficially owned a 15.1% interest in Telkom, including the class B ordinary share,
and remained a significant shareholder. In November 2004 Thintana Communications announced that
it sold its remaining 15.1% interest in Telkom, including its class B ordinary share, to the Public
Investment Corporation, an investment management company wholly owned by the South African
Government. Following the sale by Thintana Communications, all of Thintana Communications’
representatives on Telkom’s board and its management designees were replaced.

As of June 30, 2006, the Public Investment Corporation beneficially owned 8.6% of Telkom’s

issued and 9.0% of Telkom’s outstanding ordinary shares and the class B ordinary share that it had
acquired from Thintana Communications, plus an additional 7.5% of Telkom’s issued and 7.9% of
Telkom’s ordinary shares that it had acquired in the market, and the Elephant Consortium beneficially

170

owned 6.9% of Telkom’s issued and 7.2% of Telkom’s outstanding ordinary shares. The Public
Investment Corporation is not a “significant shareholder” of Telkom, however, it is entitled to appoint
one executive or non-executive director to Telkom’s board of directors, as the holder of the class B
ordinary share. As of June 30, 2006, the Government of the Republic of South Africa owned 38.0% of
Telkom’s issued and 39.8% of Telkom’s outstanding ordinary shares, plus the class A ordinary share,
and is entitled to appoint five directors, including two executive directors, to Telkom’s board of
directors and is the only “significant shareholder” of Telkom.

Directors

The following resignations and appointments to the Telkom Board of Directors occurred since April

1, 2005:

Resignations

Date of resignation

A Ngwezi

June 29, 2005

SE Nxasana

August 31, 2005

TCP Chikane

June 19, 2006

Appointments

Date of appointment

PSC Luthuli

July 29, 2005

LRR Molotsane

September 1, 2005

KST Matthews

June 19, 2006

The following are Telkom’s directors as of March 31, 2006. All of Telkom’s directors are citizens

of the Republic of South Africa.

Year

South African

of

Business

Expiration of

Year of

Name

Birth

Address

Position

Term of Office

Appointment

Nomazizi Mtshotshisa

(1)

1944

101 Devon House

Chairman of the

2008

2002

20 Georgian Crescent

Board; Non-

Hampton Office Park

executive Director

Bryanston 2021

Papi Molotsane

1959

Telkom Towers North

Chief Executive

2008

2005

152 Proes Street

Officer;

Pretoria,

Executive director

0002

Dumisani Tabata

(1)

1955

269 Oxford Road,

Non-executive

2007

2004

Ilovo, 2196

Director

Yekani Tenza

(1)

1957

5th Floor, Carlton

Non-executive

2007

2004

Centre,

director

150 Commissioner
Street,
Johannesburg, 2001

171

Year

South African

of

Business

Expiration of

Year of

Name

Birth

Address

Position

Term of Office

Appointment

Thabo Mosololi

(2)

1969

Palazzo Towers East,

Non-executive

2007

2004

Montecasino

director

Boulevard, Fourways,
2055

Lazarus Zim

(2)

1960

44 Main Street,

Non-executive

2007

2004

Johannesburg, 2001

director

Marius Mostert

(1)

1959

JGM House

Non-executive

2007

2004

5th Floor

director

72 Grayston Drive
Sandton 2196

Thenjiwe Chikane

(1)(3)

1965

Mulberry Office Park,

Non-executive

2007

2004

Broadacres Drive,

director

Fourways, 2155

Tshepo Mahloele

(4)

1967

Glenfield Office Park

Non-executive

2007

2004

Block C 1st Floor

director

Sprite Avenue
Faerie Glen, 0043

Sibusiso Luthuli

(2)

1973

14 Crompton Street,

Non-executive

2008

2005

Pinetown,

director

3600

Brahm du Plessis

(2)

1955

41 St. John Road

Non-executive

2007

2004

Houghton, 2041

director

In addition, the following director was appointed to the board on June 19, 2006:

Keitumetse Matthews

(1)

1951

Shop G4, Richmond

Non-executive

2009

2006

Centre, Main Road,

director

Plumstead,
Cape Town, 7800

(1)

Government representative.

(2)

Independent.

(3)

Resigned June 19, 2006.

(4)

Public Investment Corporation representative.

Nomazizi Mtshotshisa was appointed to the board on August 1, 2002. Ms. Mtshotshisa is a

business woman with interests in the financial services, mining and energy sectors. She has served
as national director of the National Association of Democratic Lawyers, which focuses on human
rights and transformation in the administration of justice. She is chairman of the Chris Hani
Baragwanath Reconstruction Trust, Majweng Resources (Mining) and Eco-Electrical (Pty) Limited.
Ms. Mtshotshisa also serves as director in Women’s Development Micro Finance, Mvelaphanda
Resources, Grinrod Limited and SA Black Women Investment Holdings. Ms. Mtshotshisa holds a
B. Curis degree from the University of South Africa.

Papi Molotsane was appointed to the board and as chief executive officer in September 2005.

Prior to joining Telkom, he was the Group Executive of Transnet from February 2003 to August 2005
and chief executive officer of Fedics from January 1999 to January 2003. Mr. Molotsane has a broad-
based professional background in engineering, systems, operations, sales, marketing and human
resources. Mr. Molotsane is currently a director of SA America’s Cup Challenge. Previously he acted
as a director of Arivia.kom, and Fike Investment (Pty) Limited. Mr. Molotsane has a Bachelor of
Science in Business Services, a Bachelor of Engineering Technology and Master of Science in
Business Administration. Mr. Molotsane also completed the Stanford Executive Program in the USA.
Mr. Molotsane is also a director of Vodacom.

172

Dumisani Tabata was appointed to the board on September 20, 2004. Mr. Tabata is a director

and founding member of Smith Tabata Incorporated. He was admitted as an attorney in 1984 and
specializes in constitutional litigation and administrative law. Mr. Tabata has acted as a High Court
Judge and has served on the executive board of National Association of Democratic Lawyers.
He is chairman of STRB Attorneys in Johannesburg, deputy chairman of the ABSA regional board
(Eastern Cape), a member of ABSA board (Commercial Bank) and a director of Smith Tabata
Buchanan Boyes. Mr. Tabata holds a Bachelor of Procuration LLB.

Yekani Tenza was appointed to the board on September 20, 2004. Mr. Tenza is the executive

chairman of Virtualcare Pharmacies (Pty) Limited. He is also chairman of IME Actuaries and
Consultants. He has more than 15 years business experience ranging from manufacturing industry to
the financial sector, particularly in the formulation and implementation of strategy. He has extensive
experience in the healthcare sector having been the executive director of Medscheme Holding (then,
the largest medical scheme administrator in South Africa). He is the former chief executive officer of
Bonitas Medical Aid Fund and served as President and chief executive officer of Foskor Limited
(largest producer of phosphoric acid in South Africa). He is a current non-executive director of the Gas
Corporation of South Africa (iGas) and a former director of PetroSA Limited. Mr. Tenza holds a
Bachelor of Commerce Bachelor of Accounting Science (Honours) and a MBA and he is a Certified
Public Accountant (USA).

Thenjiwe Chikane was appointed to the board on September 20, 2004. Ms. Chikane has served

as the chief executive officer at MGO Consulting since 2003, having joined them from the Department
of Finance where she was head of Finance & Economic Affairs, Gauteng. Ms. Chikane is chairman of
SITA, a board member at DBSA, PetroSA Limited and is a member of the audit committees of Poslec.
She is currently a member of SAICA (South African Institute of Chartered Accountants) and ABASA
(the Association of Black Accountants of South Africa). She has served on various other bodies, such
as the UNISA Transformation Forum. Ms. Chikane is a Chartered Accountant. Ms. Chikane resigned
from the board on June 19, 2006.

Thabo Mosololi was appointed to the board on October 15, 2004. Mr. Mosololi has been the

financial director of Tsogo Sun Gaming since 2002. His expertise spans management consulting,
financial re-engineering and strategy development. He is a member of SAICA and ABASA. In 1999,
Mr. Mosololi was appointed by the Minister of Finance to the Financial Services Board Insider Trading
Directorate. In 2001, Thabo was appointed as a commissioner on the Fiscal & Financial Commission.
He serves as chairman of the Board of Trustees for the Education Foundation and NGO involved in
the Curriculum Development and policy research on education in South Africa. Mr. Mosololi holds a
Diploma in Project Management, MAP, EDP and is a chartered accountant.

Lazarus Zim was appointed to the board on October 15, 2004. Mr. Zim has served as the

chairman of Kumba Resources Limited since February 2004 and serves on the boards of Anglo-
American SA Limited, AngloGold Ashanti Limited, Mondi SA Limited and Sanlam Limited. Previously,
he was the chief executive officer of Anglo American Corporation of South Africa Limited from
February 2005 until April 2006. Mr. Zim brings in-depth knowledge of the African telecommunications
markets as he previously worked as the managing director of MTN International and as an executive
director of MTN Group. In this role he was responsible for operations in Nigeria, Cameroon, Uganda,
Swaziland and Rwanda and Mauritius. Prior to this, he was managing director of M-Net and chief
executive officer of MIH South Africa. Mr. Zim holds a Bachelor of Commerce (Honours) and a
Masters in Commerce.

Marius Mostert was appointed to the board on September 20, 2004. Dr. Mostert is the group

financial director of Decillion Limited and is responsible for its South African operations. Prior to joining
Decillion, Dr. Mostert was financial director of PSG Investment Bank and executive vice president,
professional services at the Industrial Development Corporation. Dr. Mostert holds a Bachelor of
Commerce (Cum Laude), Bachelor of Commerce (Honours) (Investment Management),
MBA (Cum Laude), Doctorate in Commerce and is a chartered accountant. Dr. Mostert is also a
director of Vodacom.

173

Tshepo Mahloele was appointed to the board on November 29, 2004. Mr. Mahloele has

extensive experience in corporate and project finance. Mr. Mahloele currently leads the Pan-African
infrastructure development fund being established by the Pubic Investment Corporation. Mr. Mahloele
was head of corporate finance at the PIC and Isibaya Fund from August 2003 to January 2006. He
was previously a private sector investments manager at DBSA and has worked for the
Commonwealth Development Corporation, where he was involved in the capital funding for
infrastructure projects.
Mr. Mahloele is a non-executive director of Bakwena Platinum Corridor Concession. Mr. Mahloele
holds a Bachelor of Procurationis.

Brahm du Plessis was appointed to the board on December 2, 2004. Mr. du Plessis has been a

practicing advocate at the Johannesburg Bar since 1987, specializing in intellectual property law.
Prior to that he was a senior lecturer in Roman-Dutch Law at the University of Cape Town. He was a
founder member of the CDRT (Community Dispute Resolution Trust) and is past chairman of the
Johannesburg branch of NADEL. He has published a law journal article on the Contracts in Restraint
of Trade in Roman and Roman-Dutch Law. Brahm is also a member of Advocates for Transformation.
Mr. du Plessis holds a Bachelor of Arts, LLB and LLM.

Sibusiso Luthuli was appointed to the board on July 29, 2005. Mr. Luthuli is the managing director

of Ithala Limited, a position he was appointed to in July 2004. Prior to that he was finance director of
Ithala Limited from January 2004 to June 2004. Other positions Mr. Luthuli held include that of executive
manager at Nedbank Corporate from April 2000 to December 2003. He is non-executive chairman of
Enaleni Pharmaceuticals Limited, chairman of the University of KwaZulu-Natal Audit Committee, a
member of the University of Kwa Zulu Natal Council, director of Richards Bay Industrial Development
Zone (IDZ) Company and member of Thekweni Municipality Audit Committee. Mr. Luthuli holds a
Bachelor of Commerce degree from the University of Zululand, a post graduate diploma in Accountancy
from the University of Durban Westville, and is a qualified chartered accountant.

Keitumetse Matthews was appointed to the board on June 19, 2006. Ms. Matthews is a

businesswoman and has been a member of Keida Children’s Books CC since April 2006.
Ms. Matthews was chief legal advisor for the South African Broadcasting Corporation from
March 2002 to September 2005. In April 2000, she was appointed special advisor to the Minister of
Communications until February 2002. Other positions that Ms. Matthews has held include that of legal
advisor at Midi Television, housing lawyer at the London Borough of Lambert Legal Services and
copyright lawyer at British Broadcasting Corporation. Ms. Matthews is a Barrister-at-Law and also
holds a Bachelor of Arts (Honours) degree.

Alternate directors of Telkom

No alternative directors have been appointed as of the date hereof.

Senior management of Telkom

The following are members of senior management of Telkom as of March 31, 2006:

Year of

Year of

Name

Birth

Position

Employment

Papi Molotsane

(1)

1959

Chief Executive Officer

2005

Kaushik Patel

1962

Chief Financial Officer

2000

Reuben September

1957

Chief Operating Officer

1977

Wallace Beelders

1959

Chief Sales and Marketing Officer

1977

Thami Msimango

1966

Chief Technical Officer

1984

Mandla Ngcobo

1960

Chief Corporate Affairs

1998

Motlatsi Nzeku

1961

Chief Information Officer

1994

(1)

Biography set forth above.

174

The business address of each of Telkom’s executive officers is Telkom Towers North,

152 Proes Street, Pretoria, South Africa 0002.

Kaushik Patel was appointed chief financial officer in January 2004. He joined Telkom and

served as deputy chief financial officer since December 2000. Prior to joining Telkom, he served as
financial director for Teba Bank Limited from April 1999 to November 2000 and finance executive for
the African Bank Limited since March 1998. He holds a Bachelor of Accounting Science (Honours)
degree from the University of South Africa and is a Chartered Accountant (South Africa). Mr. Patel is
also a non-executive director of TDS (Pty) Limited.

Reuben September was appointed chief operating officer in September 2005. Prior to this

appointment, he served as chief technical officer from May 2002 and as managing executive of
technology and network services from March 2000. He has worked in various engineering and
commercial positions in Telkom since 1977. He is a member of the Professional Institute of Engineers
of South Africa (ECSA) and holds a Bachelor of Science degree in Electrical and Electronic
Engineering from the University of Cape Town. Mr. September is also a director of Vodacom.

Wallace Beelders was appointed chief sales and marketing officer in December 2005. He joined

Telkom in 1977 and previously held the position of managing executive for corporate, key and global
markets from October 2004 to November 2005. Previously, Mr. Beelders was managing executive of
international and special markets from December 2000 to September 2004. He holds a Masters
Diploma in Technology from the Pretoria Technikon.

Thami Msimango was appointed chief technical officer in September 2005. Mr. Msimango joined

Telkom in 1984 and has held a number of positions in Telkom. Previously, he was managing executive
of technology and network services from July 2003 to September 2005 and executive Technology,
Direction and Integration from June 2002 to June 2003. Mr. Msimango has been involved in the
information and communication technology sector for the past 21 years beginning his career in the
former Department of Posts and Telecommunications in 1984. Mr. Msimango has taken a number of
management programs at various higher education institutions. Mr. Msimango is also a non-executive
director of Swiftnet (Pty) Ltd.

Mandla Ngcobo was appointed as chief corporate affairs officer in September 2005. Previously,

he was the group legal executive from September 2000 to August 2005. Mr. Ngcobo is an admitted
attorney of the High Court. Prior to joining Telkom he was in private practice in Durban and
Johannesburg for approximately ten years. Mr. Ngcobo qualified with an LL.B degree from Natal
University in 1985 and in 2001 graduated with an L.M. in Company Law at Wits University. Mr.
Ngcobo is a trustee of the Telkom Pension Fund. He is also a past General Secretary of the Black
Lawyers Association, Gauteng Branch. Mr. Ngcobo has served as a non-executive director at Brait
South Africa following the acquisition of a 26% interest of Brait by Sithongo Consortium. Mr. Ngcobo is
also a director of Representative Investments (Pty) Limited which is part of the Sithongo consortium.
He also sits on the Brait Audit Committee. Mr. Ngcobo is a former member of the SAFA 2010 World
Cup Board and is currently a member of the remuneration sub-committee of the 2010 World Cup
Local Organizing Committee.

Motlatsi Nzeku was appointed chief information officer in March 2006. Previously, he was group

executive of procurement since November 2004 and managing executive of customer services from
April 2001 to October 2004. He holds a Bachelor of Science in Mathematics and Physics and a
Bachelor of Engineering degree.

There are no family relationships between any of Telkom’s directors or members of senior

management.

175

Senior Management of Vodacom

The following are members of senior management of Vodacom as of March 31, 2006:

Year of

Year of

Name

Birth

Position

Employment

Alan Knott-Craig

1952

Chief Executive Officer of
Vodacom Group

1993

Leon Crouse

1953

Chief Financial Officer of
Vodacom Group

1993

Shameel Aziz Joosub

1971

Managing Director of Vodacom
South Africa.

1994

Pieter Uys

1962

Chief Operating
Officer of Vodacom Group

1993

The business address of each of Vodacom’s executive officers is Vodacom Corporate Park,

082 Vodacom Boulevard, Vodavalley, Midrand, South Africa.

Alan Knott-Craig has served as a managing director of Vodacom (Pty) Limited

since 1993 and chief executive officer of Vodacom Group since October 1996. Prior to 1993,
Mr. Knott-Craig was the senior general manager of mobile communications at Telkom until 1993,
when he left to join Vodacom. Mr. Knott-Craig is also a director of several Vodacom subsidiaries.
Mr. Knott-Craig holds a Bachelor of Science degree in Electrical Engineering cum laude from the
University of Cape Town and a Master of Business Leadership degree from the University of South
Africa and was awarded an honorary Doctorate in Business Leadership from the University of South
Africa in 2006. He was inducted as one of the eight Gold Members of the GSM Association’s 2001
inaugural “Roll of Honour” for his contribution to bringing mobile telephone to South Africa. He serves
as a Commissioner on the Presidential National Commission on Information Society & Development
for ICTs.

Leon Crouse has served as chief financial officer and group finance director of Vodacom Group

since October 1996. Prior to 1996, Mr. Crouse served as Vodacom’s general manager of Finance
since Vodacom’s inception in 1993. Mr. Crouse is also a director of several Vodacom subsidiaries.
Mr. Crouse holds a Bachelor of Commerce degree and a Certificate in the Theory of Accounting
from the Nelson Mandela Metropolitan University of Port Elizabeth and is a Chartered Accountant
(South Africa).

Shameel Aziz-Joosub was appointed as managing director of Vodacom (Pty) Limited

on April 1, 2005. He has served as a director and as the managing director of Vodacom Service
Provider Company (Pty) Limited since September 2000. Prior to September 2000, Mr. Aziz-Joosub
worked in Vodacom’s finance department since 1994 and was managing director of Vodacom
Equipment Company (Pty) Limited, the handset distribution company in the Vodacom Group, before
merging it with Vodacom Service Provider Company. Mr. Aziz-Joosub also serves as director of
Vodacom Group (Pty) Limited. Mr. Aziz-Joosub holds a Bachelor of Commerce (Honors) degree from
the University of South Africa and holds a Masters of Business Administration degree from the
University of Southern Queensland, Australia, and is an Associated General Accountant and
Commercial and Financial Accountant (South Africa).

Pieter Uys has served as chief operating officer of Vodacom Group since April 2004 and

managing director of Vodacom (Pty) Limited from December 2001 to March 2005. Mr. Uys holds a
Bachelor of Science degree in Engineering and a Masters in Engineering degree from the University
of Stellenbosch and a Master of Business Administration degree from the Stellenbosch Business
School. Mr. Uys joined Vodacom in 1993 as a member of the initial engineering team.

176

Reserved Matters

Pursuant to Telkom’s articles of association, for so long as the Government is a significant

shareholder, neither Telkom nor any of its subsidiaries may take action with respect to certain
reserved matters unless authorized by the board, if, and to the extent that, the matters are not within
the scope of the exclusive powers and authority delegated to the operating committee referred to
below. In addition, the authorizing resolution of the board relating to any Government reserved matter
must have received the affirmative vote of at least two of the directors appointed by the Government.
The following are Government reserved matters:

• the approval or amendment of Telkom’s strategic objectives or those of any subsidiary;

• any determination of or amendment to Telkom’s management structure or schedule of

authorizations granted by the board to management;

• prior to May 8, 2004, any determination by the board of directors with respect to the scope

or revocation of the exclusive powers and authority of the operating committee or the human
resources review committee referred to below, and at any time, the countermanding, amending
or supplementing of any decision or action made or taken by the operating committee or the
human resources review committee before May 8, 2004;

• the formation of any committee of, or the delegation of any authority to such committee, by the

board of directors, other than as expressly set out in the articles of association;

• an increase or reduction in the issued share capital of Telkom or its subsidiaries;

• any issue, conversion or allotment of shares or securities by Telkom or any subsidiary;

• the approval or making of the dividend policy from time to time and the declaration or

distribution of any dividends by Telkom or by its subsidiaries;

• any material change in Telkom’s business or that of its subsidiaries;

• the incurrence, creation or assumption by Telkom of any indebtedness which would cause the

debt/equity ratio of Telkom, or the Telkom Group on a consolidated basis, to exceed 1.00;

• any merger or consolidation involving Telkom or any transfer of any of Telkom’s assets or

liabilities or those of its subsidiaries where the consideration or purchase price, as the case
may be, exceeds minimum thresholds;

• the execution, renewal, amendment or termination of any contract between Telkom or its

subsidiaries and any shareholder who owns in excess of 10% of the ordinary shares, unless
the Government has an interest in the contract in question that conflicts with the interest of
Telkom or the applicable subsidiary;

• the establishment by Telkom of any subsidiary;

• any change to the name under which Telkom or any subsidiary does business;

• any change in Telkom’s financial or tax year;

• any winding-up or liquidation of Telkom or any of its subsidiaries;

• after May 7, 2004 and subject to the audit and risk management committee’s exclusive authority

referred to below, the appointment of Telkom’s auditors insofar as the South African Companies
Act, 61 of 1973, requires such appointment to be made by directors;

177

• any material alteration of the terms of any employee share ownership scheme approved by a

general meeting; and

• any change in the number of directors making up the board.

Telkom’s articles of association provide that the articles relating to these reserved matters will fall

away on March 4, 2011.

178

COMPENSATION

Compensation of Directors

The following table sets forth in Rands, the cash and non-cash compensation, paid by Telkom to

its executive and non-executive directors in the year ended March 31, 2006:

Performance

Fringe

bonus

and other

Fees

Remuneration

benefits

Total

ZAR

ZAR

ZAR

ZAR

ZAR

2006
Emoluments per director:

Non-executive

2,969,158

–

–

–

2,969,158

NE Mtshotshisa

759,500

–

–

–

759,500

TCP Chikane
(resigned June 19, 2006)

181,022

–

–

–

181,022

B du Plessis

254,391

–

–

–

254,391

TD Mahloele

223,227

–

–

–

223,227

TF Mosololi†

230,809

–

–

–

230,809

M Mostert

308,272

–

–

–

308,272

A Ngwezi
(resigned June 29, 2005)

47,727

–

–

–

47,727

DD Tabata

323,022

–

–

–

323,022

YR Tenza

349,022

–

–

–

349,022

PL Zim

123,809

–

–

–

123,809

PSC Luthuli
(appointed July 29, 2005)

168,357

–

–

–

168,357

Executive

–

2,186,460  7,070,262

2,990,865   12,247,587

SE Nxasana* (resigned
August 31, 2005)

–

935,713    3,627,689

2,081,190

6,644,592

LRR Molotsane* (appointed
September 1, 2005)

–

1,250,747   3,442,573

909,675

5,602,995

Total emoluments –

Paid by Telkom

2,969,158

2,186,460  7,070,262

2,990,865  15,216,745

*

Included in fringe and other benefits is a pension contribution for SE Nxasana and LRR Molotsane of R121,643 (2005:
R278,040; 2004: R242,430) and R162,597 (2005: R0), respectively, paid to the Telkom Retirement Fund. Also included in
fringe and other benefits is a termination settlement of R1,574,514 paid to SE Nxasana.

†

Paid to Tsogo Sun Limited.

In the year ended March 31, 2006, the aggregate consolidated compensation of Telkom’s

directors and senior management (22 persons), paid or accrued, was R58.2 million which includes
remuneration, bonuses, termination, fringe and other benefits paid to directors and members of senior
management who resigned or were replaced during the year.

The Telkom Group set aside or accrued R1.3 million to provide pension, retirement and similar

benefits for its directors and senior management (22 persons) in the year ended March 31, 2006,
including directors and members of senior management who resigned or were replaced during the
year.

Bonus and Profit Sharing

Senior management and executive directors participate in the Telkom top management incentive

scheme. The incentive scheme consists of two components, namely the team award and the

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individual award. The team award constitutes 80% and the individual award 20% of the overall award.
The team award is based 60% on Telkom financial drivers and 40% on Telkom performance drivers.
The individual award is based on the performance of the individual. Payment of bonuses for the
2006 financial year took place in June 2006.

Remuneration of Non-Executive Directors

Fees for Telkom’s non-executive directors are determined by the board of directors based

on market practice, within the restrictions contained in Telkom’s articles of association. Telkom’s
non-executive directors receive no other pay or benefits other than directors’ fees, with the exception
of reimbursement of expenses incurred in connection with their directorships. The non-executive
directors do not participate in the share scheme, bonus scheme or incentive plans outlined herein
and are not eligible for pension scheme membership.

Loans

Telkom has not made any loans to any of its directors or senior management referred to herein.

Service Agreements

Telkom has entered into a service agreement with Papi Molotsane. The service agreement for

Mr. Molotsane has a three year term with a six months’ notice period by either party, which will end on
August 31, 2008. All other members of the executive committee have indefinite service employment
contracts with a three month notice period by either party.

Retention Agreement

Mr. Msimango has a retention agreement with the company until October 2006.

Incentive Plans

At Telkom’s Annual General Meeting held on January 27, 2004, Telkom’s shareholders approved

a conditional share plan for all employees. A maximum of 22,281,272 ordinary shares may be made
available for purposes of the plan, representing 4% of Telkom’s issued ordinary share capital as
of March 31, 2006. Allocation to management employees in terms of this plan shall not exceed 2% of
Telkom’s issued ordinary share capital. The remaining 2% is reserved for the remainder of the staff.
No one participant in the plan may acquire more than 0.05% of Telkom’s issued ordinary share capital.

The board may determine the maximum number of shares that will be awarded to each participant

in a conditional contract. Each conditional contract obligates Telkom to allot and issue to the employee
or procure the transfer to the employee, free of cash, the number of shares awarded to the employee,
subject to certain performance criteria applicable to him or her being met within a specified period.
The number of shares ultimately awarded to the employee, however, is dependent upon the extent to
which the employee meets certain performance criteria and, in any event, must not exceed the
number awarded. For a management employee, the performance criteria must be met over three
years. For a non-management employee, the performance criteria must be met for one-third of his or
her shares at the end of two years, for the next third at the end of three years and for the last third at
the end of four years, each from the date of his or her conditional contract. At the end of these
periods, the rights of the employees will vest, provided that each performance criterion has been met
and the employee is still a Telkom employee. Subject to the board’s discretion, if the employment is
terminated due to death, other than suicide, workforce reduction where he or she does not receive a
voluntary severance package, outsourcing, normal retirement or workforce reduction due to ill health,
his or her rights will remain unaffected; otherwise, the employee will lose his or her rights to acquire
any shares apart from the rights that have already vested. Subject to the board’s discretion, the board
may decide to make a cash payout based on certain criteria for employees who accept voluntary

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service packages pursuant to the workforce reduction program. A Telkom employee cannot receive
any dividends for awarded shares or be entitled to vote, with respect to awarded shares until their
rights to shares are vested. In addition, a Telkom employee may not assign any of his or her rights or
obligations under this plan.

On March 17, 2004, the Telkom Board of Directors approved guidelines for the allocation of

shares. The first allocation was made based on the following:

• the Telkom share price on the JSE based on the last ten trading days prior to

March 30, 2004; and

• the Telkom’s final financial results for the 2004 financial year as measured by the team award.

For officers, executives and managers, the number of ordinary shares was based on a percentage

of the individual’s total remuneration package and the individual’s performance assessed through
Telkom’s performance enhancement process. The following illustrates how individual performance
influences the number of shares:

Performance

% award

Did not meet targets

0%

Met all targets

100%

Exceeded all targets

100%+*

*

Subject to Board discretion

For employees in Telkom’s collective bargaining unit, the number of ordinary shares will be based

on a percentage applied to the weighted average remuneration per job level, regardless of the
individual’s performance as assessed through Telkom’s performance and development management
system. However, the number of ordinary shares will depend on a sliding scale of the Telkom financial
performance, as measured by Telkom’s gain-sharing plan. The following table illustrates the sliding
scale:

Overall % achievement of Telkom

financial targets

% award

Less than 90%

0%

Between 90% and 95%

50%

Between 95.1% and 99.9%

75%

100% and above

100%+*

*

Subject to Board discretion

On June 23, 2005, the Telkom board of directors approved the second allocation of shares under

the conditional share plan. The second allocation was made based on the following:

• the Telkom share price on the JSE based on the last ten trading days prior to the allocation date

of June 1, 2005;

• the individual performance assessment of employees on the management levels for the

2005 financial year;

• the total remuneration packages of employees as at April 1, 2005; and

• Telkom’s final financial results for the 2005 financial year.

The allocation of shares under the conditional share plan for the 2006 financial year will be

submitted to the September 2006 board meeting for approval.

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Government Option Grants

On March 4, 2003, the Government granted share options to purchase up to 11,140,636 of its

ordinary shares, representing 2% of Telkom’s issued and outstanding ordinary share capital, through
the Diabo Share Trust, established for the benefit of:

• persons employed by Telkom at 9:00 a.m. (S.A. time) on March 4, 2003; and

• former employees, who were employed by Telkom on or after October 1, 1999 up to 8:59 a.m.

(S.A. time) on March 4, 2003, including deceased estates of such employees. Employees who
resigned voluntarily or were dismissed on grounds of misconduct, fraud or other grounds
justifying summary dismissal at common law before 8:59 a.m. (S.A. time) on March 4, 2003
were excluded from participation in this scheme.

The options entitled these persons to acquire ordinary shares from the Government at R33.81

per share, which is the price at which Thintana Communications invested in Telkom in 1997, plus any
stamp duty, brokerage and related costs payable on the transfer of these ordinary shares. The shares
will be exercisable over a period of three years in four equal tranches. The four tranches were
exercised in September 2003, March 2004, March 2005 and March 2006. These persons were also
entitled to elect to have some or all of the shares disposed of for their benefit. Such persons did not
need to remain employed with Telkom after 9:00 a.m. (S.A. time) on March 4, 2003 in order to
continue participating in the scheme and persons who were employed by Telkom after 9:00 a.m.
(S.A. time) on March 4, 2003 did not otherwise have the right to participate in the scheme.

182

BOARD PRACTICES

Corporate Governance Statement

The board is committed to ensuring that the affairs of Telkom are conducted with integrity and in

accordance with principles set out in the King Report on Corporate Governance 2002, or King II, and
the Sarbanes Oxley Act of 2002.

Compliance with the King Code and JSE Listings Requirements

By virtue of its listing on the JSE, Telkom is obliged to comply with the Code of Corporate

Practices and Conduct contained in King II and in accordance with the new JSE Listings
Requirements which came into effect on September 1, 2003. Telkom is required to disclose the extent
of its new compliance with King II and provide reasons for non compliance.

Telkom complies in all material respects with the principles of King II. While it acknowledges the

importance of good governance, the Board is aware that Telkom does not strictly comply with certain
principles set out in King II. These areas of non compliance stem mainly from certain provisions in
Telkom’s articles of association framed to safeguard the interests of the two controlling shareholders,
that at the time of the listing were the Government of the Republic of South Africa and Thintana
Communications. In November 2004, Thintana Communications announced that it sold its entire
remaining shareholding in Telkom, 15.1%, together with the class B share, to the Public Investment
Corporation. We have been informed that the Public Investment Corporation’s shareholding fell below
15% of Telkom’s issued ordinary shares. As a result, it is no longer a “significant shareholder”. The
Government is now the sole “significant shareholder.” The Government’s reserved matters as a
“significant shareholder” holding the class A ordinary shares were unaffected by the sale by Thintana
Communications of its entire shareholding in Telkom. Most of the areas of non-compliance will be
resolved by no later than March 5, 2011, when the provisions of Telkom’s articles of association
resulting in non-compliance with King II fall away or earlier if the “significant shareholders”
shareholding falls below certain stipulated levels.

The board of directors

The board of directors comprised one executive and ten non-executive directors as of

June 30, 2006. The Government and the Public Investment Corporation are the holders of the class A
and class B ordinary shares, respectively. Based on their ordinary shareholding and their holding of
the class A and class B shares, the Government is entitled to appoint five directors, including two
executive directors, and the Public Investment Corporation is entitled to appoint one executive or
non-executive director, to the board, as of June 30, 2006.

The non-executive directors have a wide range of skills and significant commercial experience,

that enable them to bring independent judgment to bear on the board’s deliberations and decisions.
No single director or block of directors dominates decision making at board meetings.

The roles of chairman and chief executive officer do not reside in the same person. The chairman

is a non-executive director appointed by the class A shareholder, the Government, in consultation with
the class B shareholder. The chief executive officer is appointed by the board on a renewable service
contract, in consultation with each significant shareholder.

The board meets at least once a quarter, including for sessions devoted to discussing strategy

and business planning. Extraordinary board meetings are convened when necessary to deliberate on
issues that require board resolutions between scheduled meetings. Certain members of senior
management are in attendance at board meetings. Other members of management are periodically
invited to make presentations on particular issues of interest to the board.

183

Board papers and other relevant documentation are timeously circulated, giving board members

sufficient time to consider the issues on the agenda, thus enabling them to make informed decisions
on the issues at hand.

Telkom has a formal induction program for newly appointed directors and specific training is

provided for audit committee members. The induction of newly appointed directors is conducted by
the chairman and chief executive officer with input from the company secretary. Where a newly
appointed director has no or limited board experience, the induction program is structured to meet the
individual director’s specific needs.

In terms of Telkom’s articles of association, board decisions on certain specified matters require

the affirmative vote of at least two of the class A shareholder directors, appointed by the Government.

The board encourages attendance at annual general meetings by the directors and members of

management and a quorum of 75% of the 11 members is required for board meetings.

A number of standing committees have been established to assist the board and the directors in

the effective discharge of their responsibilities. Where deemed necessary, special committees are
established by the board to consider specific issues and make recommendations to the board.
Board and special committees are free to take independent professional advice at the cost of Telkom
in carrying out their delegated duties.

Directors’ attendance of board meetings

Six scheduled board meetings and ten special meetings were held during the 2006 financial year.

The following table presents the possible meetings based on the appointment and resignation of
members.

Scheduled

Special

Number of

Number of

Meetings

(1)

Attendance

Meetings

(1)

Attendance

Non-executive
NE Mtshotshisa (Chairman)

6

6

10

10

TCP Chikane (resigned June 19, 2006)

6

2

10

5

TD Mahloele

6

4

10

7

M Mostert

6

6

10

7

A Ngwezi (resigned June 29, 2005)

2

2

2

0

DD Tabata

6

5

10

8

YR Tenza

6

5

10

10

B du Plessis

6

6

10

10

TF Mosololi

6

6

10

6

PL Zim

6

2

10

5

PSC Luthuli (appointed July 29, 2005)

4

4

6

4

Executive
SE Nxasana (resigned August 31, 2005)

2

2

0

0

LRR Molotsane (appointed September 1, 2005)

4

4

5

5

(1) The table represents the possible meetings based on the appointment and resignation dates of members.

Executive committee

The chief executive officer has the power of authority to, among other things:

• implement approved business plans, annual budgets and all other matters and issues relating to

the achievement of Telkom’s obligations under its licenses, including without limitations network

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expansion, equipment procurement, tariff setting and packaging, customer service and
marketing; and

• prepare, review and recommend to the board the annual budgets and any amendments thereto.

The chief executive officer shall, in carrying out the powers set out above, be assisted by an

executive committee. The chief executive officer is the chairman of the executive committee.
The executive committee consists of seven members.

Decisions at meetings of the executive committee are taken by a majority vote of the members.

In the event of an equality of votes, the chairman of the committee has a casting vote.

The following were the members of the executive committee as of June 30, 2006:

• LRR Molotsane (Chairman);

• KR Patel;

• RJ September;

• BMC Ngcobo;

• TG Msimango;

• W Beelders; and

• MJ Nzeku.

Members’ attendance of executive committee meetings

Eight scheduled executive committee meetings and seven special meetings were held during the

2006 financial year. The following table presents the possible meetings based on appointment and
resignation dates of members.

Scheduled

Special

Number of

Number of

Meetings

(1)

Attendance

Meetings

(1)

Attendance

Existing members
LRR Molotsane (Chairman) (appointed
September 1, 2005)

3

3

6

5

KR Patel

8

8

7

7

RJ September

8

8

7

7

BMC Ngcobo

8

8

7

6

TG Msimango (appointed September 6, 2005)

3

3

6

6

W Beelders (appointed September 19, 2005)

3

3

6

6

MJ Nzeku (appointed March 1, 2006)

1

1

3

3

Resignations
SE Nxasana (resigned August 31, 2005)

5

5

1

1

GNV Magashula (resigned October 28, 2005)

5

5

1

1

NT Moholi (resigned November 30, 2005)

5

5

1

1

BB Williams (resigned November 30, 2005)

5

5

1

1

(1)

The table represents the possible meetings based on the appointment and resignation dates of members.

185

Audit and risk management committee

The audit and risk management committee comprises four non-executive directors.

A non-executive director who is not the chairman of the board chairs the committee. No member of
the audit and risk management committee may, other than in his or her capacity as a member of that
committee, the board or any other committee of the board, accept any consulting, advisory or other
compensatory fee from Telkom or any subsidiary of Telkom or be an affiliated person of Telkom or any
subsidiary or vendor of Telkom. See Directors’ Interest in note 38 of the Consolidated Financial
Statements.

The responsibilities of the audit and risk management committee include, among other things, the

following:

• appoint or, insofar as that is not permitted by the South African Companies Act, 61 of 1973,

recommend for appointment, Telkom’s auditors, determine their compensation and oversee
their work;

• resolve disagreements between Telkom’s management and its auditors in regard to financial

reporting;

• establish procedures for the treatment of complaints regarding accounting or auditing matters

and for the confidential anonymous submission by employees of concerns regarding
questionable accounting or auditing matters;

• engage independent counsel and other advisors, as determined necessary to carry out its

duties;

• make determinations with respect to payment of remuneration and other compensation to

Telkom’s auditors for the purpose of rendering or issuing an audit report and to any advisors
employed by the committee;

• conduct internal audits;

• review the interim and final financial statements;

• review and recommend changes to Telkom’s statutory audit;

• monitor Telkom’s internal accounting and auditing systems;

• conduct a corporate governance audit; and

• review and monitor Telkom’s risk management performance and provide a high-level risk

assessment for the board on an ongoing basis.

Telkom’s audit and risk management committee adopted a pre-approval policy for services by

external company auditors, which does not allow for certain services, including bookkeeping, financial
system design, valuation services, actuarial services, internal audit outsourcing services and legal
services not related to the audit. The committee also pre-approves proposed audit related services,
tax services and other permissible services. The pre-approval policy requires all auditing and non
audit services provided by Telkom’s external auditors to be pre-approved by the audit and risk
management committee. During the 2005 financial year, the committee pre-approved the
engagement of the independent auditors to provide audit services for a three-year term. The chairman
of the audit and risk management committee is the primary member of the audit and risk management
committee that has the authority to pre-approve audit and non audit services outside of the meetings
and, in his absence, any member of the audit and risk management committee.

Telkom has in place a policy to address the potential hiring of audit team members to avoid issues

of independence.

186

The audit and risk management committee has a process in place where they obtain confirmation

from the external auditors that none of the directors or officers have behaved in a manner to
fraudulently influence, coerce, manipulate or mislead the external auditors intentionally or through
negligent actions.

The following are the members of the audit and risk management committee as of June 30, 2006:

• YR Tenza (Chairman);

• TF Mosololi;

• M Mostert; and

• PSC Luthuli.

Telkom’s board of directors has determined that the chairman of its audit committee, Mr. Yekani

Tenza, is the audit and risk management committee financial expert within the meaning of Item 16A. (b)
and (c) of the requirements of Form 20-F of the SEC. The SEC has determined that the audit
committee financial expert designation does not impose on the person with that designation, any
duties, obligations or liability that are greater than the duties, obligations or liabilities imposed on such
person as a member of the audit committee of the board of directors in the absence of such
designation. Mr. Tenza is a qualified certified public accountant.

The external auditors are invited when appropriate to attend the audit and risk management

committee meetings.

Members’ attendance of audit and risk management committee meetings

Four scheduled audit and risk management committee meetings and nine special meetings were

held during the 2006 financial year. The following table presents the possible meetings based on
appointment and resignation dates of members.

Scheduled

Special

Number of

Number of

Meetings

(1)

Attendance

Meetings

(1)

Attendance

Existing members
YR Tenza (Chairman)

4

4

9

9

M Mostert

4

3

9

9

TF Mosololi

4

3

9

4

PSC Luthuli (appointed July 29, 2005)

3

3

7

6

Resignations
A Ngwezi (resigned June 29, 2005)

1

1

1

0

(1)

The table represents the possible meetings based on the appointment and resignation dates of members.

Human resources review and remuneration committee

The human resources review and remuneration committee consists of a majority of non-executive

directors and is chaired by the chairman of the board. The human resources review and remuneration
committee reviews the terms upon which Telkom’s executive directors and senior management are
employed and compensated and upon which Telkom’s non-executive directors and executive directors
are compensated and makes recommendations to the board with respect to such matters. Actions of
the human resources review and remuneration committee must be approved by a majority vote of its
members. In the event of a tie, the chairperson of the human resources review and remuneration
committee shall have a casting vote.

187

The following are members of the human resources review and remuneration committee as of

June 30, 2006:

• NE Mtshotshisa (Chairman);

• LRR Molotsane;

• DD Tabata;

• TD Mahloele;

• B du Plessis;

• KST Matthews (appointed June 19, 2006); and

• CK Mokoena (non-director).

Members’ attendance of human resources review and remuneration committee meetings

Four scheduled human resources review and remuneration committee meetings and three special

meetings were held during the 2006 financial year. The following table presents the possible meetings
based on appointment and resignation dates of members.

Scheduled

Special

Number of

Number of

Meetings

(1)

Attendance

Meetings

(1)

Attendance

Existing members
NE Mtshotshisa (Chairman)

4

4

3

3

LRR Molotsane (appointed September 1, 2005)

3

3

0

0

TD Mahloele

4

3

3

3

B du Plessis

4

4

3

3

DD Tabata

4

4

3

3

Ex-officio non-voting member
CK Mokoena (Group Executive: Human Resources) .

2

2

0

0

Resignations
SE Nxasana (resigned August 31, 2005)

1

1

0

0

GNV Magashula
(resigned October 28, 2005)

2

2

0

0

TCP Chikane (resigned June 19, 2006)

4

2

3

3

(1)

The table represents the possible meetings based on the appointment and resignation dates of members.

Directors’ remuneration

Telkom believes that the levels and make-up of the remuneration packages offered to the

directors of Telkom, especially the chief executive officer, are sufficient to attract and retain the
directors needed to run Telkom’s business successfully. In order to avoid paying more than is
necessary and to ensure that Telkom offers competitive packages, Telkom constantly benchmarks
itself against its peer group.

In determining specific remuneration packages for the chief executive officer and non executive

directors, the human resources review and remuneration committee consults with the chairperson of
the board, and is sensitive to the remuneration and employment conditions elsewhere in the Telkom
Group. In doing so, performance related elements of the remuneration constitute a large proportion of
the total remuneration package of the chief executive officer and are specifically designed to align his
interests with those of shareholders and to give such executive directors incentives to perform at the
highest level.

Should the service of any of Telkom’s executive directors be terminated early, the human

resources review and remuneration committee will tailor its approach in respect of compensation
commitments to the circumstances of the case with the broad aim of avoiding rewarding poor
performance, while dealing fairly with cases where departure is not due to poor performance.

188

No director is involved in deciding his or her own remuneration. In addition, Telkom has adopted a

formal and transparent procedure for developing a policy on executive directors’ remuneration.

Telkom’s articles of association provide that the remuneration of the directors for their service as

directors shall be determined by the directors, after taking into account the recommendations of the
human resources review and remuneration committee. Non executive directors are not, as part of
their remuneration, allocated shares in Telkom but may purchase shares in Telkom.

Directors’ remuneration and interests are detailed in note 38 to the Telkom Group’s consolidated

annual financial statements included elsewhere herein.

Company secretary and professional advice

The directors have unrestricted access to the services and advice of the company secretary.

Directors are entitled, after consultation with the chairman of the board, to seek independent
professional advice about the affairs of Telkom at Telkom’s expense.

The termination of the services of the company secretary is a matter to be decided by the board.

Directors’ and officers’ dealings

The board has adopted an insider trading policy in terms of which the directors, officers and

employees of Telkom are prohibited from dealing in Telkom’s securities when in possession of price
sensitive information that has not yet been made public. In addition, Telkom imposes a “closed period”
from the end of the reporting periods (i.e., year-end and half year-end) until the publication of the
results during which period the directors, officers and employees of Telkom are prohibited from dealing
in Telkom’s securities.

Outside the closed periods directors and officers of Telkom are required to obtain prior approval

from the insider trading compliance officer before dealing in Telkom’s securities. Where the chief
executive officer needs to deal in Telkom’s shares outside closed periods, the chairman must give the
approval. Where the chairman needs to deal in Telkom’s shares outside the closed periods, prior
approval must be obtained from the insider trading compliance officer. Directors’ dealings in Telkom’s
securities are published on SENS within the regulated timeframes. The SENS announcements that
were published during the year are made available on the website www.telkom.co.za/ir. Our website
and the information contained therein or connected thereto shall not be deemed to be incorporated
into or a part of this annual report.

Risk management

The Telkom Group has adopted a continuous, systematic enterprise-wide risk management

process for assessing and monitoring its potential business and financial risks. As part of this process
for the 2006 financial year, all the service organizations have reviewed all risks with an impact of
R100 million and greater for Telkom at the residual value, which is the residual risk after mitigating
controls have been considered. The components of the risk management system are designed to
enable us to anticipate risks and to manage them carefully in the pursuit of our business goals. The
principles, guidelines, processes and responsibilities of our internal control system have been defined
and established to help ensure prompt and accurate accounting of all business transactions and to
continuously provide reliable information about the Telkom Group’s financial position for internal and
external use. The board of directors continuously monitors treasury policies, risk limits and control
procedures. The audit and risk management committee reviews the effectiveness of the risk
management processes and reports regularly to the board.

The Telkom Group’s risk exposure and management thereof is discussed in note 37 of the

consolidated annual financial statements.

189

Financial statements

The board of directors is responsible for preparing the Telkom Group’s financial statements.

In this regard, it is the board’s responsibility to present a balanced and understandable assessment
of both interim and annual financial information as well as other price sensitive public reports,
including any reports to ICASA and other information that Telkom is statutorily obliged to disclose.

The directors report on the business as a going concern with supporting assumptions and

qualifications as and when necessary at the time of the Telkom Group’s interim and annual financial
statements, and have established a formal and transparent arrangement for considering the financial
reporting and internal control principles.

Code of ethics

Telkom has adopted a business code of ethics that seeks to instill in its employees the spirit of

fairness, respect and ethical standards in dealing with Telkom’s customers, competitors, suppliers,
investors, shareholders and communities to ensure that Telkom’s integrity is not compromised.

Specific documentation to raise and maintain ethical awareness and to guide all levels of

employees include the Telkom Insider Trading Policy, Telkom Acceptance of Directorships, Work
Outside the Scope of Telkom Duties, as well as other Telkom policies, procedures and applicable laws
as amended from time to time.

In business dealings on behalf of Telkom, employees are expected to avoid activities that might

give rise to conflicts of interest. In view of this, certain responsibilities for management and all
employees are clearly communications. Employees are expected to act in the exclusive interest of
Telkom. Procedures have been put in place to deal with conflicts of interest where these arise in the
course of employees’ day-to-day activities, such as disciplinary action, suspension or even termination
of employment and civil or criminal proceedings. Telkom has established a confidential hotline service
to encourage and enable whistle blowing. As part of the business code of ethics, there is a policy to
protect whistleblowers from discrimination and harassment. Telkom has also introduced fraud and
management systems.

The business code of ethics is reviewed regularly to ensure that it keeps up with developments

both inside and outside Telkom. The business code of ethics is published on Telkom’s website at
www.telkom.co.za/ir.

Information contained on Telkom’s website or connected thereto shall not be deemed to be

incorporated into or a part of this annual report.

Employment equity

Telkom has in place an employment equity policy, which seeks to promote equity in the workplace

by promoting equal opportunity and fair treatment through the elimination of unfair discrimination
against people from previously disadvantaged groups in the workplace. Unfair discrimination in the
workplace on the basis of gender, race, culture, religion, etc., is prohibited.

The main objectives of this policy are to:

• create an environment in which the best-qualified person is employed regardless of gender,

religion, culture and race;

• create within Telkom a balanced profile of employees that reflects the composition of South

African society at large;

• correct racial and social imbalances of the past; and

• provide for Telkom’s current and future requirements for skilled staff.

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Relationship with shareholders

Telkom is and remains ready, when practical and legal, to enter into dialogue with shareholders

and make such information publicly available to all shareholders. Telkom will make every effort to
keep its shareholders intelligently informed. Telkom has established an investor relations function
and an investor relations portal (www.telkom.co.za/ir) for communication with investors. Information
contained on Telkom’s investor portal is not a part of this annual report.

191

EMPLOYEES

Fixed-line Employees

The following table sets forth the number of our full time employees in our fixed-line segment.

As of March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

Telkom

32,358

28,972

25,575

(10.5)

(11.7)

Network and technology

23,679

21,528

19,637

(9.1)

(8.8)

Marketing and sales

6,282

5,210

4,099

(17.1)

(21.3)

Support and other

2,397

2,234

1,839

(6.8)

(17.7)

Subsidiaries

576

572

581

(0.7)

1.6

Total

32,934

29,544

26,156

(10.3)

(11.5)

In addition to our full time employees, Telkom had 812 temporary employees on March 31, 2006.

Our employees are represented by the Communication Workers Union, or CWU, and the Alliance of
Telkom Unions, or ATU. comprising the South African Communications Union, or SACU, and the
MWU-Solidarity Union. Some of our employees also belong to other unions that are not recognized
by Telkom for collective bargaining purposes, including the Postal Union, the Society of Telkom
Engineers, the South African Steel and Allied Workers Union and the United Association of South
Africa. As of March 31, 2006, approximately 74% of our total Telkom employees were union members.

Telkom is a party to a collective agreement on substantive matters covering the terms and

conditions of employment of its fixed-line unionized employees and other non-management
employees in Telkom’s bargaining unit, excluding our Telkom Directory Services and Swiftnet
subsidiaries, with ATU and CWU for the period from April 1, 2006 to March 31, 2009. In addition,
Telkom signed a new collective recognition agreement with ATU and CWU in mid-2004, designed to
enhance the relationship between shop stewards and management. Trade unions have resisted
workforce reductions and publicly opposed our privatization and have instituted and in the future could
institute work stoppages to oppose changes in our shareholding structure or gain leverage in
negotiating collective bargaining agreements. Approximately 23% of Telkom’s employees participated
in a work stoppage in March 2006 and approximately 31% of Telkom’s employees participated in an
additional work stoppage in April 2006 with respect to compensation issues, during which period
Telkom received increased reports of sabotage, vandalism and other incidents.

A number of South African trade unions, including the trade unions of our employees, have

close links to various political parties. In the past, trade unions have had a significant influence in
South Africa as vehicles for social and political reform and in the collective bargaining process.
Since 1995, South Africa has enacted various labor laws that enhance the rights of employees and
have resulted in increased compliance costs.

These laws:

• confirm the right of employees to belong to trade unions;

• guarantee employees the right to strike, the right to picket and the right to participate in

secondary strikes in prescribed circumstances;

• provide for mandatory compensation in the event of termination of employment due to

redundancy;

• limit the maximum ordinary hours of work overtime;

• increase the rate of pay for overtime;

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• require large employers, such as us, to implement employment equity policies to benefit

previously disadvantaged groups and impose significant monetary penalties for non compliance;
and

• provide for the financing of training programs by means of a levy grant system and a national

skills fund.

We believe that investment in employee training and development is essential to implementing

corporate cultural change and improving customer satisfaction. In order to improve the skill levels of
our employees, we invested R400.1 million in employee training and development in the year ended
March 31, 2006.

Leadership development continues to remain our primary priority, with specific focus on previously

disadvantaged groups. We have launched a number of initiatives designed to train our employees and
encourage employee retention.

Employee-related expenses are a significant component of our total fixed-line operating expenses.

The number of Telkom employees declined by approximately 31,236 positions from March 31, 1997
through March 31, 2006. At March 31, 2006, we had 25,575 Telkom employees. In October 2002,
Telkom and its recognized trade unions agreed to embark on a process of implementing alternative
strategies and approaches to avoid and minimize job losses and to create new career opportunities
for Telkom employees. In attempting to actively avoid involuntary separations as part of Telkom’s
workforce reduction program, Telkom concluded collective agreements with the ATU and CWU on
February 3, 2005 and February 11, 2005, respectively, that position a revised approach focusing on
utilizing a combination of voluntary separations and a reduction in other staff-related expenditure.
During the 2007 financial year, Telkom entered into a three-year long-term agreement on wages and
benefits with ATU and CWU until March 31, 2009. Telkom has placed a moratorium on employee
reductions until March 31, 2007, subject to certain conditions, including re-training and re-skilling,
“follow-the-job” initiatives, flexibility and mobility of employees and voluntary separation packages at
the discretion and initiative of Telkom.

Mobile Employees

The following table sets forth the number of Vodacom’s employees as of the dates indicated.

As of March 31,

2005/2004

2006/2005

2004

2005

2006

% change

% change

South Africa

3,848

3,919

4,305

1.8

9.8

Other African

761

1,074

1,154

41.1

7.4

Total

(1)

4,609

4,993

5,459

8.3

9.3

(1)

Vodacom had a total of 469, 183 and 280 temporary employees as of March 31, 2006, 2005 and 2004, respectively.

Includes 100% of Vodacom’s employees in the Democratic Republic of the Congo. Headcount excludes outsourced
employees. Employees seconded to other African countries are included in the number of other African countries and
excluded from Vodacom South Africa’s number of employees.

Vodacom is an equal opportunity employer committed to empowerment and has developed an

employment equity policy that is available to all employees. Vodacom’s South African employees’
participation in unions was approximately 10.2% as of March 31, 2006, approximately 13.3% as of
March 31, 2005 and approximately 7.9% as of March 31,2004. Vodacom believes that the relationship
between its management and its employees and labor unions is good.

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SHARE OWNERSHIP

As of March 31, 2006, none of Telkom’s directors had any beneficial or non-beneficial interest in

any of Telkom’s shares except as stated below:

Beneficial

Non beneficial

% of Telkom

Outstanding

Directors’ shareholding

Direct

Indirect

Direct

Indirect

Total

Shares

2006
Non-executive
NE Mtshotshisa

–

–

–

88

88

*

TF Mosololi

455

–

–

–

455

*

Total

455

–

–

88

543

*

2005
Executive
SE Nxasana (resigned
August 31, 2005)

367

802

–

267

1,436

*

Non-executive
NE Mtshotshisa

–

–

–

88

88

*

TF Mosololi

455

–

–

–

455

*

Total

822

802

–

355

1,979

*

*

Less than 1%.

As of March 31, 2006, none of Telkom’s directors or senior management individually held more

than 1% of Telkom’s outstanding ordinary shares.

As of March 31, 2006, Telkom’s directors and senior management (17 persons) collectively

beneficially held 3,494 ordinary shares. In addition, as of March 31, 2006, Telkom’s directors and
senior management (17 persons) collectively held 153 share options issued through the Diabo share
trust, which were transferred to such directors and senior management subsequent to March 31,
2006. The foregoing information does not include ordinary shares held by the Government or the
Public Investment Corporation.

In June 2004, Telkom allocated 17,341 ordinary shares to Sizwe Nxasana, 5,534 ordinary shares

to Kaushik Patel, 6,638 ordinary shares to Nombulelo Moholi, 6,549 ordinary shares to Reuben
September, 4,251 ordinary shares to Mandla Ngcobo, 4,379 ordinary shares to Wallace Beelders,
3,755 ordinary shares to Thami Msimango and 4,913 ordinary shares to Motlatsi Nzeku under its
conditional share plan. In June 2005, Telkom allocated a further 12,328 shares to Sizwe Nxasana
4,733 ordinary shares to Kaushik Patel, 5,450 ordinary shares to Reuben September, 3,489 ordinary
shares to Mandla Ngcobo, 3,489 ordinary shares to Wallace Beelders, 3,489 ordinary shares to
Thami Msimango and 3,667 ordinary shares to Motlatsi Nzeku under its conditional share plan.
These shares do not vest until three years from the date of grant subject to company performance.

The Telkom board approved the acceleration of the vesting of 29,669 shares that had

been granted to Mr. Sizwe Nxasana, Telkom’s former chief executive officer, pursuant to a
settlement agreement between Telkom and Mr. Nxasana, with the result that the shares vested on
August 31, 2005. On September 15, 2005, Mr. Nxasana exercised his right to the shares and the
shares were transferred from the treasury share reserve to Mr. Nxasana.

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Item 7.

Major Shareholders and Related Party Transactions

MAJOR SHAREHOLDERS

Overview

Telkom and its predecessors have been responsible for the exclusive provision of public

switched telecommunication services in the Republic of South Africa from 1910 through May 2002.
Prior to 1991, Telkom’s business was conducted as a division of the Department of Posts and
Telecommunications of the Government of the Republic of South Africa. On September 30, 1991, the
Government of the Republic of South Africa embarked upon a commercialization process through
which the Department of Posts and Telecommunications transferred its telecommunications enterprise
to Telkom. Telkom remained a wholly state owned entity until May 14, 1997, when the Government of
the Republic of South Africa sold a 30% equity stake in Telkom to Thintana Communications, which
was 60% beneficially owned by SBC Communications and 40% beneficially owned by Telekom
Malaysia. In March 2001, the Government sold a 3% equity stake in Telkom from its holdings to
Ucingo Investments, a consortium of black empowerment investors. On March 7, 2003, the
Government sold 154,199,467 of its ordinary shares in a global initial public offering, including
14,941,513 ordinary shares through the exercise of an over-allotment option. Prior to the global
offering, the Government owned 67% of Telkom’s issued and outstanding ordinary shares. Due to
funding constraints, Ucingo disposed of its entire shareholding on September 17, 2003. As part
of the global offering, on March 4, 2003, the Government granted to persons employed by Telkom on
March 4, 2003 and eligible former employees of Telkom, options to purchase 11,140,636 of its
ordinary shares, through the Diabo Share Trust, which are exercisable in four equal tranches over a
period of three years commencing six months after March 4, 2003, which are held by the Government
until exercised. On March 4, 2005, the second anniversary of Telkom’s listing, 785,160 bonus shares
were allotted by the South African Government to qualifying shareholders under the Khulisa offer.
Thintana Communications sold a 14.9% interest in Telkom to South African and certain international
institutional investors in June 2004. In November 2004, Thintana Communications announced that it
sold its remaining 15.1% interest in Telkom, including its class B ordinary share, to the Public
Investment Corporation, an investment management company wholly owned by the South African
Government.

The following sets forth entities or persons known to Telkom to be the beneficial holders of 5% or

more of Telkom’s issued and outstanding ordinary shares as of June 30, 2006. The following
information is based on public filings and disclosures.

Number of

Percentage of class

Name of Shareholder

Ordinary Shares

Issued

Outstanding

Government of the Republic of South Africa

207,055,967

(1)

38.0%

39.8%

Public Investment Corporation

87,660,121

(2)

16.1%

16.9%

Elephant Consortium

37,506,809

6.9%

7.2%

(1)

Includes one Class A ordinary share held in the Republic of South Africa by the Government, which represents 100% of

the class. Includes 8,448 ordinary shares held in Diabo Trust.

(2)

Includes one Class B ordinary share held by the Public Investment Corporation, which represents 100% of the class.

Includes 7.5% of Telkom’s issued and 7.9% of Telkom’s outstanding shares acquired in the market.

As of March 31, 2006, ADRs evidencing approximately 1,559,207 ADSs were held of record by

approximately 2 record holders. The 6,236,828 ordinary shares represented by those ADRs
(approximately 1.2% of Telkom’s issued and outstanding ordinary shares) were registered in the name
of Standard Bank of South Africa. As of June 30, 2006, ADRs evidencing approximately 1,594,405
ADSs were held of record by approximately 2 record holders. The 6,377,630 ordinary shares
represented by those ADRs (approximately 1.2% of Telkom’s issued and outstanding ordinary shares)

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were registered in the name of Standard Bank of South Africa. Some of these ADRs were held of
record by persons outside the United States. In addition, as of March 31, 2006, we estimate that
approximately 74 million publicly traded ordinary shares were held of record outside of South Africa.
Since certain of Telkom’s ADRs and ordinary shares are held by brokers or other nominees, the
number of ADRs and ordinary shares held of record and the number of record holders outside of
South Africa may not be representative of the location of where the beneficial holders are resident.

Telkom’s special purpose entity established to fund post retirement obligations indirectly held

R45 million in nominal value of Telkom’s 10.5% unsecured local bond due October 31, 2006 (TL06)
and approximately 312,559 of Telkom’s ordinary shares as of March 31, 2006.

As authorized by its shareholders at annual general meetings held on January 27, 2004, October

14, 2004 and October 21, 2005, Telkom is authorized to purchase up to 20% of its issued share
capital. This authority is valid until Telkom’s next Annual General Meeting, or for 15 months from the
date of the resolution, whichever period is shorter.

As part of Telkom’s commitment to the optimal use of capital, the Telkom board approved

a R2 billion share buyback program on June 2, 2006. In the year ended March 31, 2006, Telkom
repurchased 12,086,920 of its ordinary shares at a volume weighted average price of R124.31 per
share, including costs. These ordinary shares have been cancelled from the issued share capital by
the Registrar of Companies.

Between August 3, 2004 and September 15, 2004, Rossal a wholly owned subsidiary of Telkom,

repurchased 9,531,454 shares at a volume weighted average price of R78.49 per share,
including costs, which are being held in treasury for purposes of the Telkom conditional share
plan. On June 4, 2004, Telkom purchased Acajou for share repurchase activities other than
repurchases for the Telkom conditional share plan. Between June 7, 2004 and September 30, 2004,
Acajou purchased 10,849,058 shares at a volume weighted average price of R76.12 per share,
including costs, which are also being held in treasury. In the year ended March 31, 2004, Rossal,
repurchased 3,185,736 shares at a volume weighted average price of R74.58 per share, including
costs, which are being held in treasury for purposes of the Telkom conditional share plan.

In terms of the South African Companies Act, 61 of 1973, a subsidiary company may acquire up

to 10% of the shares in its holding company and if the holding company acquires its own shares
directly, such shares must be cancelled.

Telkom plans on continuing its buy back strategy based on certain criteria.

Except as stated under Item 6. “Directors, Senior Management and Employees–Share

Ownership,” none of Telkom’s directors or senior management is the beneficial owner of any of
Telkom’s ordinary share capital. Except as disclosed above, Telkom is not directly or indirectly owned
or controlled by any other corporation, foreign government or any other natural or legal person
severally or jointly and Telkom is not aware of any arrangements, the operation of which may at a
subsequent date result in a change of control of Telkom. The Government, as a significant
shareholder holding the class A ordinary share, has special voting rights that are more fully described
in Item 6. “Directors, Senior Management and Employees” below.

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RELATED PARTY TRANSACTIONS

Registration Rights Agreement

Telkom has entered into a registration rights agreement with the Government and Thintana

Communications. Pursuant to the agreement, the Government has the right to cause Telkom to either
effect a JSE public offering in South Africa, or register with the Securities and Exchange Commission
all or part of its ordinary shares, or both, at any time starting after the Minister’s 545 day lock-up
period after the expiration of or release from Thintana Communications’ 180-day lockup period. The
Government can demand any number of successive registrations, but no more than one in any
calendar year, provided that Thintana Communications was entitled to two such registrations prior to
the Government becoming entitled to demand any registrations. In addition, the Government has the
right to have its ordinary shares registered or sold in a listed public offering any time that Telkom or
any other person seeks registration of, or a listed public offering for, Telkom’s issued and outstanding
ordinary shares.

Pursuant to the registration rights agreement, in the event that the Government exercises its right

to include shares held by it in a JSE public offering or US registration of Telkom shares that is sought
by Telkom or by any other person, Telkom would be required to bear and pay all expenses incurred in
connection with such offering or registration, including all registration, listing and filing and qualification
fees, as well as underwriting discount and commissions. However, in the event that the Government
exercises its right to demand Telkom to effect a JSE public offering or US registration of ordinary
shares held by it, Telkom would be required to bear and pay all expenses incurred in connection with
registration, listing and filing or qualifications, however, certain fees relating to such registration or
listing shall be borne by the Government. In that case, underwriting discounts and commissions will
be borne by each relevant party based on the number of shares issued or sold by that party. Telkom is
required to indemnify certain parties, including the Government and the underwriters and their
respective directors, officers, employees and agents against certain losses in connection with such
public offering or registration.

Relationship with the Government of the Republic of South Africa

The Government of the Republic of South Africa is Telkom’s largest shareholder and is

responsible for the telecommunications industry policy in the Republic of South Africa. The Ministry of
Communications has the most direct role in our business. However, we have interactions with several
other Ministries, including the Ministry of Finance for matters relating to taxation, the Ministry of Labor
for matters relating to employment and the Ministry of Trade and Industry for matters relating to the
communications industry.

The Government of the Republic of South Africa as regulator

Ministry of Communications

The Ministry of Communications has a number of roles that, directly or indirectly, affect us:

• The Ministry of Communications represents the Government of the Republic of South Africa

as Telkom’s shareholder. The Minister has the powers and duties conferred on a shareholder of
a public limited liability company by South African law and Telkom’s articles of association.

• The Ministry is responsible for the development of telecommunications policy and for proposing

legislation to implement such policy, subject to supervision by the Cabinet of the Republic of
South Africa. The Ministry is also responsible for administering the Telecommunications Act, and
the Independent Communications Authority of South Africa Act, 13 of 2000.

• The Ministry has the following primary powers under the Telecommunications Act:

197

• it may issue policy directives to ICASA, binding it to perform its functions under the

Telecommunications Act, in accordance with such policy directives;

• any regulation made by ICASA needs to be approved and published by the Ministry, which may

reject such approval, before it becomes valid and enforceable; and

• the Ministry has the sole power to approve the grant of any license for a public switched

telecommunications service, a national long distance telecommunications service, an
international telecommunications service, a service to be provided by small businesses in
underserviced areas with a teledensity of less than 5% or a mobile telecommunications service.

ICASA

ICASA is the regulatory body for the telecommunications and broadcasting industries. ICASA
derives its powers from the Independent Communications Authority of South Africa Act, 13 of
2000, and, with respect to telecommunications, from the Telecommunications Act, 103 of 1996.
ICASA serves as the primary regulatory and licensing authority for the South African
telecommunications and broadcasting industries, except for specific licenses that can only be
granted by the Minister of Communications.

ICASA’s primary powers under the Telecommunications Act are to:

• conduct public inquiries in any matter relevant to the achievement of the objectives of the

Telecommunications Act or to the performance of its functions in terms of the
Telecommunications Act;

• plan, control and manage the radio frequency spectrum and license its usage;

• make recommendations to the Minister of Communications on the granting of

telecommunication licenses for which the Minister of Communications has issued an
invitation to apply and, where such licenses are granted by the Minister, issue such licenses
and, in all other cases grant and issue telecommunication licenses;

• make regulations as provided for in the Telecommunications Act, subject to ratification by

the Minister of Communications;

• approve, amend or reject agreements entered into by telecommunications licensees relating

to interconnection or the leasing of telecommunications facilities, in accordance with the
relevant regulations; and

• investigate and adjudicate alleged contraventions of the Telecommunications Act,

regulations or license conditions by licensees and, where appropriate, impose sanctions
provided in the Telecommunications Act.

A bill amending the ICASA Act, No. 13 of 2000, was passed by the Parliament of South Africa

and signed by the President and came into effect on July 19, 2006. The amendment to the ICASA
Act redefines and expands the powers of ICASA to control, in conjunction with the Electronic
Communications Act, the communications market. The main provisions of the ICASA Act
amendments are the removal of the power of the Minister to approve regulations made by ICASA,
increased power of ICASA to conduct enquiries and to enforce its rulings and the establishment of
a Complaints and Compliance Committee to assist ICASA in hearings and making findings on
complaints and allegations of non-compliance with the Electronic Communications Act.

198

Public Finance Management Act and Public Audit Act

Telkom is required to report certain aspects of its business and operations, such as its

corporate and business plans, to the Minister of Communications in her capacity as executive
authority of Telkom pursuant to the PFMA and PAA. Telkom has obtained a temporary exemption from
certain provisions of the PFMA until November 2007 and has been informed by the South African
Auditor-General that it will not be required to comply with the PAA until such date. Telkom submitted
an application to the National Treasury to motivate amending the PFMA so as to exclude companies
listed on the JSE, such as Telkom, from the provisions of the Act while such companies remain so
listed. See Item 3. “Key Information–Risk Factors–Risks Related to Regulatory and Legal Matters–If
Telkom is required to comply with the provisions of the South African Public Finance Management Act,
1 of 1999, or PFMA, and the provisions of the South Africa Public Audit Act of 2004, or PAA, Telkom
could incur increased expenses and its net profit could decline and compliance with the PFMA and
PAA could result in the delisting of Telkom’s ordinary shares and ADSs from the JSE and the New
York Stock Exchange.”

The Government of the Republic of South Africa as a customer

The departments and agencies of the Government of the Republic of South Africa in the

aggregate comprise one of our largest customers. Generally, we deal with the various departments
and agencies of the Government as separate customers, and the provision of services to any one
department or agency does not constitute a material part of our revenues. Legislation has been
enacted to centralize all procurement by the Government through one agency. We estimate that in the
year ended March 31, 2006, Government customers, excluding certain Government owned parastatal
companies, accounted for at least 9% of our total fixed-line revenue, excluding directory services and
other revenue. If the Government transfers some or all of its business to other operators, our
operating revenue and net profit could decline.

The Government Of The Republic Of South Africa Guarantees

Pursuant to Section 35 of the South African Exchequer Act, 66 of 1975, the Government

of the Republic of South Africa guaranteed Telkom’s borrowings incurred prior to 1991.
As of March 31, 2006, R4.3 billion of our total indebtedness of R11 billion was guaranteed
by the Government of the Republic of South Africa.

Relationship with Vodacom and Related Transactions

Vodacom Joint Venture Agreement

We acquired a 50% equity interest in Vodacom in 1993. Our rights as a shareholder of Vodacom

are governed by a joint venture agreement, which was entered into on March 29, 1995, among
Telkom, Vodafone, VenFin, Vodacom and other related parties. On April 20, 2006, Vodafone acquired
100% of the shares of VenFin Limited, who ultimately owned 15% in Vodacom, thus increasing its
beneficial interest in Vodacom to 50%.

Governance

The Vodacom joint venture agreement sets the number of directors of the board of directors of

Vodacom at a minimum of twelve. Telkom has the right to appoint four directors, Vodafone has the
right to appoint three directors, VenFin has the right to appoint one director and the remaining four
directors are appointed by shareholders holding 10% or more of the issued shares of Vodacom who
are a party to the joint venture agreement. Currently, the only shareholders holding beneficially 10% or
more of the issued shares in Vodacom are Telkom and Vodafone and the four board members
appointed by Telkom and Vodafone are senior management of Vodacom.

199

Under the Vodacom joint venture agreement, the Vodacom board was required to establish a

directing committee and delegate all its power, functions and authority to act on behalf of Vodacom to
this committee. This authority cannot be revoked without the prior written consent of the shareholders
holding 10% or more of the issued shares of Vodacom. The directing committee comprises all
directors appointed to Vodacom’s board by shareholders holding 10% or more of the issued shares
of Vodacom. Currently, the directing committee consists of eight members comprising four directors
appointed by Telkom and four directors appointed by Vodafone.

The unanimous written agreement of those shareholders holding 10% or more of the issued

shares of Vodacom is required for, among other things, the following consensus matters prior to
Vodacom or any of its subsidiaries that are a party to the joint venture agreement taking any of the
following actions:

• changing the nature of or discontinuing its business;

• disposing of a material part of assets, shares or claims against its subsidiaries;

• making material acquisitions, merging with another company or entering into a change of control

transaction;

• altering or affecting its capital structure, including the issuance of any shares, the granting of

options or the issue of convertible debentures;

• proposing any special resolution;

• altering its dividend policy;

• incurring certain interest bearing debt which exceeds 50% of the consolidated shareholders’

funds;

• establishing any employee bonus or share incentive scheme;

• appointing or removing any director to or from its board of directors, otherwise than in

accordance with the joint venture agreement;

• entering into any agreement with any of its shareholders or affiliates;

• agreeing to any material alteration of its rights flowing from any license held by it or its

subsidiaries enabling such companies to do their business;

• approving or amending the business plan of Vodacom; and

• appointing or removing the chairperson of the board or chief executive officer.

If the shareholders holding 10% or more of the issued shares of Vodacom fail to reach agreement

on an above consensus matter, they are required to exercise all the powers that they have to ensure
the consensus matter is not consummated. Should any dispute arise between the shareholders
holding 10% or more of the issued shares of Vodacom regarding the failure of those shareholders to
reach consensus, the dispute is to be referred for determination to the chairpersons of those
shareholders at the request of any shareholder holding 10% or more of the issued shares of
Vodacom. If the chairpersons fail to reach agreement on the consensus matter in question, each
shareholder is entitled to enforce any rights through any competent court.

Pursuant to the Vodacom joint venture agreement, all members of the directing committee are

required to agree on certain matters and, in the event of disagreement, the issue is treated as a
consensus matter requiring the unanimous written consent of those shareholders holding 10% or
more of the issued shares of Vodacom. The following matters require unanimous approval:

• the approval or amendment of any subsidiary company business plans;

200

• expenditures that are in excess of 10% of total budgeted expenditures;

• non-budgeted capital expenditures that are in excess of 5% of the consolidated shareholders’

funds;

• the encumbrance of any assets or the issuance of guarantees where the liability secured is in

excess of the lower of 5% of the consolidated shareholders’ funds or R10 million;

• any agreement with any shareholder of Vodacom; and

• the appointment of the company secretary.

The approval of at least six directors appointed to the directing committee is required to take

action with respect to:

• the approval or adoption of the terms and conditions and any amendments to the interconnect

and transmission agreements concluded with Telkom;

• the setting or adjustment of tariffs; and

• the approval of terms and conditions of supply and associated agreements with the suppliers

of infrastructure.

Non-competition

Each party to the Vodacom joint venture agreement has agreed that neither it nor its affiliates

will form a similar joint venture relationship, or invest in any competitive business in the Republic of
South Africa. This restraint lapses with respect to each party two years after the date such party
ceases to be a shareholder of Vodacom or upon termination of the joint venture agreement.

In addition, each party to the Vodacom joint venture agreement has agreed that it will not own,

manage or otherwise become engaged in any GSM mobile telecommunications entity or analogue
system or otherwise participate in any mobile telecommunications activities in any African country,
a major portion of which is situated below the equator, unless the party proposing to engage in such
activity first offers Vodacom the opportunity to pursue such activity and Vodacom declines. Any
decision by Vodacom to become involved in a GSM or analogue system in this territory requires the
written consent of those shareholders holding 10% or more of the issued shares of Vodacom.

Right of first offer

If any Vodacom shareholder that is a party to the joint venture agreement wishes to sell any of the

shares held by it, it must offer to sell such shares and an equivalent portion of its claims on loan
accounts in Vodacom to the other party to the joint venture agreement. If none of the non-transferring
parties accepts such an offer to purchase all of the shares and claims offered on the terms in the
notice, then the selling shareholder has the right to sell the shares and an equivalent portion of its
claims to a third party at a price not lower than the price, and upon the terms, set forth in the seller’s
original offer.

Other related transactions with Vodacom

We market and sell our residential products through our customer call center, customer service

branches and Telkom Direct Shops, mobile customer service branches, kiosks, the South African Post
Office, independent distributors and vendors and through telemarketing.

Other Related Transactions

The following are additional related party transactions of which Telkom is aware:

201

Mesdames Mtshotshisa and Chikane and Messrs. Tabata, Tenza and Mostert, five of Telkom’s

board members during the 2006 financial year, were the Government’s representatives on Telkom’s
board of directors. Ms. Chikane resigned on June 19, 2006 and was replaced by Ms. Matthews as the
Government’s representative on Telkom’s board of directors. Mr. Mahloele and Ms. Ngwezi, two of
Telkom’s Board members, were the Public Investment Corporation’s representatives on Telkom’s
board of directors. Ms. Ngwezi resigned on June 29, 2005. The Public Investment Corporation is
currently only entitled to appoint one representative to Telkom’s board of directors.

See also note 40 to the Telkom Group’s consolidated financial statements for additional

information with respect to related party transactions.

202

Item 8.

Financial Information

CONSOLIDATED FINANCIAL STATEMENTS AND

OTHER FINANCIAL INFORMATION

Consolidated Financial Statements

Reference is made to Item 18 of this annual report for this information.

Legal Proceedings

On May 7, 2002, the South African Value added Network Services Providers’ Association, an

association of VANS providers, filed complaints against Telkom at the Competition Commission of the
Republic of South Africa under the South African Competition Act, 89 of 1998, alleging, among other
things, that Telkom was abusing its dominant position in contravention of the Competition Act, 89 of
1998, and that it was engaged in price discrimination. The Competition Commission found, among
other things, that several aspects of Telkom’s conduct prima facie contravened the Competition Act,
89 of 1998, and referred certain of the complaints to the Competition Tribunal for adjudication. The
complaints deal with Telkom’s alleged refusal to provide telecommunications facilities to certain VANS
providers to construct their networks, refusal to lease access facilities to VANS providers, provision of
bundled and cross subsidized competitive services with monopoly services, discriminatory pricing with
regard to leased line services and alleged refusal to peer with certain VANS providers. Telkom has
brought an application in the South African High Court challenging the Competition Tribunal’s
jurisdiction to adjudicate this matter. The Competition Commission has opposed the application.
Telkom is currently waiting for certain confidential documents contained in the Competition
Commission’s record of proceedings, after which Telkom may supplement its papers if necessary and
after which the Competition Commission must file their answering affidavit. Telkom’s attorneys are
corresponding with the Competition Commission in this regard. Telkom is currently waiting for the
Competition Commission to file its record of proceedings. The Competition Commission has now
approached the High Court on application for an order directing which of the confidential documents
can be included in the record of proceedings. These matters and the amount of Telkom’s liability are
not expected to be finalized within the next financial year. If these complaints are upheld, however,
Telkom could be required to cease these practices and fined an amount of up to 10% of Telkom’s
annual turnover, excluding the turnover of subsidiaries and joint ventures, for the financial year prior to
the complaint date, or be ordered to divest itself of the relevant business. Telkom is currently unable to
predict the amount that it may eventually be required to pay. If Telkom is required to cease these
practices, divest itself of the relevant business or pay significant fines, Telkom’s business and financial
condition could be materially adversely affected and its revenue and net profit could decline.

Telcordia instituted arbitration proceedings against Telkom in March 2001 before a single arbitrator

of the International Court of Arbitration, operating under the auspices of the International Chamber of
Commerce, which is seated in Paris, France. The seat of the arbitration is in Johannesburg, South
Africa. Telcordia is seeking to recover approximately $130 million for monies outstanding and
damages, plus costs and interest at a rate of 15.5% per year. The arbitration proceedings relate to the
cancellation of an agreement entered into between Telkom and Telcordia during June 1999 for the
development and supply of an integrated end-to-end customer assurance and activation system by
Telcordia. In September 2002, a partial award was issued by the arbitrator in favor of Telcordia.
Telkom subsequently filed an application in the South African High Court to review and set aside the
partial award. On November 27, 2003, the South African High Court set aside the partial award and
issued a cost order in favor of Telkom. On May 3, 2004, the South African High Court dismissed an
application by Telcordia for leave to appeal and ordered Telcordia to pay the legal costs of Telkom.
On November 29, 2004 the Supreme Court of Appeals granted Telcordia leave to appeal. Telcordia
has since filed a notice of appeal. The appeal is set down for hearing from October 30, 2006 to

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November 3, 2006. Telcordia also petitioned the United States District Court for the District of
Columbia to confirm the partial award, which petition was dismissed, along with a subsequent appeal.
Following the dismissal of the appeal, Telcordia filed a similar petition in the United States District
Court of New Jersey. The United States District Court of New Jersey also dismissed Telcordia’s
petition, reaffirming the decision of the United States District Court of Columbia. Telcordia has since
appealed this dismissal. Telkom is currently unable to predict when the dispute will be resolved or the
amount that it may eventually be required to pay Telcordia, if any, and has reversed all of its
provisions for estimated liabilities, including interest and legal fees. If Telcordia recovers substantial
damages from Telkom, Telkom would be required to fund such payments from cash flows or drawings
on its existing credit facilities, which could cause its indebtedness to increase and its net profit to
decline.

Vodacom entered into a five year management agreement with Vee Networks effective April 1,

2004, pursuant to which Vodacom would have managed Vee Networks’ cellular network operations in
Nigeria with the intention of acquiring an equity stake in the business. On May 31, 2004, however,
Vodacom announced that it had elected to terminate the management contract and abandon its plan
to make an equity investment in the business of Vee Networks in Nigeria. Vodacom continued to
provide technical support to Vee Networks for a period of six months, until September 30, 2004, on
which date 7 employees returned to South Africa and 22 employees were employed by Vee Networks
in Nigeria. In 2004 Econet Wireless Network had initiated various actions against Vee Networks and
Vee Networks’ shareholders. Vodacom was featured in some of these actions as a potential defendant
in the event its acquisition of Vee Networks’ shares occurred. Since Vodacom did not acquire any
shareholding in Vee Networks, no action was instituted against it by Econet Wireless Network Limited.

In December 2005, the ISPA, an association of ISPs, filed complaints against Telkom at the

Competition Commission regarding alleged anti-competitive practices on the part of Telkom.
A maximum administrative penalty of up to 10%, calculated with reference to Telkom’s annual turnover,
excluding the turnover of subsidiaries and joint ventures, for the financial year prior to the complaint
date, may be imposed or be required to cease these practices or divest itself of the relevant business,
if it is found that Telkom has committed a prohibited practice as set out in the Competition Act, 1998 (as
amended). The complaints deal with the cost of access to SAIX, the prices offered by TelkomInternet,
the alleged delay in provision of facilities to ISPs and the alleged favorable installation timelines offered
to TelkomInternet customers. The Competition Commission has formally requested Telkom to provide it
with certain records of orders placed for certain services, in an attempt to first investigate the latter
aspects of the complaint. These matters and the amount of Telkom’s liability are not expected to be
finalized within the next financial year. Telkom is currently unable to predict the amount that it may
eventually be required to pay. If Telkom is required to cease these practices, divest itself of the relevant
business or pay significant fines, Telkom’s business and financial condition could be materially
adversely affected and its revenue and net profit could decline.

As competition continues to increase, we expect that we will become involved in an increasing

number of disputes regarding the legality of services and products provided by us and third parties.
These disputes may range from court lawsuits to complaints lodged by or against us with various
regulatory bodies. For instance on April 17, 2003, ORION filed a complaint and launched interim
proceedings against Telkom with the South African competition authorities. The complaint and
proceedings relate to certain discount plans that Telkom has in place or is negotiating with some of its
business customers. The complainant alleges that Telkom is specifically targeting the complainant’s
customers, who would otherwise be using the complainants’ least cost routing technology, which
enables fixed-to-mobile calls from corporate branch exchanges to be transferred directly to mobile
networks, and that Telkom’s actions are exclusionary and based on predatory pricing. The
Competition Commission has declined to refer the complaint to the Competition Tribunal. The
complainant has however referred the complaint to the tribunal. In another high court matter, Telkom

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has reached a settlement with 13 respondents in terms of which Telkom accepted the validity of a
judgment made in October 2003 in the Pretoria High Court which found least-cost routing is legal. In
December 2003, Telkom was given leave to appeal the original ruling, an option that it has decided
not to pursue. We are not currently able to predict when these disputes may be resolved or the
amount that we may eventually be required to pay, however, we have not included provisions for any
of these claims in our financial statements. In addition, we may need to spend substantial amounts
defending or prosecuting these claims even if we are ultimately successful. If we were to lose these or
future legal and arbitration proceedings, we could be prohibited from engaging in certain business
activities and could be required to pay substantial penalties and damages, which could cause our
revenue and net profit to decline and have a material adverse impact on our business and financial
condition. We may be required to fund any penalties or damages from cash flows or drawings on our
credit facilities, which could cause our indebtedness to increase.

We are parties to various additional proceedings and lawsuits in the ordinary course of our

business, which our management does not believe will have a material adverse impact on us.

Dividend Policy

For a discussion of Telkom’s dividend policy, see Item 3. “Key Information–Dividends and

Dividend Policy.”

SIGNIFICANT CHANGES

Except as disclosed elsewhere in this annual report, there have been no significant changes in

Telkom’s business since March 31, 2006, the date of the annual financial statements included in this
annual report.

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Item 9.

The Offer and Listing

Markets

Telkom’s ordinary shares are listed on the JSE in the “Telecommunications Services” sector under

the symbol “TKG” and ISIN Code “ZAE000044897” and its ADSs are listed on the New York Stock
Exchange, Inc. under the symbol “TKG.” The ADSs are evidenced by American Depositary Receipts,
or ADRs, issued by The Bank of New York, as depositary, under the Deposit Agreement, dated as of
March 3, 2003, among Telkom, The Bank of New York, as depositary, and the registered and
beneficial owners from time to time of ADRs. The following table sets forth, for the periods indicated:

• the reported high and low market quotations as reported by the JSE; and

• the reported high and low sales prices on the NYSE Composite Tape of the ADSs:

JSE (ZAR per

NYSE (USD per

Ordinary Share)

ADS)

High

Low

High

Low

2003 Financial Year

(1)

30.75

27.80

14.78

13.65

2004 Financial Year

78.80

29.55

49.60

14.85

First Quarter

April 2003

34.75

29.10

18.25

14.68

May 2003

34.00

30.50

17.70

15.58

June 2003

38.75

31.30

20.80

15.75

Second Quarter

July 2003

45.00

38.80

24.35

21.20

August 2003

43.02

40.00

23.44

21.46

September 2003

44.07

40.30

25.34

22.15

Third Quarter

October 2003

53.50

43.30

30.90

24.90

November 2003

65.30

53.20

40.50

30.75

December 2003

70.51

62.80

43.10

37.70

Fourth Quarter

January 2004

75.01

62.50

44.90

35.00

February 2004

77.60

67.25

45.05

40.85

March 2004

78.80

68.45

49.60

41.60

2005 Financial Year

117.00

70.25

79.85

42.38

First Quarter

April 2004

87.00

75.50

54.80

43.75

May 2004

79.40

72.50

47.26

42.45

June 2004

86.50

73.00

52.75

45.25

Second Quarter

July 2004

84.00

77.75

54.25

50.90

August 2004

81.99

76.00

51.00

46.70

September 2004

80.00

72.55

48.00

44.80

Third Quarter

October 2004

87.00

73.50

56.75

46.44

November 2004

103.50

82.00

70.25

55.70

December 2004

101.00

91.20

66.90

63.80

206

JSE (ZAR per

NYSE (USD per

Ordinary Share)

ADS)

High

Low

High

Low

Fourth Quarter

January 2005

109.00

93.01

72.75

62.10

February 2005

116.31

104.20

79.50

68.10

March 2005

117.00

101.50

79.85

67.00

2006 Financial Year

171.00

98.45

111.50

64.01

April 2005

109.50

98.45

70.36

64.75

May 2005

116.39

106.50

73.98

66.05

June 2005

120.30

104.10

71.25

64.11

Second Quarter

July 2005

131.00

108.00

77.15

64.01

August 2005

130.00

120.00

79.98

75.25

September 2005

129.98

121.35

81.85

76.50

Third Quarter

October 2005

130.00

114.65

79.35

70.85

November 2005

145.00

125.80

86.75

77.75

December 2005

141.59

130.05

88.90

82.11

Fourth Quarter

January 2006

152.00

134.75

99.85

88.00

February 2006

171.00

148.05

111.50

98.67

March 2006

165.90

148.10

108.39

97.36

2007 Financial Year through June 30

167.85

121.05

109.50

67.42

First Quarter

April 2006

167.85

139.50

109.50

91.79

May 2006

147.00

127.51

96.40

76.90

June 2006

142.50

121.05

86.00

67.42

(1)

From March 4, 2003, the date the ordinary shares commenced trading on the JSE and the ADSs commenced trading on
the NYSE through March 31, 2003.

On June 30, 2006, the last trading price of the ordinary shares as reported by the JSE was

R131.99 per share and the last trading price of the ADSs on the NYSE Composite Tape was $70.00.

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Item 10.

Additional Information

MEMORANDUM AND ARTICLES OF ASSOCIATION

Set forth below is a summary of material information relating to Telkom’s share capital,

including summaries of certain provisions of Telkom’s memorandum and articles of association, the
South African Companies Act, 61 of 1973, and the Listings Requirements of the JSE. This summary is
qualified in its entirety by the provisions of Telkom’s memorandum and articles of association and by
the applicable provisions of South African law and the Listings Requirements of the JSE. You should
refer to the full text of Telkom’s new memorandum and articles of association, which is incorporated by
reference as an exhibit to this annual report.

General

Telkom was incorporated on September 30, 1991, as a public limited liability company registered

under the South African Companies Act with registration number 1991/005476/06. Telkom is governed
by its memorandum and articles of association and the provisions of the South African Companies
Act, 61 of 1973. Telkom is also subject to the Listings Requirements of the JSE and the New York
Stock Exchange.

Telkom’s main object and business is to supply telecommunications, broadcasting, multimedia

technology and information services to the general public in the Republic of South Africa.

Share Capital

Pursuant to a special resolution passed at a general meeting of Telkom held on January 16, 2003,

Telkom’s authorized and issued share capital was, with effect from March 4, 2003, altered by the
conversion of one ordinary share held by the Government into one class A ordinary share with a par
value of R10 and one ordinary share held by Thintana Communications into one class B ordinary
share with a par value of R10. As a result, as of March 31, 2005, Telkom’s authorized share capital
was R10,000,000,000, divided into 999,999,998 ordinary shares with a par value of R10 each, one
class A ordinary share with a par value of R10 and one class B ordinary share with a par value of
R10, and its issued share capital was R5,570,318,190, divided into 557,031,817 ordinary shares with
a par value of R10 each, one class A ordinary share with a par value of R10 and one class B ordinary
share with a par value of R10. As of March 31, 2006, the date of Telkom’s most recent balance sheet,
which is included in this annual report, Telkom’s authorized share capital was R10,000,000,000,
divided into 999,999,998 ordinary shares with a par value of R10 each, one class A ordinary share
with a par value of R10 and one class B ordinary share with a par value of R10, and its issued share
capital was R5,449,448,970 divided into 544,944,897 ordinary shares with a par value of R10 each,
one class A ordinary share with a par value of R10 and one class B ordinary share with a par value of
R10 and its outstanding share capital was R5,214,083,180, divided into 521,408,318 ordinary shares
with a par value of R10 each, one class A ordinary share with a par value of R10 and one class B
ordinary share with a par value of R10.

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The following shows a reconciliation of shares outstanding from April 1, 2005 through

March 31, 2006:

Number of shares

Shares issued at April 1, 2005

557,031,819

Shares held in treasury at April 1, 2005

(23,566,248)

Shares outstanding at April 1, 2005

533,465,571

Shares repurchased and cancelled during 2006 financial year

(12,086,920)

Shares released from treasury during 2006 financial year

29,669

Shares outstanding at March 31, 2006

521,408,320

Shares held in treasury at March 31, 2006

23,536,579

Shares issued at March 31, 2006

544,944,899

Only ordinary shares are listed on the JSE and ADSs listed on the New York Stock Exchange only

represent ordinary shares. The class A and B ordinary shares are not listed on any stock exchange.

Before the alteration of Telkom’s authorized and issued share capital on March 4, 2003,

Telkom’s authorized share capital was R10,000,000,000, divided into 1,000,000,000 ordinary shares
with a par value of R10 each, and its issued share capital was R5,570,318,190, divided into
557,031,819 ordinary shares with a par value of R10 each and its share premium was
R2,723,000,000. No alterations to Telkom’s share capital occurred during the five years preceding
the date of this annual report, other than the alteration of Telkom’s authorized and issued share capital
on March 4, 2003 and as discussed above.

All of Telkom’s issued and outstanding ordinary shares rank equally with each other and are fully

paid and not subject to calls for additional payments of any kind. Except as specified in Telkom’s
articles of association, selected provisions of which are described in this annual report, the class A
ordinary share and the class B ordinary share rank equally with the ordinary shares.

In March 2003, the government granted share options to purchase up to 11,140,636 of its ordinary

shares, representing 2% of Telkom’s issued and outstanding ordinary share capital, through the Diabo
Share Trust. The exercise price is R33.81 per share. The share options are exercisable in four equal
tranches. The four tranches were exercised in September 2003, March 2004, March 2005 and March
2006.

Significant Shareholder

Pursuant to Telkom’s articles of association, a “significant shareholder” is the registered holder

of the class A ordinary share or the class B ordinary share and, in addition, of at least 15% of the
issued ordinary shares, which percentage will be adjusted from time to time to reflect the dilutive
effect of any issuance of new ordinary shares by Telkom after March 4, 2003, provided that the
percentage will not be lower than 10%. A significant shareholder has certain specific rights in terms
of Telkom’s memorandum and articles of association as more fully described below. As of the date
hereof, the Government is the only significant shareholder.

If, by March 4, 2011, the class A ordinary share and class B ordinary share have not otherwise

been converted into ordinary shares under the terms of Telkom’s articles of association, they will
automatically be so converted and the rights of the holders of the class A ordinary share and class B
ordinary share, including any rights as significant shareholders, will be terminated under Telkom’s
articles of association.

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Dividends

Telkom’s shareholders, in a general meeting, or its board, from time to time, may declare a

dividend to be paid to the registered holders of one or more classes of shares; provided that
Telkom’s shareholders may not declare a greater dividend in a general meeting than is recommended
by the board and provided further that no dividend may be declared to a holder of the class A ordinary
share or class B ordinary share, unless the same dividend is declared to holders of all ordinary
shares. In addition, the declaration or distribution of dividends or other distributions must
be approved by the board as a reserved matter. See Item 6. “Directors, Senior Management and
Employees–Directors and Senior Management–Reserved Matters.”

Pursuant to Telkom’s articles of association, dividends on ordinary shares will not bear interest.

Dividends are declared payable to shareholders registered as such on a date subsequent to the date
of publication of the announcement of the declaration of the dividend. This date may not be sooner
than 14 days after the date of such publication. All unclaimed dividends may be invested or otherwise
utilized by the board for Telkom’s benefit until claimed, provided that dividends unclaimed after a
period of three years shall be forfeited. Forfeited dividends revert to Telkom or its assigns.

Any dividend or other sum payable in cash to a shareholder may be transmitted by ordinary post

to the address of the shareholder recorded in the register or any other address the shareholder may
previously have given to Telkom in writing or by electronic transfer to such bank account as the
shareholder may previously have given to Telkom in writing. Telkom will not be responsible for any
loss in transmission. Subject to the approval of shareholders in a general meeting, any dividend may
be paid and satisfied, either wholly or in part, by the distribution of specific assets as the board
may determine and direct at the time of declaring the dividend.

Any cash dividends paid by Telkom will be declared in South African Rands. The shareholders

in a general meeting, or the board of directors, may at the time of declaring a dividend, stipulate that
the dividend be paid to shareholders having registered addresses outside South Africa or who have
given written instructions requesting payment at addresses outside South Africa, shall be paid in a
currency other than South African currency. Holders of ADSs on the relevant record date will be
entitled to receive any dividends payable in respect of the ordinary shares underlying the ADSs,
subject to the terms of the deposit agreement. Cash dividends paid in Rands will be converted by the
depositary to Dollars and paid by the depositary to holders of ADSs, net of conversion expenses of
the depositary, in accordance with the deposit agreement, a copy of which is incorporated by
reference to Exhibit 2.2 to this annual report.

Voting Rights

Subject to any rights or restrictions attached to any class of shares, every shareholder present at

a general meeting in person, by proxy or by representation will, on a show of hands, have one vote
only and, in the case of a poll, that proportion of the total votes which the aggregate amount of the
nominal value of the shares held by that shareholder bears to the aggregate of the nominal value of
all the shares issued by Telkom. For a description of shareholders’ rights to request a poll, see Item
10. “Additional Information–Memorandum and Articles of Association–General Meetings of
Shareholders.” A shareholder is entitled to appoint a proxy to attend, speak and vote at any meeting
on the shareholder’s behalf. The proxy need not be a shareholder of Telkom.

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Issue of Additional Shares and Pre-emptive Rights

Subject to the provisions of the South African Companies Act, 61 of 1973, the JSE Listings

Requirements and any rights or restrictions attached to any class of shares, shareholders in a general
meeting may authorize the board to allot and issue shares or grant options over unissued shares to
such persons at such times, and generally on such terms and conditions, and for such consideration,
whether payable in cash or otherwise, as it may decide. Telkom’s shareholders granted to the board
the authority to allot and issue up to 22,281,272, representing 4% of Telkom’s issued ordinary share
capital, ordinary shares to the participants under Telkom’s conditional share plan in a general meeting
held on January 27, 2004. There may not be any increase or reduction in Telkom’s issued share
capital or that of any of its subsidiaries without the authorization of the board as a reserved
matter. See Item 6. “Directors, Senior Management and Employees–Directors and Senior
Management–Reserved Matters.” No change in the number of issued class A ordinary shares or class
B ordinary shares may be made without the approval of the holder of the class A ordinary share and
class B ordinary share, respectively.

The Listings Requirements of the JSE require Telkom’s unissued ordinary shares to be offered

first to existing shareholders in proportion to their holdings of ordinary shares unless these shares are
issued for the acquisition of assets. The shareholders may, however, grant either a general approval
in a general meeting authorizing the directors to issue ordinary shares for cash or a specific approval
for a particular issue of ordinary shares, without first offering them to existing shareholders. Issues of
ordinary shares for cash pursuant to a general approval in the aggregate in any one financial year
may not exceed 15% of the issued share capital of that class. The maximum discount at which
securities may be issued under a general approval is 10% of the weighted average trading price of
those securities over 30 business days on the JSE prior to the date that the price of the issue is
determined or agreed by the directors. A specific approval to issue ordinary shares is subject to,
among other things, the disclosure of the number, or maximum number, of securities to be issued and
disclosure of whether the discount at which the securities are to be issued is unlimited and, if not, the
limit. A general and specific approval are each subject to the requirement of approval of a 75%
majority of votes cast by shareholders present or represented by proxy at a general meeting,
excluding, in the case of a specific approval, any parties and their associates participating in the
specific issue for cash. As of the date hereof, except for the authority referred to above, no general or
specific approval authorizing the directors to issue shares for cash has been granted to the board by
the shareholders of Telkom.

Subject to the South African Companies Act, 61 of 1973, the directors or Telkom’s shareholders

may resolve in a general meeting to utilize all or any part of Telkom’s reserves, or any amount
available for distribution as a dividend and not required for the payment or provision of dividends on
preference shares, to pay for Telkom’s authorized but unissued shares to be issued as fully paid
capitalization shares to shareholders entitled to receive such distributions as a dividend.

Transfer of Shares

Telkom’s articles of association do not contain any restriction on the right to transfer ordinary

shares, except as described below. Ordinary shares may be transferred by an instrument in writing in
any usual common form or in such other form as the board of directors may approve if such transfer
does not arise pursuant to a trade of such shares on the JSE. The transferor will be deemed to
remain the holder of the ordinary shares until the name of the transferee is entered in Telkom’s share
register in respect of the transferred ordinary shares. Every instrument of transfer presented for
registration must be accompanied by the certificate representing the ordinary shares to be transferred
and/or such other evidence Telkom may require to prove the title of the transferor or the transferor’s
right to transfer the ordinary shares.

211

Although shareholders are entitled to hold their ordinary shares in certificated form, ordinary

shares may only be traded on the JSE if they have been dematerialized through Share Transactions
Totally Electronic Limited, or STRATE. A dematerialized share is not evidenced by a share certificate
and may not be transferred by an instrument in writing, but is represented and transferred by means
of electronic book entries.

The class A share is not transferable to any transferee, except to an eligible Ministry, as defined in

the articles of association, without the written consent of the class B shareholder. If the class A share
is to be transferred to an eligible Ministry, it may be so transferred only if it is transferred together with
as many shares as would be sufficient to constitute the transferee a significant shareholder without
taking account of any other shares already held by or on behalf of such transferee at the time of the
actual delivery of the class A share to the transferee pursuant to the applicable underlying contract,
and only after consultation with the class B shareholder. The class A share will be converted into an
ordinary share on March 4, 2011 or if, at any time before then, it ceases to be held by the Minister, as
defined in the articles of association, or the class B share is converted into an ordinary share.

The class B share, including the rights attached to it, may be transferred to a transferee only if it is

transferred together with as many shares as would be sufficient to constitute the transferee a
significant shareholder without taking account of any other shares already held by or on behalf of such
transferee at the time of the actual delivery of the class B share to the transferee pursuant to the
applicable underlying contract, and only after consultation with the class A shareholder. The class B
share will be converted into an ordinary share on March 4, 2011 or if, at any time before then, the
class B shareholder ceases to hold at least 5% of Telkom’s issued shares.

Disclosure of Interest in Shares

Pursuant to the South African Companies Act, 61 of 1973, registered shareholders are required at

the end of every calendar quarter to disclose to the issuer the identity of each other person who has a
beneficial interest in the shares held by the registered holder and the number and class of those
shares. Moreover, an issuer of shares may, by notice in writing, require a person who is a registered
holder of, or whom the issuer knows or has reasonable cause to believe, has a beneficial interest in,
a share issued by the issuer to identify to the issuer the person on whose behalf a share is held.
The addressee of the notice may also be required to give particulars of the extent of the beneficial
interest held during the three years preceding the date of the notice. All issuers of shares are obliged
to establish and maintain a register of the disclosures described above and to publish in their annual
financial statements a list of the persons who hold beneficial interests equal to or in excess of 5% of
the total number of shares of that class issued by the issuer together with the extent of those
beneficial interests.

Register of Members

Telkom keeps a register of its members, being shareholders whose names have been included in

this register, in South Africa. Telkom may keep a branch share register in any foreign country, subject
to the approval of the South African Reserve Bank.

General Meetings of Shareholders

Telkom is required by the South African Companies Act, 61 of 1973, to hold an annual general

meeting not later than nine months after the end of every financial year and within 15 months after the
date of its last preceding annual general meeting. The board may convene a general meeting
whenever it thinks fit and must do so on the request of 100 shareholders or of shareholders holding,
at the date of request, not less than one-twentieth of shares carrying voting rights.

212

Telkom is required by the South African Companies Act, 61 of 1973, to provide at least 21 “clear

days” intervening notice for annual general meetings and for general meetings at which special
resolutions are proposed, and at least 14 “clear days” intervening notice for all other general
meetings. “Clear days” exclude the date on which notice is given, and the date on which the meeting
is held.

A holder of shares may by notice require Telkom to record an address within South Africa which

shall be deemed to be his or her address for the purpose of the service of notices. Telkom’s articles of
association require notices of general meetings to be in writing and to be given or served on any
shareholder either by sending the notice, or a message advising that the notice is available on a
website and containing the address of such website by electronic mail or telefacsimile to an electronic
mail address or telefacsimile number notified to Telkom for this purpose. Alternatively, the written
notice may be given by delivery in person or by sending it through the post, properly addressed, to a
shareholder at his or her address shown in the register of shareholders or to a beneficial holder of
Telkom’s shares at the address which has been disclosed to Telkom and recorded in its register of
such disclosures. Notice may be given to any beneficial holder of Telkom’s shares who has not
disclosed his or her address, electronic mail address or telefacsimile number to Telkom, by publishing
that notice or an advertisement that such notice is available on a website, in the South African
Government Gazette and any newspaper determined by Telkom’s directors. Any notice to
shareholders must simultaneously be given to the secretary or other suitable official of any recognized
stock exchange on which Telkom’s shares are listed in accordance with the requirements of the stock
exchange. Every notice shall be deemed to have been received on the date on which it is so delivered
and, if it is sent by post, on the day on which it is posted. If it is published in the South African
Government Gazette or if it is advertised in the Government Gazette, it is deemed to have been
received on the date it appears in the Government Gazette. If it is sent by electronic mail or
telefacsimile, it is deemed to have been sent on the day it is sent or transmitted.

No business may be transacted at any general meeting unless the requisite quorum is present

when the meeting proceeds to business. A quorum is at least three shareholders present in person or,
in the case of a shareholder which is a company, by representation, and entitled to vote, provided that
no quorum will be constituted if the class A shareholder and class B shareholder are not duly
represented. If within thirty minutes from the time appointed for the meeting a quorum is not present,
the meeting will stand adjourned to the same day in the next week, or if that day is a South African
public holiday or a Saturday or Sunday, the next succeeding day other than a South African public
holiday, Saturday or Sunday, at the same time and place. The quorum at the adjourned meeting shall
be three shareholders present in person or by representation. If a quorum at the initial meeting was
not established because of the absence of the class A shareholder or class B shareholder, the
presence of the absent shareholder is not required to establish a quorum at the adjourned meeting.
In order to pass a special resolution, shareholders holding in the aggregate not less than one fourth of
the total votes of all shareholders entitled to vote must be present in person or by proxy at the
meeting.

At a general meeting, a resolution put to the vote will be decided by a show of hands unless a poll

is demanded by:

• the chairman of the meeting;

• not less than five shareholders having the right to vote at such meeting; or

• a shareholder or shareholders representing not less than one tenth of the total voting rights of

all shareholders having the right to vote at the meeting or a shareholder or shareholders entitled
to vote and holding in aggregate not less than one tenth of Telkom’s issued share capital.

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Resolutions will be carried by a majority of the votes recorded at the meeting except in the case

of a special resolution which must be passed either on a show of hands, by not less than three fourths
of the number of Telkom’s shareholders entitled to vote who are present in person, by proxy
or by representation or, where a poll has been demanded, by not less than three fourths of the total
votes to which the shareholders present in person, by proxy or by representation are entitled.

Annual Report and Accounts

Telkom’s board is required to keep such accounting records and books of account as are

prescribed by the South African Companies Act, 61 of 1973. Generally, no shareholder, other than
a director, has any right to inspect any of Telkom’s accounting record books, accounts or documents.

The board is required, in respect of each of Telkom’s financial years, to prepare annual

consolidated financial statements and present them before the annual general meeting.

Pursuant to the Listings Requirements of the JSE, unaudited interim reports must be distributed to

all shareholders within three months after the end of the first six months of Telkom’s financial year.

Telkom’s consolidated financial statements must, in conformity with IFRS, fairly present the state

of affairs and business of Telkom and all of its consolidated subsidiaries at the end of the financial
year concerned and the profit or loss of Telkom and all of its consolidated subsidiaries for that
financial year.

Changes in Capital

Telkom may from time to time by special resolution:

• consolidate, divide or sub-divide all or any part of Telkom’s issued or unissued capital;

• increase or cancel all or any part of Telkom’s unissued capital;

• convert any of Telkom’s shares, whether issued or not, into shares of another class;

• convert all or any of Telkom’s paid-up shares into stock and reconvert such stock into paid-up

shares; or

• convert any shares having a par value into shares having no par value and vice versa.

Telkom may from time to time reduce its issued share capital, share premium, stated capital,

reserves and/or any capital redemption reserve fund with the approval of an ordinary resolution of
Telkom’s shareholders in a general meeting and with a resolution of Telkom’s directors. Any increase
or reduction in Telkom’s issued share capital or that of any of Telkom’s subsidiaries must be approved
by directors as a reserved matter. See Item 6. “Directors, Senior Management and
Employees–Directors and Senior Management–Reserved Matters.”

Variation of Rights

Whenever Telkom’s capital is divided into different classes of shares, the rights attached to any

class of shares in issue may be varied, modified or abrogated by special resolution, provided that no
variation that adversely affects those rights may be made without the written consent or ratification of
the holders of three fourths of the issued shares of that class or a resolution passed in the same
manner as a special resolution at a separate general meeting of the holders of such shares.

The affirmative vote or consent of the holder of the class A ordinary share or the holder of the

class B ordinary share, as the case may be, is required for any amendment, alteration or cancellation
of any of the provisions of Telkom’s memorandum and articles of association that would alter or
change the powers, preferences or special rights of the class A ordinary share or class B ordinary

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share or the holder of the class A ordinary share or class B ordinary share, as the case may be,
so as to affect either adversely. Telkom’s memorandum and articles of association further require
Telkom to obtain written consent from the Government before issuing any securities or amending any
existing securities in a manner that would adversely affect the Government’s right under a special
condition set forth in Telkom’s memorandum of association, including the creation of a new class of
shares or the amendment of the rights attached to an existing class of shares to provide them with
rights superior to or equal to or adversely affecting the rights of Government under this condition.
This special condition provides, among other things, that Telkom must obtain written consent from the
Government before:

• taking any action that would result in Telkom’s ceasing to provide telecommunications services

under its public switched telecommunications services license in the Republic of South Africa; or

• disposing of assets, the effect of which would materially impair Telkom’s ability to fulfill its

obligation under its public switched telecommunications services license.

The rights conferred upon the holders of the shares of any class will be deemed not to be directly

or indirectly adversely affected by the creation or issue of further shares ranking equally with them or
the cancellation of any shares of any other class.

Distribution of Assets on Liquidation

If Telkom is liquidated, whether voluntarily or compulsorily, the assets remaining after the payment

of all of Telkom’s liabilities and the costs of winding-up shall be distributed among the shareholders
in proportion to the numbers of shares held by them, subject to the rights of any shareholders to
whom shares have been issued on special conditions and subject to Telkom’s right to set-off unpaid
capital or premium against the liability, if any, of shareholders. Furthermore, with the authority of a
special resolution, the liquidator may divide among the shareholders, in specie or kind, the whole or
any part of the assets, whether or not those assets consist of property of one kind or different kinds.

Any winding up or liquidation of Telkom must be authorized as a board reserved matter.

See Item 6. “Directors, Senior Management and Employees–Directors and Senior

Management–Reserved Matters.”

Purchase of Shares

The South African Companies Act, 61 of 1973, permits loans by a company to its employees,

other than directors, for the purpose of purchasing or subscribing for shares of that company or of its
holding company.

The procedure for acquisition by a company of its own shares is regulated both by the

South African Companies Act, 61 of 1973, and the Listings Requirements of the JSE. The South
African Companies Act, 61 of 1973, provides that a company may, by special resolution, if authorized
by its memorandum and articles of association, approve the acquisition of its shares; provided that a
company may not make any payment in whatever form to acquire any share issued by that company
if there are reasonable grounds for believing that the company is or would, after the payment, be
unable to pay its debts or if the consolidated assets of the company fairly valued would, after the
payment, be less than the consolidated liabilities of the company. The South African Companies Act,
61 of 1973, also provides that:

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• a subsidiary may acquire up to a maximum of 10% in the aggregate of the number of issued

shares of its holding company, or parent company; and

• a company may make payments to its shareholders if authorized by its memorandum and

articles of association, subject to the provisions referred to above relating to its ability to pay
debts and solvency.

Under South African law and the Listings Requirements of the JSE, the shareholders in a general

meeting may approve a specific acquisition by the company of its issued shares or grant the company
a general authority to acquire its issued shares by way of a renewable mandate which is valid until the
company’s next annual general meeting, provided that such authority may not extend beyond 15
months from the date of the granting of the general authority. The general authority is subject to,
among other things, the following:

• the acquisition of ordinary shares must be on the “open market” of the JSE;

• the number of ordinary shares that may be acquired pursuant to the general authority may not,

in the aggregate, exceed 20% of Telkom’s issued share capital in any one financial year; and

• the ordinary shares may not be acquired at a price that is more than 10% above the weighted

average of the market value of the ordinary shares for the five business days immediately
preceding the date on which the transaction is effected.

At Telkom’s annual general meeting held on October 14, 2004, the shareholders of Telkom

granted Telkom, through a special resolution, the authority for Telkom or a subsidiary of Telkom to
acquire Telkom’s issued and outstanding ordinary share capital from time to time, upon such terms
and conditions and in such amounts as the directors of Telkom and/or its subsidiaries may from time
to time decide, but always subject to the Companies Act, 61 of 1973, as amended, and the listing
requirements from time to time of the JSE, which general approval shall endure until the following
annual general meeting of Telkom, which was held on October 21, 2005. At this meeting, the
shareholders of Telkom provided general approval for the share repurchase program until the next
Annual General Meeting or 15 months from the date of the resolution, whichever period is shorter.

Directors

Pursuant to Telkom’s articles of association, the holder of the class A ordinary share and the

holder of the class B ordinary share, for so long as they hold the class A ordinary share and the class
B ordinary share, respectively, are entitled to appoint directors based on the percentage of the issued
ordinary shares owned by them as follows:

• if either shareholder owns at least 25% of the issued ordinary shares, it has the right to appoint

five directors, including two executive directors;

• if either shareholder owns at least 20%, but less than 25% of the issued ordinary shares, it has

the right to appoint four directors, including, in the case of the Public Investment Corporation,
two executive directors and, in the case of the Government, one executive director;

• if either shareholder owns at least 15%, but less than 20% of the issued ordinary shares, it has

the right to appoint three directors, including, in the case of the Public Investment Corporation,
two executive directors and, in the case of the Government, three non-executive directors;

• if either shareholder owns at least 10%, but less than 15% of the issued ordinary shares, it has

the right to appoint two directors, including, in the case of the Public Investment Corporation,
two executive directors and, in the case of the Government, two non-executive directors; and

• if either shareholder owns at least 5%, but less than 10% of the issued ordinary shares, it has

the right to appoint one director, including, in the case of the Public Investment Corporation, one
executive director and, in the case of the Government, one non-executive director.

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Neither the holder of the class A ordinary nor the holder of the class B ordinary share will have the

right to appoint more than five directors, regardless of their share ownership.

The remaining directors, if any, other than Telkom’s chief executive officer who is appointed by

Telkom’s board of directors, may be appointed by a general meeting. A general meeting is not entitled
to fill a vacancy of a director appointed by the Government or the Public Investment Corporation, as
holders of the Class A ordinary share and the Class B ordinary share, respectively.

At each of Telkom’s annual general meetings, at least one third of Telkom’s directors appointed

by a general meeting, excluding executive directors, directors appointed by the holder of the class A
ordinary share and the holder of the class B ordinary share and any directors appointed by the
directors after the conclusion of Telkom’s preceding annual general meeting, are required to retire
from office but are eligible for re election. The directors to retire are those who have been longest in
office or, as between directors appointed by a general meeting who have been in office for an equal
length of time, in the absence of agreement, determined by lot. If, after such retirements, there would
remain in office any director appointed by a general meeting who would have held office for three
years since his last election, he shall also retire at such annual general meeting. In addition, those
directors appointed by a general meeting since the last annual general meeting are required to retire
from office. A retiring director is eligible for re election. Directors appointed by the holder of the class A
ordinary share or the holder of the class B ordinary share, as the case may be, can be removed and
replaced at any time upon receipt by Telkom of written notice from the holder of the class A ordinary
share or the holder of the class B ordinary share, as the case may be.

The remuneration of Telkom’s directors shall be determined from time to time by its directors,

taking into account the recommendations of the remuneration committee appointed by Telkom’s
directors. Telkom’s directors shall be paid all their traveling and other expenses properly incurred
by them in the execution of their duties in or about Telkom’s business, which are approved
or ratified by Telkom’s directors.

Any director who serves on any committee, devotes special attention to Telkom’s business, goes

or resides outside of the Republic of South Africa for any of Telkom’s purposes, or performs any
services that are outside the scope of ordinary duties of a director, may be paid such extra
remuneration or allowances as Telkom’s directors, excluding the director in question, may determine.

Telkom’s articles of association provide that a director shall not vote in respect of any contract or

arrangement or any other proposal whatsoever in which he or she has a material interest, other than
by virtue of his or her interest in securities in Telkom and in certain other limited circumstances.

A director may not be counted in the quorum of a meeting in relation to any resolution in which he

or she is not permitted to vote.

The directors are not obliged to hold any qualification shares.

Telkom’s articles of association grant a director appointed by the Government, as a significant

shareholder, the right, for so long as it is a significant shareholder, to nominate certain of the directors
that Telkom is entitled to appoint to the boards of directors of its subsidiaries and Vodacom.

The number of directors that the Government is entitled to nominate is based on the ratio of the

number of ordinary shares owned by the Government to the sum of the ordinary shares owned by the
Government and the Public Investment Corporation, as the class B shareholder.

If the class A ordinary share and/or class B ordinary share are converted into ordinary shares, the

rights of the Government and/or the Public Investment Corporation as holders of the class A ordinary
share and class B ordinary share, respectively, including their rights of appointment of directors to
Telkom’s board of directors and the boards of directors of Telkom’s subsidiaries and Vodacom,
will be terminated.

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Borrowing Powers

The directors may exercise all of Telkom’s powers to borrow money and to mortgage or encumber

Telkom’s property or any part thereof and to issue debentures, whether secured or unsecured,
whether outright or as security for any debt, liability or obligation of Telkom or of any third party. For
this purpose, the borrowing powers of the directors are unlimited. Telkom’s borrowing powers have not
been exceeded during the past three years.

Non-South African Shareholders

Other than as described under “–Transfer of Shares,” there are no limitations in Telkom’s

memorandum or articles of association on the right of non-South African shareholders to hold or
exercise voting rights attaching to any of its ordinary shares.

Rights of Minority Shareholders and Fiduciary Duties

Majority shareholders of South African companies have no fiduciary obligations under

South African common law to minority shareholders. However, under provisions in the
South African Companies Act, 61 of 1973, a shareholder may, under certain circumstances, seek relief
from the court if the shareholder has been unfairly prejudiced. These provisions are designed to
provide relief for oppressed shareholders without necessarily overruling the majority’s decision. There
may also be common law and statutory personal actions available to a shareholder of a company.

The fiduciary obligations of directors may differ from those in the United States and certain other

countries. Under South African law, the directors of a company are required to adhere to and act in
accordance with two main fiduciary duties, the duty to act in the best interests of the company and the
duty to act with due care and skill. The fiduciary duty to act in the best interests of the company
includes a duty that the directors must avoid a conflict between their personal interests and the
interests of the company, prohibits the directors from using their fiduciary position for personal benefit,
prohibits the directors from exceeding the powers of the company and prohibits the directors from
exercising any power for an improper or collateral purpose. The fiduciary duty to act with due care and
skill includes the requirement that the directors must not act negligently, fraudulently or recklessly and
must exercise judgment as to what is in the best interests of the company. South African law provides
for personal liability of directors if they conduct the business of the company fraudulently or recklessly.
Under Delaware law, the fiduciary duties of directors consist of the duty of care, the duty
of loyalty and the duty of disclosure. The fiduciary duty of care requires directors to inform themselves
of all material information reasonably available to them prior to making a business decision. The
fiduciary duty of loyalty prohibits directors from using their position of trust and confidence to further
their private interests. The fiduciary duty of disclosure requires directors to disclose to stockholders all
material facts germane to a transaction involving stockholder approval.

Comparison of Shareholders’ Rights Under South African and Delaware Law

The following describes some of the material differences between the rights of shareholders under

South African and Delaware law.

Voting rights, generally

South Africa

Under South African law, every shareholder in a public company has a vote in respect of the

shares held by such shareholder in the issued share capital of the company. The number of votes
exercisable by that shareholder is that proportion of the total votes in the company which the
aggregate amount of the nominal value of the shares held by that shareholder bears to the total

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amount of the nominal value of all the shares in the company. Any shareholder of a company entitled
to attend and vote at a meeting of the company is entitled to appoint another person or persons,
whether a member or not, to act for such shareholder by proxy.

Delaware

Under Delaware law, each stockholder is entitled to one vote for each share of capital stock held

by the stockholder, unless otherwise provided in the certificate of incorporation of the company.
Each stockholder entitled to vote at a meeting of stockholders may authorize another person or
persons to act for the stockholder by proxy for up to three years from its date, or for a longer
period if the proxy specifically provides.

Preemptive rights

South Africa

Under South African law, no shareholder shall have preemptive rights to purchase additional

securities of a company unless the organizational documents of the company expressly grant
preemptive rights. However, the Listings Requirements of the JSE require that unissued ordinary
shares of a company listed on the JSE be offered first to existing shareholders in proportion to their
holdings of shares of that company unless the shares are issued for the acquisition of assets. See this
Item “–Memorandum and Articles of Association–Issue of Additional Shares and Preemptive Rights.”

Delaware

Delaware law provides that no stockholder shall have preemptive rights to purchase additional

securities of the company unless the certificate of incorporation of the company expressly grants
these rights.

Cumulative voting

Cumulative voting is a system for electing directors whereby the number of votes a shareholder

is entitled to vote in an election of directors equals the number of shares held by the shareholder
multiplied by the number of open directorships. Under cumulative voting, a shareholder may cast
all or any number of the shareholder’s votes for a single candidate or for any number of candidates.

South Africa

Under South African law, shareholders do not have the right to elect directors by cumulative

voting. The number of votes that a shareholder may cast in respect of the appointment of each
individual director equals the number of votes generally exercisable by that shareholder.
South African law provides that at a general meeting of a company, a motion for the appointment of
two or more persons as directors of the company by a single resolution shall not be moved, unless
a resolution that it shall be so moved has first been agreed to by the meeting without any vote being
given against it.

Delaware

Under Delaware law, stockholders do not have the right to elect directors by cumulative vote

unless the right is granted in the company’s certificate of incorporation.

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Shareholder approval of corporate matters by written consent

South Africa

Under South African law, any action required to be taken at any annual or other general meeting

of a company, other than actions requiring a special resolution, may be taken without a meeting,
without prior notice and without a formal vote, if the required written consent setting forth that action to
be taken and waiving the required prior notice is signed by all shareholders.

Delaware

Under Delaware law, any action required to be taken at any annual or special meeting of the

stockholders may be taken without a meeting, without prior written notice and without a vote, if a
written consent setting forth the action to be taken is signed by the number of holders of outstanding
stock that would be necessary to authorize or take the action at a meeting at which all shares entitled
to vote thereon were present and voted, unless otherwise provided in the certificate of incorporation
of the company. Prompt notice of the taking of any action by less than unanimous consent must be
given to shareholders who did not consent to the action.

Anti-takeover provisions

South Africa

Under the South African Companies Act, 61 of 1973, the South African Securities Regulation

Panel, or SRP, regulates certain transactions and schemes aimed at the take-over of companies such
as Telkom in order to ensure the equal treatment of shareholders. For this purpose, the SRP has
promulgated a code, which is loosely based on the U.K. City Code on Take-Overs and Mergers,
setting out general principles and specific rules regulating take-overs and mergers. The SRP requires
that a mandatory offer be made to shareholders, at specified prices, in circumstances where:

• the offeror acquires more than 35% of the votes exercisable at a general meeting of a company,

if the offeror, prior to the acquisition, held less than 35% of such votes; or

• the offeror acquires more than 5% of such votes during any twelve month period, if the offeror,

prior to the acquisition, held more than 35%, but less than 50% of such votes.

The SRP code also sets out comprehensive rules regulating the procedures to be followed and

the manner in which the offer should be made. In addition, under the JSE Listings Requirements, a
company listed on the JSE is required to obtain shareholder approval for any transaction between that
company and a “material” shareholder if the JSE considers that shareholder to have a significant
interest in or influence over the company. A “material” shareholder is any person who is or within
twelve months preceding the date of the transaction was entitled to exercise or controls the exercise
of 10% or more of the votes permitted to be cast at a general meeting of the company.

Delaware

Delaware law contains a business combination statute that protects Delaware companies from

hostile takeovers and from actions following the takeover by prohibiting some transactions once an
acquirer has gained a significant holding in the company.

Section 203 of the Delaware General Corporation Law prohibits “business combinations,”

including mergers, sales and leases of assets, issuances of securities and similar transactions
by a company or a subsidiary with an interested stockholder that beneficially owns 15% or more
of a company’s voting stock, within three years after the person becomes an interested stockholder,
unless:

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• the transaction that will cause the person to become an interested stockholder is approved

by the board of directors of the target prior to the transaction;

• after the completion of the transaction in which the person becomes an interested stockholder,

the interested stockholder holds at least 85% of the voting stock of the company not including
shares owned by persons who are directors and also officers of interested stockholders and
shares owned by specified employee benefit plans; or

• after the person becomes an interested stockholder, the business combination is approved

by the board of directors of the company and authorized at an annual, or special, meeting of
stockholders by the affirmation vote of the holders of at least 66.67% of the outstanding voting
stock, excluding shares held by the interested stockholder.

A Delaware company may elect not to be governed by Section 203 by a provision contained

in the original certificate of incorporation of the company or an amendment to the original certificate of
incorporation or to the bylaws of the company, which amendment must be approved by a majority of
the shares entitled to vote and may not be further amended by the board of directors of the company.
This amendment is not effective until twelve months following its adoption.

Shareholder access to and inspection of corporate records

South Africa

According to South African law, the register of members of a company is open to inspection by

any shareholder or his or her duly authorized agent. Any person may apply to a company for a copy
of or extract from the register of shareholders, and the company shall either furnish such copy or
extract or afford such person adequate facilities for making such copy or extract. If access to the
register of shareholders for the purpose of making any inspection or any copy or extract or facilities
for making any copy or extract is refused or not granted or furnished within fourteen days after a
written request to that effect has been delivered to the company, the company, and any director or
officer of the company who knowingly is a party to the refusal or default, shall be guilty of an offense.
The person denied access may apply to court for relief.

Delaware

Delaware law allows any stockholder to inspect and make copies of the stock ledger and the

other books and records of a Delaware company for a purpose reasonably related to that person’s
interest as a stockholder. If the company refuses to permit an inspection or does not reply to the
demand within five business days, the stockholder may apply to the Delaware Court of Chancery for
an order to compel the inspection.

Duties of directors and officers

South Africa

According to South African law, the business and affairs of every company are managed by the

board of directors as provided in the company’s organizational documents. The board of directors
shall consist of one or more members, each of whom shall be a natural person. The actual number
of directors shall be fixed by the company’s organizational documents. Directors need not be
shareholders unless required by the organizational documents. The organizational documents may
prescribe other qualifications for directors as well.

According to South African law, a public company such as Telkom is required to appoint a

company secretary and a public officer. In addition, a public company may appoint further officers in
accordance with its organizational documents with such titles and duties as may be set out in the

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organizational documents or as may be determined by the company. Any share certificates signed by
two directors of the company, or one director and one other officer of the company authorized by the
directors for such purpose, evidences title to the shares concerned. The duties of the company
secretary of a company include ensuring that minutes of all shareholders’ meetings, directors’
meetings and meetings of any board committees are properly recorded.

Delaware

According to Delaware law, the business and affairs of every company are managed by the board

of directors as provided in the company’s certificate of incorporation. The board of directors consists
of one or more members, each of whom is a natural person. The actual number of directors shall be
fixed by the company’s bylaws or in its certificate of incorporation. Directors need not be stockholders
unless required by the bylaws or certificate of incorporation. The bylaws or certificate of incorporation
may prescribe other qualifications for directors as well.

Delaware law also requires every company to have officers with titles and duties as are stated in

the bylaws or in a resolution of the board of directors, which is not inconsistent with the bylaws and as
may be necessary to enable the company to sign instruments and stock certificates. One of the
officers shall have the duty to record the proceedings of the meetings of the stockholders and
directors. Officers are chosen in the manner and hold their offices for the terms prescribed by the
bylaws or determined by the board of directors or other governing body.

Meetings

South Africa

South African law requires every company to hold an annual general meeting not more than nine

months after the end of every financial year of the company and within not more than fifteen months
after the date of the last annual general meeting of the company. If for any reason an annual general
meeting of the company is not or cannot be held in this manner, the South African Registrar of
Companies may, on application by the company or any shareholder or its legal representative, call or
direct the calling of a general meeting of the company which shall be deemed to be an annual general
meeting. South African law requires that the annual financial statements of the company as well as
group financial statements be considered at the annual general meeting. Furthermore, the company’s
auditor must be appointed at the annual general meeting and the meeting must address the business
which is required to be dealt with pursuant to the organizational documents of the company. Directors
are appointed by a general meeting, unless otherwise provided in the organizational documents of the
company. The JSE Listings Requirements require that the appointment of a director to fill a casual
vacancy or as an addition to the board must be confirmed at the next annual general meeting of the
company.

General meetings of the company may, except insofar as is otherwise provided in the

organizational documents of the company, be called by the board of directors in accordance with the
organizational documents of the company or by two or more shareholders holding not less than one
tenth of its issued share capital.

Delaware

Under Delaware law, unless directors are elected by written consent in lieu of an annual meeting,

an annual meeting of the stockholders shall be held for the election of directors on a date and at a
time designated by the company’s bylaws. Stockholders may, unless the certificate of incorporation
provides otherwise, act by written consent to elect directors. In addition, any other proper business
may be transacted at the annual meeting. If an annual meeting is not held within 30 days of the date
designated for such a meeting, or is not held for a period of 13 months after the last annual meeting,

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the Delaware Court of Chancery may summarily order a meeting to be held upon the application
of any shareholder or director.

Delaware law also permits special meetings of shareholders to be called by the board of directors

and by other persons authorized to do so by the company’s certificate of incorporation or bylaws.

Dividends

South Africa

Under South African law, a company may make payments to its shareholders if authorized thereto

by its organizational documents. A company may not make any payment, in whatever form, to its
shareholders if there are reasonable grounds for believing that:

• the company is or would, after the payment, be unable to pay its debts as they become due in

the ordinary course of business; or

• the consolidated assets of the company fairly valued, after the payment, would be less than the

consolidated liabilities of the company.

Delaware

Under Delaware law, the directors of a company may declare and pay dividends out of surplus or,

when no surplus exists, out of net profits for the fiscal year in which the dividend is declared or the
preceding fiscal year, subject to any restrictions in the company’s certificate of incorporation.
Dividends may not be paid out of net profits if, after payment of the dividend, the capital of the
company would be less than the capital represented by the issued and outstanding stock of all
classes having a preference upon the distribution of assets.

Repurchase or redemption of shares

South Africa

South African law provides that a company may, by special resolution, if authorized by its

memorandum and articles of association, repurchase or redeem its shares; provided that a company
shall not make any payment to repurchase any shares issued by the company if there are reasonable
grounds for believing that the company is or would, after the payment, be unable to pay its debts or if
the consolidated assets of the company would, after the payment, be less than the consolidated
liabilities of the company.

Delaware

Delaware law permits a company to repurchase or redeem its shares, provided, however,

that no company shall do so when the capital of the company is impaired or when the purchase
or redemption would cause any impairment of the capital of the company, except that a company may
purchase or redeem out of its capital any of its own shares which are entitled upon any distribution
of the company’s assets, whether by dividend or liquidation, to a preference over another class or
series of its stock, or, if no shares entitled to such a preference are outstanding, any of its own
shares, if the shares will be retired upon their acquisition and the capital of the company reduced in
accordance with Delaware law.

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Limitations of liability of directors

South Africa

Under South African law, any provision, whether contained in the organizational documents of a

company or in any contract with a company, that purports to exempt any director or officer of the
company from any liability which by law would otherwise attach to such person in respect of any
negligence, default, breach of duty or breach of trust of which the person may be guilty in relation to
the company or to indemnify the person against any such liability is void. A company may, however,
indemnify a director or officer as described in this Item “–Indemnification of officers and
directors–South Africa.” If, in any proceedings for negligence, default, breach of duty or breach of trust
against any director or officer of a company, it appears to the court that the person concerned is or
may be liable, but that the person has acted honestly and reasonably, and that, considering all facts
and circumstances of the case, including those concerned with the person’s appointment, the person
ought fairly to be excused for the wrongdoing, the court may relieve the person, either wholly or partly,
from liability on terms determined by the court.

Delaware

Delaware law permits a company to include a provision in its certificate of incorporation

eliminating or limiting the personal liability of a director to the company or its shareholders for
damages for breach of the director’s fiduciary duty, provided that a director’s liability shall not be
limited:

• for any breach of the director’s duty of loyalty to the company or its shareholders;

• for acts or omissions not in good faith or which involve intentional misconduct or a knowing

violation of law;

• under Section 174 of the Delaware General Corporation Law, which concerns unlawful

payments of dividends, stock purchases or redemption; or

• for any transaction from which the director derived an improper personal benefit.

Indemnification of officers and directors

South Africa

Under South African law, the organizational documents of a company may contain a provision

indemnifying any director or officer or auditor in respect of any liability incurred by such person in
defending any proceedings, whether civil or criminal, in which judgment is given in the person’s favor,
in which the person is acquitted or the proceedings are abandoned or in connection with any
application in which the court relieves the person from liability on the basis that the person acted
honestly and reasonably and that the person ought fairly to be excused for negligence, default, breach
of duty or breach of trust.

Delaware

Delaware law provides that, subject to certain limitations in the case of derivative suits brought by

a company’s stockholders in its name, a company may indemnify any individual who is made a party
to any third party suit or proceeding on account of being a director, officer, employee or agent of the
company against expenses, including attorneys’ fees, judgments, fines and amounts paid in
settlement reasonably incurred by the officer or director in connection with the action, through, among
other things, a majority vote of the directors who were not parties to the suit or proceeding, even if
less than a quorum, if the individual:

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• acted in good faith and in a manner the officer or director reasonably believed to be in or not

opposed to the best interests of the company or, in some circumstances, at least not opposed
to its best interests; and

• in a criminal proceeding, had no reasonable cause to believe the officer’s or director’s conduct

was unlawful.

To the extent a director, officer, employee or agent is successful in the defense of the action, suit

or proceeding, the company is required by Delaware law to indemnify the individual for reasonable
expenses incurred thereby.

Material Contracts

See Item 4. “Information on the Company–Business Overview–Fixed–line Communications–Fees

and tariffs–Interconnection tariffs” and Item 7. “Major Shareholders and Related Party Transactions”
for certain material agreements we have entered into.

EXCHANGE CONTROLS

The following is a summary of the relevant material South African exchange control measures,

which has been derived from publicly available documents. The following summary is not a
comprehensive description of all of the exchange control regulations and does not cover exchange
control consequences that depend upon your particular circumstances. We recommend that you
consult your own advisor about the exchange control consequences in your particular situation.
The discussion in this section is based on current South African laws and regulations. Changes in
laws may alter the exchange control provisions that apply to you, possibly on a retroactive basis.

Introduction

Dealing in foreign currency, the export of capital and/or revenue, incurring of liabilities by residents

to non-residents and various other exchange control matters in South Africa are regulated by the
South African exchange control regime and regulations. The South African exchange control regime
forms part of the general monetary policy of South Africa. The South African exchange control
regulations are issued pursuant to section 9 of the Currency and Exchanges Act, 9 of 1933.
Pursuant to the regulations, the control over South African capital and/or revenue reserves,
as well as their accruals and spending, is vested in the Minister of Finance.

The Minister of Finance has delegated the administration of exchange controls to the Exchange

Control Department of the South African Reserve Bank, or Excon, which is responsible for the day to
day administration and functioning of exchange controls. Excon has wide discretion but exercises its
powers within certain policy guidelines and issues circulars and rulings from time to time. Within
prescribed limits, authorized dealers in foreign exchange are permitted to deal in foreign exchange in
accordance with the provisions and requirements of the rulings and circulars, which contain certain
administrative measures, as well as conditions and limits applicable to transactions in foreign
exchange, which may be undertaken by authorized dealers. Non-residents have been granted general
approval to deal in South African assets and to invest and disinvest in South Africa in terms of the
rulings and circulars.

The Republic of South Africa’s exchange control regulations provide for restrictions on exporting

capital from the Common Monetary Area, consisting of the Republic of South Africa, the Republic of
Namibia, and the Kingdoms of Lesotho and Swaziland. Transactions between residents of the
Common Monetary Area, on the one hand, including companies, and non-residents of the Common
Monetary Area, on the other hand, are subject to these exchange control regulations.

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There are many inherent disadvantages of exchange controls including the distortion of the price

mechanism, the problems encountered in the application of monetary policy, the detrimental effects on
inward foreign investment and the administrative costs associated therewith. The South African
Minister of Finance has indicated that all remaining exchange controls are likely to be dismantled as
soon as circumstances permit. There has, since 1996, been a gradual relaxation of exchange
controls. The gradual approach to the abolition of exchange controls adopted by the Government of
South Africa is designed to allow the economy to adjust more smoothly to the removal of controls that
have been in place for a considerable period of time. The stated objective of the authorities is equality
of treatment between residents and non-residents with respect to inflows and outflows of capital.
The focus of regulation, subsequent to the abolition of exchange controls, is expected to favor the
positive aspects of prudential financial supervision.

The present exchange control regime in South Africa is used principally to control cross border

capital movements. South African companies are not permitted to maintain foreign bank accounts
and, without the approval of Excon, are generally not permitted to export capital from South Africa
or to hold foreign currency. In addition, South African companies are required to obtain the approval
from Excon prior to raising foreign funding on the strength of their South African balance sheets,
which would permit recourse to South Africa in the event of defaults. Where 75% or more of a South
African company’s capital, voting power, power of control or earnings is directly or indirectly controlled
by non-residents, such a company is designated an “affected person” and certain restrictions are
placed on its ability to obtain local financial assistance. Telkom is not, and has never been, designated
an affected person.

Foreign investment and outward loans by South African companies are also restricted. In addition,

without the approval of Excon, South African companies are generally required to repatriate to South
Africa profits of foreign operations and are limited in their ability to utilize profits of one foreign
business to finance operations of a different foreign business. South African companies establishing
subsidiaries, branches, offices or joint ventures abroad are generally required to submit financial
statements on these operations to Excon on an annual basis. As a result, a South African company’s
ability to raise and deploy capital outside the Common Monetary Area is restricted.

Although exchange controls have been gradually relaxed since 1996, unlimited outward transfers

of capital are not permitted at this stage. The Government has announced its intention to remain
committed to a gradual approach to exchange control liberalization. Part of this process of gradual
exchange control liberalization and financial sector strengthening is the shift to a system of prudential
regulation. Prudential regulations are applied internationally to protect policyholders and pensioners
from excessive risk, and typically include restrictions on foreign asset holdings. It is not possible to
predict when existing exchange controls will be abolished or modified by the South African
Government in the future, although some of the more salient changes to the South African exchange
control provisions over the past few years have been as follows:

• As an interim step towards prudential regulation, institutional investors comprised of retirement

funds, long term insurers, collective investment scheme management companies and
investment managers are allowed to transfer funds from South Africa for investment abroad,
subject to certain limitations as follows:

• The exchange control limit on foreign portfolio investment by institutional investors is

applied to an institution’s total retail assets.

• The foreign exposure of retail assets may not exceed 15% in the case of retirement funds

and long term insurers and 25% in the case of collective investment scheme management
companies and investment managers registered as institutional investors for exchange
control purposes.

• Institutional investors will, on application, be allowed to invest an additional five per cent of

their total retail assets by acquiring foreign currency denominated portfolio assets in Africa
through foreign currency transfers from South Africa or by acquiring inward listed
securities.

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• In October 2002, the exchange control allowance for foreign direct investment into Africa was

increased from R750 million to R2 billion, in line with South Africa’s commitment to the
New Partnership for Africa’s Development, or NEPAD. In order to facilitate global expansion
of South African companies from a domestic base, the exchange control allowances for direct
investment outside of Africa was increased from R500 million to R1 billion. In October 2004 the
previous Exchange Control limits imposed on new foreign direct investments by South African
companies were abolished, subject to certain provisions which relate to the Exchange Control
Department of the South African Reserve Bank’s investment criteria. Companies wishing to
establish new overseas ventures or new ventures in Africa are now permitted to transfer
unlimited amounts abroad in order to finance approved investments. However, the approval of
Excon is required in advance and companies will need to comply with Excon’s investment
criteria in establishing such new ventures, which investment criteria include, among other
things, demonstrating benefit to South Africa and control of the foreign entity. Excon has
however reserved the right to stagger capital outflows relating to very large foreign investments
in order to manage the potential impact on the foreign exchange market.

• Dividends repatriated from abroad by South African companies during the period

February 26, 2003 to October 26, 2004 (dividend credits) automatically form part of domestic
funds and may be allowed to be retransferred abroad for the financing of approved foreign
direct investments or approved expansions, but may not be transferred abroad for any other
purpose.

• After October 26, 2004, a South African holding company may retain dividends declared by their

offshore subsidiaries offshore, which may be used for any purpose, without any recourse to
South Africa. Foreign dividends repatriated to South Africa after October 26, 2004 may be
retransferred abroad at any time and used for any purpose, provided there is no recourse to
South Africa. Such funds may, however, under no circumstances be utilized to fund
investments/loans into the Common Monetary Area for any purpose whatsoever via a
roundtripping structure, except if invested in approved inward listed instruments, such as foreign
inward listed securities issued on the JSE.

• Remittance of directors’ fees payable to persons permanently resident outside the Common

Monetary Area may be approved by authorized dealers, pursuant to the rulings.

Authorized dealers in foreign exchange may, against the production of suitable documentary

evidence, provide forward cover to South African residents in respect of fixed and ascertained future
foreign exchange commitments covering the movement of goods.

A system of exchange control allowances for the export of funds when persons emigrate has been

in place in South Africa for a number of decades. Persons who emigrate from South Africa are entitled
to take limited amounts of money out of South Africa by way of a cash allowance R160 000 per
person which is equal to a travel allowance of R160,000 per adult and R50,000 per child under 12 in
a family) and a foreign capital allowance (R2,000,000 per person with a limit of R4,000,000 per family
unit) and may export certain items. The balance of the emigrant’s funds are blocked and held under
the control of an authorized dealer. These blocked funds may only invested in prescribed investments
including:

• blocked current, savings, interest bearing deposit accounts in the books of an authorized dealer

in the banking sector;

• securities listed on the JSE and financial instruments listed on the Bond Exchange of South

Africa which are deposited with an authorized dealer and not released except temporarily for
switching purposes, without the approval of Excon. Authorized dealers must at all times be able
to demonstrate that listed securities or financial instruments which are dematerialized or
immobilized in a central securities depositary are being held subject to the control of the
authorized dealer concerned;

• mutual funds units; or

• the South African Futures Exchange.

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Aside from the investments referred to above, blocked Rands may only be utilized for very limited

purposes. Capitalization shares and dividends declared out of capital gains or out of income earned
prior to emigration remain subject to the blocking procedure. Emigrants’ blocked assets may be
unwound and such emigrants are entitled, on application to Excon and subject to an exiting schedule
and an exit levy of 10%, to exit such blocked assets from South Africa.

Sales of Shares

Under present regulations, our ordinary shares and ADSs are freely transferable outside the

Common Monetary Area between non-residents of the Common Monetary Area. In addition, the
proceeds from the sale of ordinary shares on the JSE on behalf of shareholders who are not residents
of the Common Monetary Area are freely remittable to such shareholders. Share certificates held by
non-residents will be endorsed with the words “non-resident.”

Dividends

Other than non-cash dividends and dividends of a capital nature, which require specific Excon

approval, dividends declared in respect of shares held by a non-resident in a company whose shares
are listed on the JSE are freely remittable. See Item 3. “Key Information–Dividends and Dividend
Policy.”

Any cash dividends paid by us are expected to be paid in Rands. Holders of ADSs on the relevant

record date will be entitled to receive any dividends payable in respect of the shares underlying the
ADSs, subject to the terms of the deposit agreement. Subject to exceptions provided in the deposit
agreement, cash dividends paid in Rands will be converted by the depositary to Dollars and paid by
the depositary to holders of ADSs, net of conversion expenses of the depositary, in accordance with
the deposit agreement. The depositary will charge holders of ADSs, to the extent applicable, taxes
and other governmental charges and specified fees and other expenses. See Item 3. “Key
Information–Dividends and Dividend Policy.”

Shareholders who are not residents of the Common Monetary Area who are in receipt of scrip

dividends and who elect to dispose of the relevant shares, may remit the proceeds arising from the
sale of the relevant shares.

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TAXATION

The following is a summary of the material South African and US tax consequences in connection

with the acquisition, ownership and disposition of Telkom’s ordinary shares and ADSs. The following
summary is not a comprehensive description of all of the tax considerations that may be relevant to a
decision to acquire purchase, own or dispose of Telkom’s shares or ADSs and does not cover tax
consequences that depend upon your particular tax circumstances. This discussion is only a general
discussion; it is not a substitute for tax advice.

We recommend that you consult your own tax advisor about the consequences of holding

Telkom’s ordinary shares or ADSs, as applicable, in your particular situation. The discussion in this
section is based on current law. Changes in laws may alter the tax treatment of Telkom’s ordinary
shares or ADSs, as applicable, possibly on a retroactive basis.

South African Tax Matters

Withholding tax on dividends

The Republic of South Africa does not impose withholding tax on dividends. Accordingly, we are

not obliged to withhold any tax on dividends paid by us to our shareholders whether or not such
shareholder is resident in the Republic of South Africa. Any future decision to re-impose a withholding
tax on dividends declared by South African residents to non-resident shareholders is generally
permissible under the terms of a reciprocal tax treaty entered into between the Republic of South
Africa and the United States in 1997. That treaty, however, provides that any withholding tax
introduced in the future shall be limited to:

• 5% of the gross amount of the dividends declared, provided that the beneficial owner of the

shares on which the relevant dividends are declared is a company holding at least 10% of the
voting stock of the relevant company declaring such dividend; and

• 15% of the gross amount of the dividends declared by the relevant company in all other cases.

Although no withholding tax is payable on dividends declared by a South African resident, South

Africa has a secondary tax on companies, or STC, which is 12.5% of the net amount of the dividend.
Although the STC is the liability of the South African resident company which declares the dividend,
it would reduce the amount available for distribution. See “–Secondary tax on companies.”

Income taxes relating to shareholders

In principle, South African residents are taxed on their worldwide income regardless of the source

thereof. Non-residents are, subject to certain exemptions, taxed in relation to income derived from a
source within or deemed to be within the Republic of South Africa. These exemptions include normal
dividends received from South African companies, such as Telkom; interest received from sources in
the Republic of South Africa, including on stocks or securities issued by the government, provided the
non-resident is (a) a natural person who was not physically in South Africa for more than 183 days
during the particular tax year or (b) at any time in that tax year did not carry on business through a
permanent establishment in South Africa.

Under South African tax law, a natural person is a resident if the person is ordinarily resident in

the Republic of South Africa or, if not ordinarily resident during any particular year of assessment for
tax purposes, the person was physically present in the Republic of South Africa for certain prescribed
periods in the five years prior to and during the tax year in question. Non-natural persons, including
companies and trusts, are deemed to be resident in the Republic of South Africa for tax purposes if
they were incorporated or formed in the Republic of South Africa or have their place of effective
management in the Republic of South Africa. However, a person, natural or non-natural, is not a

229

resident of the Republic of South Africa if that person is deemed to be exclusively a resident of
another country in terms of a double taxation agreement entered into between the Republic of South
Africa and that other country.

Generally, income tax is payable on the profits derived from the disposal of shares in a South

African company by residents of the Republic of South Africa if the profits derived from such
disposal are of a revenue nature as opposed to a capital nature. Essentially, a profit is viewed as
being of a revenue nature if it is made pursuant to the operation of a business or scheme of profit
making and not incidentally or as a result of a mere realization of a share held for long-term
investment purposes. In determining whether the income derived from the disposal of such shares is
of a capital or revenue nature, the South African tax authorities and courts look at, among other
things, the intention of the holder of the shares to determine whether the disposal gave rise to a
capital or a revenue profit. Currently profits derived from the disposal of South African shares held as
long-term investments are generally regarded to be profits of a capital nature and are not subject to
South African income tax, but may be subject to capital gains tax. See “–Capital gains tax” for a
discussion of the imposition of capital gains tax. Generally, the distribution of profits by way of
dividends paid by a South African resident company, such as Telkom, in the ordinary course, is not
deductible by the company and is exempt from South African taxation for the recipient.

If a non-resident shareholder trades in South African shares, such non-resident shareholder would

be subject to South African income tax if the proceeds from the disposal would be seen as being from
a South African source, which would generally be the case where the trading activities take place in
South Africa.

To the extent that any share is acquired at a discount to market price, or any other benefit is

derived from the acquisition of the share, there is a risk that the relevant discount benefit could be
regarded as an income tax taxable benefit in the hands of the relevant shareholder if that shareholder
is an employee or director of Telkom and that share was acquired from Telkom, its associated
institutions or a third party by arrangement with it, or if that shareholder is an employee of the
Government of the Republic of South Africa and that share was acquired from the Government, its
associated institutions or a third party by arrangement with it.

Should a resident of the United States be subject to South African income tax pursuant to the

South African legislation, the tax treaty between South Africa and the United States may provide such
resident with tax relief. The tax treaty between South Africa and the United States provides that profits
of an enterprise of a US resident shall only be taxed in South Africa if such US resident carries on a
business in South Africa through a permanent establishment situated in South Africa. Thus if South
Africa has taxing rights to any profits generated by the disposal of shares by a US resident to the
extent that such US resident carries on business through a permanent establishment in South Africa
and the share dealing activities form part of such permanent establishment’s business, the US
resident will, in principle, be taxed on the profits of the disposal to the extent that such profits are from
a source within or deemed to be within South Africa.

Income taxes

As discussed above, income tax is levied in the Republic of South Africa only on income which

is classified to be of a revenue nature. South African companies are subject to corporate income tax
of 29% of their taxable income. See “–Secondary tax on companies.”

Capital gains tax

Capital gains tax was introduced into the South African taxation system with effect from

October 1, 2001. Capital gains tax was introduced by way of an amendment to the South African
Income Tax Act, 58 of 1962, to incorporate therein a substantive new schedule known as the Eighth

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Schedule. The relevant capital gains tax rates are summarized in the table below.

Capital gains tax is imposed on certain capital gains arising from the disposal or deemed disposal

of an asset and a prescribed portion of the capital gain, as set out in the table below, will be included
in a taxpayer’s taxable income. An asset is very broadly defined in the legislation and includes shares
in a South African company. If, however, the profits of the disposal were subject to income tax, no
capital gains tax liability would arise.

Capital gains or losses are calculated separately with respect to each asset disposed of during

the tax year and then aggregated to ultimately calculate the taxpayer’s total taxable capital gain or
loss. Each capital gain is determined by deducting from the proceeds accruing to the taxpayer from
the relevant disposal, the base cost of the asset and any portion of the proceeds already subject
to income tax. The base cost includes all direct costs in respect of the acquisition, permanent
improvements and disposal of the asset. The net capital gain for the tax year, in the case of natural
persons and certain special trusts only, is reduced by an annual exclusion of R12,500.

The following table sets out the prescribed portion of a capital gain that would be included in a

taxpayers’ taxable income, the normal tax rates applicable to taxpayers and, consequently, the
effective rate at which capital gains are taxed:

Prescribed portion

of the capital gain

included in taxable

Statutory

income expressed

income

Effective

Type of taxpayer

as a percentage

tax rate

rate

(%)

(%)

(%)

Individuals

25

0 – 40

0 – 10

Retirement funds

n/a

n/a

n/a

Trusts

Special

25

0 – 40

0 – 10

Other

50

40

20

Life assurers.

–

–

–

Individual policyholder fund

25

30

7.5

Company policyholder fund

50

29

14.5

Corporate fund

50

29

14.5

Untaxed policyholder fund

–

–

–

Companies 

50

29

14.5

Permanent establishments (branches)

50

34

17

Small business corporations

50

0 – 29

0 – 14.5

Employment companies

50

34

17

Collective investment schemes

n/a

n/a

n/a

The legislation makes provision, in certain circumstances, for a set-off of capital losses against

capital gains and a carry forward of capital losses.

To the extent a non-resident makes a capital gain on the disposal of shares, such gain will be

taxed in South Africa only if: (a) the shares form part of the assets of a permanent establishment
through which trade is carried on in South Africa or (b) the shares held by the non-resident, alone or
with any connected person, represent at least 20% of the equity of a company and 80% or more of
the net value of the non-trading assets of such company, such as Telkom, comprise immovable
property located in South Africa. However, pursuant to the tax treaty between South Africa and the
United States, South Africa only has taxing rights to the extent that the shares disposed of form part of
the business property of a permanent establishment in South Africa.

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Stamp duty

South African stamp duty, or uncertificated securities tax in an electronic environment, is payable

on the registration of transfer of shares, or a change in their beneficial ownership, in a South African
company. South African stamp duty is generally payable where shares are not listed on a securities
exchange in the Republic of South Africa at the rate of 0.25% of the arm’s length consideration
payable for the shares concerned or their market value, whichever is greater. In respect of
transactions involving shares listed on a securities exchange in South Africa, uncertificated securities
tax is payable at the same rates as set out above on every change in beneficial ownership thereof
pursuant to the Uncertificated Securities Tax Act, 31 of 1998.

South African stamp duty or uncertificated securities tax is generally payable on the registration

of the transfer or change in beneficial ownership of the shares in the records of a South African
company regardless of whether the transfer is executed within or outside South Africa. There are
certain exceptions to the payment of stamp duty where, for example, the instrument of transfer is
executed outside South Africa and registration of transfer is effected in any branch register kept
by the relevant company outside of South Africa, subject to certain provisions set forth in the
South African Stamp Duties Act, 77 of 1968. Transfers of ADSs are not subject to South African stamp
duty or uncertificated securities tax; however, if shares are withdrawn from the deposit facility, stamp
duty or uncertificated securities tax is payable on the subsequent transfer of the shares. An acquisition
of shares from the depositary by an investor in exchange for ADSs representing the shares, including
an acquisition upon termination of a deposit arrangement, may render an investor liable to South
African stamp duty or uncertificated securities tax at the same rate as stamp duty or uncertificated
securities tax on a subsequent transfer of shares, upon the registration of the investor as the holder or
new beneficial owner of shares.

Secondary tax on companies (STC)

STC is payable in the Republic of South Africa by resident companies of the Republic of South

Africa at a rate of 12.5% based on the net amount of dividends declared by a company during any
dividend cycle. The net amount of dividends declared by a company is the excess of the dividends
declared by the company over the amount of certain dividends accruing to the company during the
relevant dividend cycle. A dividend cycle runs from the date of accrual of a dividend to the
shareholders to the next shareholder accrual date. Any excess of dividends accruing to a company
in a relevant dividend cycle, excluding those foreign dividends which are not exempt from South
African income tax, over the dividends paid in such cycle are carried forward by the company to the
succeeding dividend cycle as an STC credit.

The imposition of STC, together with the corporate income tax discussed above, effectively

imposes a dual corporate tax system in the Republic of South Africa with the liability for each of STC
and normal corporate income tax being separately determined. Accordingly, a company without a
normal tax liability may have a liability for STC, and vice versa, and may be liable for both normal tax
and STC on profits distributed. STC creates a maximum effective tax rate on companies of 36.89%.
Capitalization shares awarded and distributed in lieu of cash dividends do not incur STC at that stage
and listed South African companies often offer capitalization shares in lieu of cash dividends. No
South African tax, including withholding tax, is payable in respect of the receipt of these shares by the
recipients thereof. However, STC will arise to the extent capitalized profits used to award the
capitalization shares are subsequently paid to shareholders whether in connection with a liquidation
or reconstruction of the company or a repayment of capital, including a share buy-back.

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United States Tax Matters

The following discussion sets forth the material US federal income tax consequences of the

ownership and disposition of our ordinary shares or ADSs relevant to US holders, and in certain
circumstances, non-US holders, as of the date of this annual report. This discussion is based on the
US Internal Revenue Code of 1986, as amended, referred to herein as the Code, and existing final,
temporary and proposed Treasury Regulations, rulings and judicial decisions, all as of the date hereof
and all of which are subject to prospective or retroactive changes, which could affect the tax
consequences as described below.

This discussion does not purport to address all US federal income tax consequences that may be

relevant to a particular investor. This discussion applies to you only if you hold our ordinary shares or
ADSs, as applicable, as a capital asset for US federal income tax purposes, generally, assets held for
investment, within the meaning of Section 1221 of the Code. This discussion does not address the tax
consequences that may be relevant to you if you are a member of a class of holders subject to
special rules, including:

• dealers in securities or currencies;

• traders in securities that elect to use a mark-to-market method of accounting for securities

holdings;

• banks or other financial institutions;

• insurance companies;

• tax-exempt organizations;

• persons that hold our ordinary shares or ADSs as part of a straddle or a hedging, integrated,

constructive sale or conversion transaction for US federal income tax purposes;

• persons whose functional currency for US federal income tax purposes, as defined

in Section 985 of the Code is not the US Dollar;

• persons resident or ordinarily resident in South Africa;

• persons liable for alternative minimum tax;

• persons that own, or are treated as owning, directly, indirectly or constructively, ten percent or

more of the total combined voting power of our ordinary shares or ADSs;

• a US expatriate or former long-term resident of the US;

• a person who acquired our ordinary shares or ADSs as compensation;

• a regulated investment company; or

• a real estate investment trust.

Further, this discussion does not address the indirect consequences to holders of equity

interests in entities, for instance, partnerships, that own our ordinary shares or ADSs. In addition,
this discussion does not address any aspect of US federal gift or estate tax, or the state, local or
non-US tax consequences of an investment in our ordinary shares or ADSs.

For purposes of the discussion below, you are a US holder if you are a beneficial owner of our

ordinary shares or ADSs who or which is:

• a citizen or resident of the United States;

• a corporation, or entity taxable as a corporation, that was created or organized in or under the

laws of the United States or any state of the United States, including the District of Columbia;

233

• an estate, the income of which is subject to US federal income tax regardless of its source; or

• a trust if: (a) a court within the United States is able to exercise primary supervision

over its administration and one or more US persons, as defined in Section 7701(a)(30) of the
Code, have the authority to control all substantial decisions of the trust or (b) the trust was in
existence on August 20, 1996, and on August 19, 1996 was treated as a domestic trust and has
elected to be treated as a US person.

A non-US holder is a beneficial owner of our ordinary shares or ADSs who is not a US holder.

Tax consequences to US holders

For US federal income tax purposes, if you are the beneficial owner of ADSs you will be treated

as the beneficial owner of the underlying ordinary shares represented by the ADSs.

Distributions

Subject to the passive foreign investment company discussion below, any distributions, other than

ordinary shares, distributed pro rata to a US holder with respect to our ordinary shares or ADSs will be
a dividend to such US holder to the extent those distributions are made out of our current and
accumulated earnings and profits, as determined for US federal income tax purposes. Any such
dividend generally will be included in your gross income as foreign source dividend income on the
date the distribution is received or, in the case of a US holder of ADSs, on the date of receipt by the
depositary. Distributions in excess of our current and accumulated earnings and profits will be treated
first as a nontaxable return of capital, reducing your tax basis in the ordinary shares or ADSs. Any
such distribution in excess of your tax basis in the ordinary shares or ADSs will be treated as capital
gain and will be either long-term or short-term depending upon whether you have held the ordinary
shares or ADSs for more than one year. Generally, the maximum tax rate on qualified dividends is
15% for individuals for tax years 2003 through 2008. We expect our dividends to be qualified
dividends as long as our ordinary shares or ADSs continue to be readily tradable on the New York
Stock Exchange, you have held our ordinary shares or ADSs for more than 60 days during the
121-day period beginning 60 days before the ex-dividend date, and we are not a passive foreign
investment company, or a PFIC, for US federal income tax purposes in the taxable year in which we
pay a dividend and were not a PFIC in the preceding taxable year, provided certain other
requirements are met. Each individual US holder is urged to consult his or her own tax advisor
regarding the availability to him or her of the reduced dividend tax rate in light of his or her own
particular situation.

Dividends paid by us will not be eligible for the dividends received deduction available to certain

US corporate shareholders. Because we do not calculate our earnings and profits under US rules, you
will not be able to demonstrate that a distribution is not out of earnings and profits.

We expect to pay distributions on the ordinary shares and ADSs in South African Rands. Dividends

paid in South African Rands generally will be included in your gross income in a US Dollar amount
calculated by reference to the exchange rate in effect on the day you, in the case of ordinary shares, or
the depositary, in the case of ADSs, receive the dividend, regardless of whether the payment is
converted into US Dollars at that time. Any foreign currency gain or loss that you recognize on a
subsequent conversion of Rands into US Dollars will be US source ordinary income or loss.

Dispositions

Subject to the passive foreign investment company discussion below, you generally will realize

capital gain or loss upon the sale or other disposition of our ordinary shares or ADSs measured by the
difference between the amount realized on the sale or other disposition and your tax basis in the
ordinary shares or ADSs, which is generally your cost of the ordinary shares or ADSs reduced by any

234

previous distributions that are not characterized as dividends. Any recognized gain or loss will be
long-term capital gain or loss if the ordinary shares or ADSs have been held for more than one year
on the date of the sale or other disposition. In general, any capital gain or loss recognized will be
treated as US source income or loss, as the case may be, for US foreign tax credit purposes. Your
ability to deduct capital losses may be subject to limitations. Currently, there is a maximum tax rate of
15% on net long-term capital gains of non-corporate taxpayers with respect to transactions after May
5, 2003 through December 31, 2008.

If you receive Rands upon the sale or other disposition of our shares or ADSs, you will realize an

amount equal to the US Dollar value of the Rands on the date of the sale or other disposition, or in
the case of cash basis and electing accrual basis taxpayers, the settlement date. You will have a tax
basis in the Rands received equal to the US Dollar amount of the Rands received. Any foreign
currency gain or loss you recognize on a subsequent conversion of Rands into US Dollars generally
will be US source ordinary income or loss.

You may incur South African stamp duty or MST, in connection with a subsequent registration or

transfer of our ordinary shares. See Item 10. “Additional Information–Taxation–South African Tax
Matters–Stamp duty.” In such case, stamp duty or MST, as applicable, will not be a creditable tax for
US foreign tax credit purposes.

Passive foreign investment company

We do not believe that we are a PFIC for US federal tax purposes and expect to continue

our operations in such a manner that we will not become a PFIC. A determination of whether a
non-US company is a PFIC must be made on an annual basis, and our status could change
depending among other things upon changes in our activities and assets and the activities and
assets of corporations in which we own, directly or indirectly, a 25 percent or more interest. If we
were to become a PFIC, US holders would generally be subject to US federal income taxes at the
highest ordinary income tax rate on any excess distributions received and any gain realized from the
sale or other disposition of the ordinary shares or ADSs plus an interest charge on certain taxes
treated as having been deferred by US holders under the PFIC rules, regardless of whether we
continue to be a PFIC.

US holders should consult their own tax advisors concerning the United States federal income tax

consequences of holding ordinary shares or ADSs if we are considered a PFIC in any taxable year,
including the advisability and availability of making certain elections that may alleviate the tax
consequences referred to above.

Tax consequences for non-US holders

You generally will not be subject to US federal income tax or withholding tax on dividends

received from us with respect to our ordinary shares or ADSs unless that income is considered
effectively connected with the conduct of a US trade or business, and if an applicable income tax
treaty so requires as a condition for you to be subject to US federal income tax on a net income basis
in respect of income from our ordinary shares or ADSs, as applicable, such dividends are attributable
to a permanent establishment that you maintain in the United States.

You generally will not be subject to US federal income tax on any gain recognized upon the sale

or exchange of our ordinary shares or ADSs, unless:

• that gain is effectively connected with the conduct of a US trade or business and, if an

applicable income tax treaty so requires as a condition for you to be subject to US federal
income tax on a net income basis in respect of gain from the sale or other disposition of our
ordinary shares or ADSs, as applicable, such gain is attributable to a permanent establishment
maintained by you in the United States; or

235

• you are an individual and are present in the United States for at least 183 days in the taxable

year of the sale or other disposition, and either your gain is attributable to an office or other
fixed place of business that you maintain in the United States or you have a tax home in the
United States.

If you are engaged in a US trade or business, the income from our ordinary shares or ADSs,

including dividends and the gain from the disposition of our ordinary shares or ADSs, that is effectively
connected with the conduct of that trade or business generally will be subject to regular
US federal income tax in the same manner as income of a US holder, as discussed above. In
addition, if you are a corporation, your earnings and profits that are attributable to that effectively
connected income, subject to certain adjustments, may be subject to an additional branch profits tax
at a rate of 30%, or any lower rate as may be specified by an applicable tax treaty.

Information reporting and backup withholding

Backup withholding and information reporting requirements may apply to payments within the

United States on our ordinary shares or ADS, including certain payments on the proceeds of a sale
or redemption of our ordinary shares or ADSs, to US holders. We, our agent, a broker, the trustee or
any paying agent, as the case may be, may be required to withhold tax from any payment that is
subject to backup withholding if the US holder fails to furnish the US holder’s taxpayer identification
number, to certify that such US holder is not subject to backup withholding, or to otherwise comply
with the applicable requirements of the backup withholding rules. The backup withholding rate is
currently 28%, and will be 31% for amounts paid after December 31, 2010 unless Congress enacts
legislation providing otherwise. US holders required to establish their exempt status must generally
provide such certification on IRS Form W-9, entitled Request for Taxpayer Identification Number.
Certain US holders, including, among others, corporations, are not subject to the backup withholding
and information reporting requirements.

Non-US holders generally are not subject to information reporting or back-up withholding with

respect to dividends paid on, or upon the disposition of, our ordinary shares or ADSs, provided that
such a non-US holder provides a taxpayer identification number, certifies to its foreign status, or
otherwise establishes an exemption. Non-US holders required to establish their exempt status must
generally provide such certification on IRS Form W8-BEN, entitled Certificate of Foreign Status.

The amount of any back-up withholding will be allowed as a credit against a holder’s US federal

income tax liability and may entitle such holder to a refund, provided that certain information is
furnished to the IRS.

HOLDERS AND PROSPECTIVE PURCHASERS OF OUR ORDINARY SHARES OR ADSs

SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE
US FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS TO ANY
ADDITIONAL TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING
OF SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY STATE,
LOCAL OR NON-US JURISDICTION, AND ESTATE, GIFT, AND INHERITANCE LAWS.

DOCUMENTS ON DISPLAY

We are subject to the informational requirements of the Securities Exchange Act of 1934, as

amended, or the Exchange Act, as they apply to foreign private issuers, and file reports and other
information with the SEC. As a foreign private issuer, we are exempt from Exchange Act rules
regarding the content and furnishing of proxy statements to shareholders and rules relating to short
swing profit reporting and liability.

236

Our SEC filings are available to the public over the internet at the SEC’s website at

http://www.sec.gov. You may also read and copy any document we file at the public reference facilities
of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, United States.
You may obtain more information concerning the operation of the public reference section of the SEC
by calling the SEC at 1-800-SEC-0330. In addition, the reports and other information we file with
the SEC are also available for reading and copying at the offices of the New York Stock Exchange,
11 Wall Street, New York, New York 10005, United States. We also maintain an internet site at
http://www.telkom.co.za. Our website and the information contained therein or connected
thereto shall not be deemed to be incorporated into or a part of this annual report.

237

Item 11.

Quantitative and Qualitative Disclosures About Market Risk

Financial Instruments and Financial Risk Management

Exposure to continuously changing market conditions has highlighted the importance of financial

risk management as an element of control. Treasury policies, risk limits and control procedures are
continuously monitored by Telkom’s board of directors through its audit and risk management
committee.

We hold or issue financial instruments to finance our operations, for the temporary investment of

short-term funds and to manage currency and interest rate risks. In addition, certain financial
instruments, for example trade debtors and trade creditors, arise directly from our operations.

We finance our operations primarily with a mixture of issued share capital, retained profit and

long-term and short-term loans. We use derivative financial instruments to manage our exposure to
market risks from changes in interest and foreign exchange rates. The derivatives used for this
purpose are principally interest rate swaps, currency swaps and forward exchange contracts.

Market Sensitive Instruments – Other than for Trading Purposes

Interest rate risk management

Interest rate risk arises from the repricing of our forward cover and floating rate debt as well as

incremental funding or new borrowings and the refinancing of existing borrowings.

Our policy is to manage interest cost through the utilization of a mix of fixed and variable rate

debt. In order to manage this mix in a cost efficient manner, we make use of interest rate derivatives
as approved pursuant to our group policy. Fixed rate debt represented 92.0%, 91.5% and 86.9% of
our total consolidated debt as of March 31, 2006, 2005 and 2004, respectively. A debt profile of mainly
fixed rate debt has been maintained to limit our exposure to interest rate increases.

238

The following table shows our fixed and variable rate debt for the periods indicated.

At March 31, 2006

2007

2008

2009

2010

2011

Thereafter Total

Fair value

(in ZAR millions, except percentages)

Long term debt
Telkom
Fixed rate (ZAR

denominated)
Long term debt, including
current portion

2,638

4,581

–

–

1,780

2,500

11,499

10,910

Average interest rate

(1)

9.48%

16.05%

–

–

14.98%

15.00% 14.15%

Finance leases

5

10

16

1

11

824

867

867

Fixed rate (EURO

denominated)
Long term debt

–

–

–

–

–

–

–

–

Average interest rate

(1)

(percentage)

–

–

–

–

–

–

–

–

Variable rate (ZAR

denominated)
Variable rate

–

–

–

–

–

–

–

–

Average interest rate
(percentage)

(2)

Variable rate (EURO

denominated)
Variable rate

3

–

–

–

12

70

85

85

Average interest rate

(2) (3)

6.81%

–

0.10%

0.133%

0.34%

Vodacom

(4)

Fixed (ZAR denominated)

Finance leases and other
short term debt

43

58

96

49

81

80

407

459

Fixed rate (USD

denominated)
Long term debt, including
current portion

29

–

–

–

–

–

29

29

Average interest rate

(2)

Variable rate (EURO

denominated)
Long term debt, including
current portion

29

–

–

–

–

–

29

29

Average interest rate

(3)

Variable rate (USD

denominated)
Long term debt, including
current portion

710

–

–

–

–

46

756

756

Average interest rate

(3)

Variable rate (TSH

denominated)
Long term debt, including
current portion

14

–

–

–

–

–

14

14

Average interest rate

(3)

239

(1)

Weighted average yield to maturity.

(2)

Weighted average interest rate.

(3)

Variable rate equals the current reset rate applicable on reporting date.

(4)

Represents Telkom’s 50% share of Vodacom’s interest bearing indebtedness.

The following table shows our interest rate swaps for the periods indicated.

At March 31, 2006

2007

2008

2009

2010

2011 Thereafter

Total

Fair value

(in ZAR millions, except percentages)

Telkom

ZAR Pay fixed, receive
floating . . . . . . . . .

–

1,000

–

–

–

–

1,000

(106)

Average pay rate

(1) (3)

. .

14.67%

–

–

–

14.67%

Average receive rate

(1) (3)

7.09%

7.09%

Vodacom

(2)

ZAR Receive fixed, pay
floating . . . . . . . . .

–

–

47

–

–

62

109

19

Average pay rate

(1) (3)

. .

9.15%

–

–

9.43%

9.31%

Average receive rate

(1)

.

14.90%

–

15.27%

15.11%

(1)

Weighted average interest rate.

(2)

Represents Telkom’s 50% share of Vodacom’s indebtedness.

(3)

Variable rate calculated as of March 31, 2006.

Foreign currency exchange rate risk

We manage our foreign exchange rate risk by hedging all identifiable exposures via various

financial instruments suitable to our risk exposure.

Cross currency swaps and forward foreign exchange contracts have been entered into to reduce

the foreign currency exposure on our operations and our liabilities. We also enter into forward foreign
exchange contracts to hedge interest expense and purchase and sale commitments denominated in
foreign currencies, principally US Dollars and Euros. The purpose of our foreign currency hedging
activities is to protect us from the risk that the eventual net flows will be adversely affected by
changes in exchange rates.

We make use of foreign debt funding when the opportunity exists to fund at a lower than local

cost of funding, or for strategic reasons.

240

The following table sets forth our liabilities and related derivative instruments subject to foreign

exchange risk for the periods indicated.

At March 31, 2006

2007

2008

2009

2010

2011

Thereafter Total

Fair value

(in ZAR millions, except percentages)

Telkom
Long term debt
Fixed rate (EURO

denominated)

(2)

–

–

–

–

–

–

–

Average interest rate

(1)

–

–

–

–

–

–

–

Variable rate (EURO

denominated)

(2)

3

–

–

12

70

85

85

Average interest rate

(1)

6.81%

–

–

0.10%

0.133%

0.34%

–

Accounts payable (EURO

denominated)

(2)

88

–

–

–

–

–

88

88

Accounts payable (USD

denominated)

(3)

interest free

300

–

–

–

–

300

300

Account payable (GBP

denominated)

(4)

interest free

24

–

–

–

–

–

24

24

Vodacom
Fixed rate (USD

denominated)

(3)

29

–

–

–

–

–

29

29

Variable rate (EURO

denominated)

(2)

29

–

–

–

–

–

29

29

Variable rate (USD

denominated)

(3)

710

–

–

–

–

46

756

756

Variable rate (TSH

denominated)

(5)

14

–

–

–

–

–

14

14

(1)

Weighted average interest rate.

(2)

EURO converted at the spot rate quoted on Reuters of R7.482 EURO on March 31, 2006.

(3)

USD converted at the spot rate quoted on Reuters of R6.180 USD on March 31, 2006.

(4)

GBP converted at the spot rate quoted on Reuters of R10.737 GBP on March 31, 2006.

(5)

TSH converted at the spot rate quoted on Reuters of R0.005 TSH on March 31, 2006.

241

The following tables set forth our foreign currency forward exchange contracts for the periods

indicated.

Forward contracts to buy foreign currencies and sell ZAR

At March 31, 2006

2007

2008

2009

2010

2011

Thereafter Total

Fair value

(ZAR)

Telkom
US Dollars
Notional Amount (millions)

1,134

–

–

–

–

–

1,134

(51)

Average contractual exchange

rate

6.51

–

–

–

–

–

6.51

EURO
Notional Amount (millions)

631

–

–

–

–

–

631

(29)

Average contractual exchange

rate

7.96

–

–

–

–

–

7.96

Pound Sterling
Notional Amount (millions)

82

–

–

–

–

–

82

(8)

Average contractual exchange

rate

11.97

–

–

–

–

–

11.97

Swedish Krona
Notional Amount (millions)

46

–

–

–

–

–

46

(1.0)

Average contractual exchange
rate

0.82

–

–

–

–

–

0.82

Japanese Yen
Notional Amount (millions)

2

–

–

–

–

–

2

(0.17)

Average contractual exchange

rate

0.06

–

–

–

–

–

0.06

Vodacom
US Dollar
Notional Amount (millions)

22

–

–

–

–

–

22

(0.3)

Average contractual exchange

rate

6.31

–

–

–

–

–

6.31

EURO
Notional Amount (millions)

604

–

–

–

–

–

604

(17)

Average contractual exchange

rate

7.81

–

–

–

–

–

7.81

Pound Sterling
Notional Amount (millions)

239

–

–

–

–

–

239

(13)

Average contractual exchange

rate

11.47

–

–

–

–

–

11.47

Swiss Franc
Notional Amount (millions)

0.03

–

–

–

–

–

0.03

–

Average contractual exchange

rate

4.89

–

–

–

–

–

4.89

242

Forward contracts to sell foreign currencies and buy ZAR

At March 31, 2006

2007

2008

2009

2010

2011

Thereafter Total

Fair value

(ZAR)

Telkom
US Dollars
Notional Amount (millions)

679

275

–

–

–

–

954

140

Average contractual

exchange rate

6.59

10.94

–

–

–

–

7.44

EURO
Notional Amount (millions)

294

–

–

–

–

–

294

(3)

Average contractual

exchange rate

7.49

–

–

–

–

–

7.49

Pound Sterling
Notional Amount (millions)

54

–

–

–

–

–

54

2.3

Average contractual

exchange rate

11.27

–

–

–

–

–

11.27

Swedish Krona
Notional Amount (millions)

22

–

–

–

–

–

22

(0.3)

Average contractual

exchange rate

0.79

–

–

–

–

–

0.79

Japanese Yen
Notional Amount (millions)

1

–

–

–

–

–

1

0.03

Average contractual

exchange rate

0.05

–

–

–

–

–

0.05

Vodacom
US Dollar
Notional Amount (millions)

0.4

–

–

–

–

–

0.4

(0.0)

Average contractual

exchange rate

6.09

–

–

–

–

–

6.09

EURO
Notional Amount (millions)

15

–

–

–

–

–

15

(0.0)

Average contractual

exchange rate

7.53

–

–

–

–

–

7.53

Pound Sterling
Notional Amount (millions)

2

–

–

–

–

–

2

0.01

Average contractual

exchange rate

10.86

–

–

–

–

–

10.86

Swiss Franc
Notional Amount (millions)

0.03

–

–

–

–

–

0.03

0.0

Average contractual

exchange rate

4.85

–

–

–

–

–

4.85

Other market risks

Credit risk management

We are not exposed to major concentrations of credit risk. To reduce the risk of counter party

failure, limits are set based on the individual ratings of counterparties by well-known ratings agencies.
Credit limits are reviewed on an annual basis or when information becomes available in the market.
We limit our exposure to any counterparty and these exposures are monitored daily. We expect that
all counterparties will meet their obligations.

Trade debtors comprise a large and widespread customer base, covering residential, business

and corporate customer profiles.

243

Credit checks are performed on all customers, other than prepaid customers, on application for

new services and on an ongoing basis where appropriate.

Liquidity risk management

We are exposed to liquidity risk as a result of uncertain debtor related cash flows and capital

commitments.

Liquidity risk is managed by our corporate finance division in accordance with policies and

guidelines formulated by Telkom’s executive committee. Pursuant to our borrowing requirements,
we ensure that sufficient facilities exist to meet our immediate obligations. Telkom’s operating
committee maintains a reasonable balance between the period over which assets generate funds
and the period over which the respective assets are funded in order to manage long-term liquidity risk.

We had available credit facilities not utilized of R9.5 billion as of March 31, 2006.

Fair value of financial instruments

The fair values of financial instruments are calculated using the market rates on valuation date.

The values disclosed above are indicative values and may not be the realizable value.

Item 12.

Description of Securities Other than Equity Securities

Not applicable.

244

PART II

Item 13.

Defaults, Dividend Arrearages and Delinquencies

None.

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

Item 15.

Controls and Procedures

We are aware of the importance of maintaining adequate disclosure controls and procedures and

internal control over financial reporting and are continuously working towards improving these controls
and procedures. Beginning with the year ended March 31, 2007, Section 404 of the U.S. Sarbanes-
Oxley Act of 2002 will require Telkom to include an internal control report by management with
Telkom’s Annual Report on Form 20-F. The internal control report must contain: (1) a statement of
management’s responsibility for establishing and maintaining adequate internal control over financial
reporting for Telkom; (2) a statement identifying the framework used by management to conduct the
required evaluation of the effectiveness of its internal control over financial reporting; (3)
management’s assessment of the effectiveness of its internal control over financial reporting as of the
end of its most recent fiscal year, including a statement as to whether or not its internal control over
financial reporting is effective; and (4) a statement that its independent auditors have issued an
attestation report on management’s assessment of its internal control over financial reporting. Telkom
completed a process of risk identification and control documentation, which was benchmarked to
internal control guidelines and frameworks such as the Commission of Sponsoring Organizations of
the Treadway Commission and Control Objectives for Information and Related Technology, and
performing quarterly self-assessments and a series of continuous management testing. Telkom is
currently in the process of remediating the necessary improvements identified during the
documentation and management testing phases in preparation for the management certification and
auditor attestation requirements of Section 404.

In the course of Telkom’s ongoing preparation for its Section 404 certification, Telkom and its

consolidated subsidiaries have identified areas of internal control over financial reporting that may
need improvement and have designed enhanced processes and controls and plan to design
additional enhanced processes and controls, as necessary, to address these and any other issues
that might be identified in the future. Vodacom, as a joint venture company, is not subject to the
requirements of the Section 404 evaluation. In addition, we have identified errors in our consolidated
financial statements and determined that it was necessary to restate our previously issued
consolidated financial statements as described in note 2 of the notes to Telkom Group’s audited
consolidated financial statements and note 23 of the notes to Vodacom’s audited consolidated
financial statements included in this annual report and Telkom’s auditors, Ernst & Young, have notified
us that they had identified two significant deficiencies under standards established by the Public
Company Accounting Oversight Board at Telkom that were reported to Telkom’s audit committee and
Vodacom’s auditors, Deloitte & Touche, have advised that they had identified two significant
deficiencies under standards established by the Public Company Accounting Oversight Board at
Vodacom that were reported to Vodacom’s audit committee. Vodacom’s two significant deficiencies
were also reported to Telkom’s audit committee by Ernst & Young.

A control deficiency exists when the design or operation of a control does not allow management

or employees, in the normal course of performing their assigned functions, to prevent or detect
misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of
control deficiencies, that adversely affects the company’s ability to initiate, authorize, record, process
or report external financial data reliably in accordance with generally accepted accounting principles
such that there is more than a remote likelihood (i.e., probability of greater than 5%) that a

245

misstatement of the company’s annual or interim financial statements that is more than
inconsequential will not be prevented or detected.

The first significant deficiency related to lease accounting with respect to Telkom’s leases/rentals

for PABX systems, routers and related equipment, which Ernst & Young had identified as a significant
deficiency in the 2005 financial year. Ernst & Young stated that the manner in which Telkom’s records
are maintained makes it difficult to match the carrying amounts of assets with its respective lease
contracts and the results of Ernst & Young’s current year audit procedures indicated that Telkom had
not implemented adequate systems to enable it to analyze its rental/lease agreements in order to
determine whether the substance of the agreements constitute finance leases. As a result, the
lease/rental agreements may be inappropriately accounted for resulting in misstated financial results
and position. Telkom has extended the project to include all systems, routers and related equipment.
The task team involving representatives from all the relevant and impacted business organizations
has validated all contracts and relevant data. This project is expected to be finalized in the 2007
financial year.

The second significant deficiency related to Telkom’s outsourced network arrangements with

Nedbank and Old Mutual, which are the types of transactions Telkom intends to target in the future.
The results of Ernst & Young’s audit suggested that there were indicators that Telkom had insufficient
processes (i.e. internal controls) in place to ensure that the accounting for these complex outsourced
network arrangements is appropriately assessed at the time of entering into the arrangement and that
there was a significant risk that a more than remote likelihood of a misstatement in the financial
statements could occur and/or not be detected in a timely manner as a result of the lack of sufficient
processes in this regard. Due to the unique customer requirements and creative solutions and
services created, these transactions could not be billed and managed through the existing billing and
reporting systems that are utilized for normal business transactions. Telkom is in the process of
designing and implementing processes with appropriate and adequate internal controls to enable it to
assess whether its outsourced network arrangements are appropriately accounted for in compliance
with IFRS.

The first significant deficiency at Vodacom related to the failure of Vodacom Congo to perform a

reconciliation between its general ledger and its financial subsidiary systems for pre-paid revenue. As
part of the year end audit, management identified an unreconciled difference that, although immaterial
to the Vodacom group, remained a significant deficiency since the reconciliation is a key control for
the company. A reconciliation between the general ledger and the financial subsidiary systems has
been implemented.

The second significant deficiency at Vodacom related to ineffective controls to ensure that the

correct commencement dates were applied in the calculation of the appropriate depreciation expense
on fixed assets at Vodacom Congo during the year, resulting in errors in calculations. As part of the
year end audit, management sourced, reviewed and corrected the accuracy of 85%, in value, of the
fixed asset commencement dates and the related expense recognition. Controls have been identified
to ensure that the correct commencement dates are applied in the calculation of the appropriate
depreciation expense on fixed assets and Vodacom is in the process of implementing these controls.

The auditors also noted a number of other matters involving internal control over financial

reporting and its operation that they consider to be control deficiencies. Telkom is currently
considering the control deficiencies and intends to take action as it considers appropriate.

As previously reported, Telkom’s auditors had also identified a number of deficiencies in the 2005

financial year. The following controls have been implemented to address the deficiencies identified
during the 2005 financial year:

246

• Employee liabilities–Provision for sick leave. Telkom implemented a process to review all

complex calculations and assumptions used in the calculation of employee liabilities on a
regular basis. The key assumptions used in the calculation of employee liabilities are analyzed
during the month leading up to the half-year and year-end reporting dates.

• Revision of asset useful lives. Telkom has set up an IAS 16 implementation team that focused

on ensuring that the requirements of the amended IAS 16, including the assessment of useful
lives on a continued basis, are adequately addressed. The objectives of the existing
depreciation rate review group responsible for the review of depreciation rates has been
expanded to include the review of the lengthening the useful lives of assets that are considered
to be currently depreciating over a period shorter than the intended useful life. The depreciation
rate review group meets at least quarterly.

• Financial statement close process. Due to the complexity and continuous changes in IFRS and

US GAAP, an internal position has been created and a senior manager has been appointed to
manage Telkom’s risks involved in financial reporting and a formalized approach and
procedures have been implemented.

• Employee liabilities–Team award bonus provision and computation. A formal document detailing

the calculation of the return on assets and EBIT has been approved by the remuneration
committee of the board on June 1, 2005 for the 2005 and 2006 financial years.

• SAP basis–Basis authorizations. The current access to these transactions has been reviewed in

April 2005 and access has been limited to SAP users based on their current business
operational requirements. All SAP authorizations are reviewed on a quarterly basis as part of
the authorizations.

• Monitoring of fraud risks. The responsibility of identifying fraud risks to the business is a dual

responsibility of Group Finance with respect to fraud risk identification in the financial reporting
area and of the Telkom asset and revenue protection services group, or TARPS, from an
operational and non-financial reporting risk perspective.

A complete capability investigation and review was performed by TARPS to assess Telkom’s
forensic capability for purposes of fraud management and a fraud risk identification exercise
covering financial reporting and the possibility of misstatements due to fraud was also
performed. A risk register has also been compiled and was presented at the June 2006 audit
and risk management committee meeting.

An evaluation was performed under the supervision and with the participation of our management,

including our chief executive officer and chief financial officer, of the effectiveness, as of March 31,
2006, the end of the period covered by this annual report, of our disclosure controls and procedures
within the meaning of Rule 13a-15(e) of the U.S. Securities Exchange Act of 1934, as amended,
which we refer to as the Exchange Act. Based on this evaluation, and as a result of the foregoing
errors and significant deficiencies that were identified, our chief executive officer and our chief
financial officer concluded that, as of such date, our disclosure controls and procedures were not
effective for recording, processing, summarizing and reporting the material information we are
required to disclose in the reports we file or submit under the Exchange Act, within the time periods
specified in the rules and forms of the SEC. Except as described above, there were no significant
changes in our internal control over financial reporting that occurred during the period covered by this
annual report that have materially affected, or that are reasonably likely to materially affect, our
internal control over financial reporting.

We may identify other conditions that may result in significant deficiencies or material weaknesses

in the future, which could impact our ability to comply with Section 404 in a timely manner. If we are
not able to implement the requirements of Section 404 in a timely manner or with adequate
compliance or our independent auditors are not able to attest as to the effectiveness of our internal
control over financial reporting, we may be subject to sanctions or investigation by regulatory

247

authorities, such as the U.S. Securities and Exchange Commission, or SEC. As a result, we may be
required to incur costs in improving our internal control system and the hiring of additional personnel.
Any such actions could negatively affect our results and have a significant adverse effect on our
business, operations, reputation and net profit.

Item 16A.

Audit Committee Financial Expert

Our board of directors has determined that the chairman of our audit committee, Mr. Yekani

Tenza, is an audit committee financial expert within the meaning of Item 16A. (b) and (c) of the
requirements of Form 20-F of the SEC. The SEC has determined that the audit committee financial
expert designation does not impose on the person with that designation, any duties, obligations or
liability that are greater than the duties, obligations or liabilities imposed on such person as a member
of the audit committee of the board of directors in the absence of such designation. Mr. Tenza is a
qualified certified public accountant.

Item 16B.

Code of Ethics

Telkom has adopted a business code of ethics and a disclosure of information policy that apply

to all of our employees, including our principal executive officer, principal financial officer and principal
accounting officer or controller. Telkom’s business code of ethics, taken together with its disclosure
of information policy, are designed to comply with the requirements of Item 16B of Form 20-F.
Telkom’s business code of ethics seeks to instill in its employees the spirit of fairness, respect and
ethical standards in dealing with Telkom’s stakeholders. In business dealings on behalf of Telkom,
employees are expected to avoid activities that might give rise to conflicts of interest. Employees are
expected to act in the exclusive interest of Telkom. Procedures have been put in place to deal with
conflicts of interest where these arise in the course of employees’ day-to-day activities.

Telkom is committed to promoting the highest standards of behavior and compliance with laws

and regulations. Therefore its business code of ethics is reviewed regularly to ensure that it keeps
up with developments both inside and outside Telkom.

We have incorporated by reference our business code of ethics and disclosure policy as exhibits

to this annual report.

Item 16C.

Principal Accountant Fees and Services

The following table sets forth the aggregate audit fees, audit related fees, tax fees of our principal

accountants and all other fees billed for products and services provided by our principal accountants
other than audit fees, audit related fees and tax fees for each of the 2006 and 2005 financial years:

Audit Related

Audit Fees

Fees

(1)

Tax Fees

All Other Fees

Total

(ZAR millions)

2005

19

1

–

–

20

2006

29

6

–

–

35

(1)

Audit related services mainly include services performed to assist management in assessing the
status of its compliance with the Sarbanes-Oxley Act.

Audit Committee Pre-Approval Policy

In accordance with our audit committee pre-approval policy, all audit and non-audit services

performed for us by our independent accountants were pre-approved by the audit committee of our
board of directors, which concluded that the provision of such services by the independent
accountants was compatible with the maintenance of that firm’s independence in the conduct of its
auditing functions.

248

The pre-approval policy provides for categorical pre-approval of permissible non-audit services

and requires the specific pre-approval by the audit committee, prior to engagement, of such services,
other than audit services covered by the annual engagement letter, that are individually estimated to
result in an amount of fees less than 10% of the independent accountant’s total audit engagement fee
for individual services; provided that all such fees must be less than 50% of the total audit fees for
Telkom’s annual audit engagement. In addition, services to be provided by the independent
accountants that are not within the category of pre-approved services must be approved by the audit
committee prior to engagement, regardless of the service being requested and the amount, but
subject to the restrictions above.

Requests or applications for services that require specific separate approval by the audit

committee are required to be submitted to the audit committee by both management and the
independent accountants, and must include a detailed description of the services to be provided and a
joint statement confirming that the provision of the proposed services does not impair the
independence of the independent accountants.

The audit committee may delegate pre-approval authority to one or more of its members.

The member or members to whom such authority is delegated shall report any pre-approval
decisions to the audit committee at its next scheduled meeting. The audit committee does not
delegate to management its responsibilities to pre-approve services to be performed by the
independent accountants.

Item 16D.

Exemptions From the Listing Standards for Audit Committees

Not applicable.

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Ordinary Shares

In 2004 Telkom embarked on a share repurchase program to acquire shares to be used for the

Telkom conditional share plan, and to facilitate share repurchase activities for purposes other than for
the Telkom conditional share plan. The following table sets forth information with respect to Telkom’s
share repurchases in the 2004, 2005 and 2006 financial years.

249

(a) Total

(b) Average

(c) Total

(d) Maximum

number of

price

number of

number of

shares

paid per

shares

shares

purchased

share

purchased

that may

ZAR

as part of

yet be

publicly

purchased

announced

under the

plans or

plans or

programs

programs

(1)

For the year ended March 31, 2004

March 24 to March 31, 2004 

3,185,736

74.58

3,185,736

108,220,627

For the year ended March 31, 2005

June 7 to June 21, 2004

2,337,000

76.88

2,337,000

105,883,627

August 3 to August 31, 2004

7,457,094

78.69

7,457,094

98,426,533

September 1 to September 30, 2004 

10,586,418

76.28

10,586,418

87,840,115

For the year ended March 31, 2006

June 29 to June 30, 2005

152,172

108.82

152,172

87,687,943

July 1 to July 29, 2005

2,659,193

120.10

2,659,193

85,028,750

August 1 to August 31, 2005

3,161,098

126.65

3,161,098

81,867,652

September 1 to September 30, 2005

6,114,457

125.32

6,114,457

75,753,195

(1)

On January 27, 2004, the shareholders of Telkom authorized, by way of general approval, Telkom, or a subsidiary of
Telkom, to acquire up to 20% of Telkom’s issued share capital, upon such terms and conditions, and in such amounts as
the directors of Telkom and/or its subsidiaries may from time to time decide. The repurchases are subject to the
provisions of the Companies Act, 61 of 1973, as amended, and the Listing Requirements of the JSE. In terms
of the South African Companies Act, 61 of 1973, as amended, a subsidiary company may not acquire more than 10% of
the shares in its holding company and if the holding company acquires its own shares directly, such shares must be
cancelled. This approval was valid until the next Annual General Meeting, which was held on October 14, 2004. At this
meeting, the shareholders of Telkom provided general approval for the share repurchase program until the next Annual
General Meeting, or for 15 months from the date of the resolution, whichever period is shorter. At the following Annual
General Meeting, which was held on October 21, 2005, the shareholders of Telkom again provided general approval for
the share repurchase program until the next Annual General Meeting, or for 15 months from the date of the resolution,
whichever period is shorter. Telkom plans on continuing its share buy back strategy based on certain criteria.

250

PART III

Item 17.

Financial Statements

The registrant has responded to Item 18 in lieu of responding to this Item.

Item 18.

Financial Statements

See Index to Financial Statements for a list of all financial statements filed as part of this annual

report.

251

Item 19.

Exhibits

Documents filed as exhibits to this annual report:

Exhibits

Description

1.1

Memorandum and Articles of Association of Telkom S.A. Limited (“Telkom”)
(Incorporated by reference to Exhibit 3.1 to Telkom’s Registration Statement on
Form F-1 (File No. 333 102834) (the “F-1”))

(1)

2.1

Form of Ordinary Share Certificate (Incorporated by reference to Exhibit 4.1 to the
Form F-1)

(1)

2.2

Deposit Agreement, dated as of March 3, 2003, among Telkom, the Bank of New
York, as Depositary, and Owners and Beneficial Owners of American Depositary
Receipts issued thereunder, including the form of American Depositary Receipt
(Incorporated by reference to Exhibit 4.2 to the F-1)

(1)

4.1

Agreement, dated July 31, 2000, between Telkom and Total Facilities Management
Company (Pty) Limited (Incorporated by reference to Exhibit 10.3 to the F-1)

(1)

4.2

Exclusive Facilities Management Services Agreement, dated March 31, 2001,
between Telkom and systems Applications Project (Africa) (Pty) Limited (Incorporated
by reference to Exhibit 10.4 to the F-1)

(1)

4.3

Multiparty Implementation Agreement, dated September 30, 1993, among Telkom,
Vodacom Group (Pty) Limited, Mobile Telephone Network (Pty) Limited, the
Postmaster General and the Government of the Republic of South Africa
(Incorporated by reference to Exhibit 10.5 to the F-1)

(1)

4.4

Interconnection Agreement, dated February 16, 1994, among Telkom and Vodacom
Group (Pty) Limited, as amended by agreements among Telkom, Vodacom Group
(Pty) Limited and MTN on August 22, 1996, January 12, 1998, July 21, 1998 and
September 4, 2001 (Incorporated by reference to Exhibit 10.6 to the F-1)

(1)

4.5

Interconnection Agreement, dated February 16, 1994, among Telkom and MTN, as
amended by agreements among Telkom, Vodacom Group (Pty) Limited and MTN on
August 22, 1996, January 12, 1998, July 21, 1998, and September 14, 2001
(Incorporated by reference to Exhibit 10.7 to the F-1)

(1)

4.6

Interconnection Agreement, dated August 31, 2001, between Telkom SA Limited and
Cell C, as amended by agreement among Telkom, Vodacom Group (Pty) Limited and
Cell C, dated September 18, 2001 (Incorporated by reference to Exhibit 10.8 to
the F-1)

(1)

4.7

Joint Venture Agreement, dated March 31, 1995, between Telkom, Vodafone Group
plc, Rembrant Group Limited, Vodacom Group, Vodacom, Vodac and Vodafone
Holdings (SA) (Pty) Limited (Incorporated by reference to Exhibit 10.9 to the F-1)

(1)

4.8

Registration Rights Agreement, dated January 16, 2003, among the Minister of
Communications of the Government of the Republic of South Africa, Thintana
Communications LLC and Telkom SA Limited (Incorporated by reference to
Exhibit 10.11 to the F-1)

(1)

252

4.9

Telkom Conditional Share Plan (Incorporated by reference to Exhibit 4.11 to Telkom’s
Annual Report on Form 20-F for the year ended March 31, 2004)

(1)

(1)

4.10

4.11

Service Agreement between Telkom SA Limited and Sizwe Nxasana (Incorporated by reference to Exhibit 4.12 of the 20-F for the year ended March 31, 2004)

Service Agreement between Telkom SA Limited and Papi Molotsane 

(2)

8.1

Subsidiaries of Telkom (Incorporated by reference to Exhibit 21.1 to the F-1)

(1)

11.1

Telkom SA Limited Business Code of Ethics (Incorporated by reference to
Exhibit 11.1 to the 20-F)

(1)

11.2

Telkom SA Limited Disclosure of Information Policy (Incorporated by reference to
Exhibit 11.2 to the 20-F)

(1)

12.1

Certification of chief executive officer pursuant to 17 CFR 240.13a 14(a), promulgated
under Section 302 of the Sarbanes Oxley Act of 2002

(2)

12.2

Certification of chief financial officer pursuant to 17 CFR 240.13a 14(a), promulgated
under Section 302 of the Sarbanes Oxley Act of 2002

(2)

13.1

Certification of chief executive officer and chief financial officer furnished pursuant to
Rule 13a 14(b) (17 CFR 240.13a 14(b)) or Rule 15d 14(b) (17 CFR 240.15d 14(b))
and Section 1350 of Chapter 63 of Title 18 of the United States Code
(18 U.S.C. 1350), promulgated under Section 906 of the Sarbanes Oxley Act
of 2002

(2)

(1)

Incorporated by reference.

(2)

Filed herewith.

253

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that
it has duly caused and authorized the undersigned to sign this annual report on its behalf.

TELKOM SA LIMITED

By: /s/ Leapeetswe Rapula Radiala Molotsane

Name: Leapeetswe Rapula Radiala Molotsane
Title: Chief Executive Officer

Dated: August 4, 2006

Telkom SA Limited

Content to the consolidated annual financial statements

for the three years ended March 31, 2006

Page

Reports of the independent registered public accounting firm

F-2

Consolidated income statement

F-3

Consolidated balance sheet

F-4

Consolidated statement of changes in equity

F-5

Consolidated cash flow statement

F-6

Notes to the consolidated annual financial statements

F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TELKOM SA LIMITED

We have audited the accompanying consolidated balance sheets of Telkom SA Limited (‘Telkom’) and its
subsidiaries (together ‘the Group’) as of March 31, 2006, 2005 and 2004, and the related consolidated statements
of income, shareholders' equity, and cash flows for each of the three years then ended set out on pages F-3 to
F-98.
 
These financial statements are the responsibility of the Group’s directors. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the financial statements of Vodacom
Group (Proprietary) Limited, a 50% joint venture proportionally consolidated, which statements reflect total assets
constituting 22%, 20% and 19% at March 31, 2006, 2005 and 2004, respectively, and total revenues constituting
36%, 32% and 28% for the years ended March 31, 2006, 2005 and 2004, respectively of the related consolidated
totals. Those statements were audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to the amounts included for Vodacom Group (Proprietary) Limited, is based solely on the
report of the other auditors.

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. We were not engaged to perform an audit of
the Group’s internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits, and the report of other auditors, provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial position of Telkom SA Limited and its
subsidiaries at March 31, 2006, 2005 and 2004, and the consolidated results of their operations and their cash
flows for the years then ended, in conformity with International Financial Reporting Standards, which differ in
certain significant respects from U.S. generally accepted accounting principles (see Note 44 to the consolidated
financial statements).

As described in Note 2 to the consolidated annual financial statements, in 2006 the Group adopted new
accounting standards, IAS 16 (revised) Property, plant & equipment, IAS 17 (revised) Leases, IAS 19 (revised)
Employee benefits, IAS 24 (revised) Related party disclosures, IAS 40 (revised) Investment property, IFRS 4
Insurance contracts and IFRIC 1 Changes in existing decommissioning, restoration and similar liabilities. The
Group also changed its revenue recognition policy with regards to connection revenues to analogise to guidance
issued under U.S. generally accepted accounting principles.

The consolidated annual financial statements further discloses in note 2 certain restatements affecting the Group’s
balance sheets at March 31, 2005 and March 31, 2004 and the related statements of income for the years then
ended. These restatements relate to changes in the application of accounting standards with regards to straight-
lining of operating leases, classification of investment properties, classification of certain derivative financial
instruments and classification of non integral software.


ERNST & YOUNG
Registered Accountants and Auditors


Pretoria
South Africa
June 2, 2006

F-2

Restated

Restated

2004

2005

2006

Notes

Rm

Rm

Rm

Total revenue

3.1

41,115

43,696

48,260

Operating revenue

3.2

40,582

43,160

47,625

Other income

4

255

280

480

Operating expenses

31,499

32,179

33,428

Employee expenses

5.1

7,408

8,111

7,489

Payments to other operators

5.2

5,985

6,132

6,826

Selling, general and administrative expenses

5.3

7,665

8,824

10,273

Services rendered

5.4

2,269

2,021

2,114

Operating leases

5.5

924

803

850

Depreciation, amortisation, impairment and write-offs

5.6

7,248

6,288

5,876

Operating profit

9,338

11,261

14,677

Investment income

6

322

350

397

Finance charges

7

3,264

1,695

1,233

Interest

2,488

1,686

1,346

Foreign exchange and fair value effect

776

9

(113)

Profit before tax

6,396

9,916

13,841

Taxation

8

1,738

3,082

4,520

Profit for the year

4,658

6,834

9,321

Attributable to:
Equity holders of Telkom

4,589

6,751

9,182

Minority interest

69

83

139

4,658

6,834

9,321

Basic earnings per share (cents)

9

823.9

1,246.7

1,744.7

Diluted earnings per share (cents)

9

823.9

1,244.3

1,735.2

Dividend per share (cents)

9

90.0

110.0

900.0

Consolidated income statement

for the three years ended March 31, 2006

F-3

Consolidated balance sheet

at March 31

Restated

Restated

2004

2005

2006

Notes

Rm

Rm

Rm

Assets
Non-current assets

41,751

42,552

44,813

Property, plant and equipment

10

37,756

36,448

37,274

Intangible assets

11

1,864

3,182

3,910

Investments

12

1,567

2,277

2,894

Deferred expenses

13

213

133

254

Deferred taxation

14

351

512

481

Current assets

11,423

15,045

12,731

Other financial assets

15

1,241

5,074

275

Short-term investments

12

168

69

69

Current portion of deferred expenses

13

430

214

226

Inventories

16

520

658

814

Trade and other receivables

17

5,846

5,820

6,399

Cash and cash equivalents

18

3,218

3,210

4,948

Total assets

53,174

57,597

57,544

Equity and liabilities
Equity attributable to equity holders of Telkom

21,628

26,141

29,165

Share capital and premium

19

8,293

8,293

6,791

Treasury shares

19

(238)

(1,812)

(1,809)

Share-based compensation reserve

20

–

68

151

Non-distributable reserves

21

91

361

1,136

Retained earnings

22

13,482

19,231

22,896

Minority interest

23

200

220

301

Total equity

21,828

26,361

29,466

Non-current liabilities

16,707

13,870

12,391

Interest-bearing debt

24

12,703

9,504

7,655

Deferred taxation

14

469

947

1,068

Deferred revenue

13

1,097

959

991

Provisions

26

2,438

2,460

2,677

Current liabilities

14,639

17,366

15,687

Credit facilities utilised

18

422

909

693

Trade and other payables

27

6,007

6,782

6,103

Shareholders for dividend

7

7

4

Current portion of interest-bearing debt

24

4,051

4,499

3,468

Current portion of deferred revenue

13

1,718

1,717

1,975

Current portion of provisions

26

1,329

1,428

1,660

Income tax payable

460

1,711

1,549

Other financial liabilities

15

645

313

235

Total liabilities

31,346

31,236

28,078

Total equity and liabilities

53,174

57,597

57,544

F-4

Attributable to ordinary shareholders

Share-based

Non-

compen-

distri-

Share          Share

Treasury

sation

butable

Retained

Minority

Total

capital      premium

shares

reserve      reserve

earnings

Total

interest

equity

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Balance at April 1, 2003

as previously reported

5,570

2,723

– –

(15)

10,392

18,670

194

18,864

Change in accounting policy
(Refer to note 2)

(809)

(809)

–

(809)

Restated balance at April 1, 2003

5,570

2,723

–

–

(15)

9,583

17,861

194

18,055

Total recognised income
and expense for the year

9

4,589

4,598

69

4,667

Total income and expense recognised
directly in equity for the year – Fair value
adjustment on investment (Refer to note 21)

9

9

9

Profit for the year (Net of restatement
R70 million) (Refer to note 2)

4,589

4,589

69

4,658

Dividend declared of 90 cents per share

(501)

(501)

(54)

(555)

Transfer to non-distributable reserves
(Refer to note 21)

189

(189)

–

–

Foreign currency translation reserve
(Refer to note 21) (net of tax R5 million)

(92)

(92)

(9)

(101)

Purchase of treasury shares

(238)

(238)

(238)

Restated balance at

March 31, 2004

5,570

2,723

(238)

– 91

13,482

21,628

200

21,828

Total recognised income and expense
for the year

(22)

6,751

6,729

83

6,812

Total income and expense recognised
directly in equity for the year

(22)

(22)

(22)

Fair value adjustment on investment
(Refer to note 21)

9

9

9

Realisation of fair value adjustment on
investment (Refer to note 21)

(31)

(31)

(31)

Profit for the year

6,751

6,751

83

6,834

Dividend declared of 110 cents per share

(606)

(606)

(67)

(673)

Transfer to non-distributable reserves
(Refer to note 21)

279

(279)

–

–

Foreign currency translation reserve
(Refer to note 21) (net of tax RNil)

13

13

(1)

12

Purchase of treasury shares

(1,574)

(1,574)

(1,574)

Business combination (Refer to note 33)

(117)

(117)

(117)

Net increase in share-based compensation
reserve (Refer to note 20)

68

68

68

Acquisition of subsidiary (Refer to note 33)

–

5

5

Restated balance at

March 31, 2005

5,570

2,723

(1,812)

68

361

19,231

26,141

220

26,361

Total recognised income and expense –
Profit for the year

9,182

9,182

139

9,321

Dividend declared of 900 cents per share

(4,801)

(4,801)

(78)

(4,879)

Transfer to non-distributable reserves
(Refer to note 21)

716

(716)

– –

Foreign currency translation reserve
(Refer to note 21) (net of tax RNil)

59

59

(7)

52

Net increase in share-based
compensation reserve (Refer to note 20)

86

86

86

Acquisition of subsidiary
(Refer to note 33)

–

27

27

Shares bought back and cancelled
(Refer to note 19)

(121)

(1,381)

(1,502)

(1,502)

Shares vested and re-issued
(Refer to note 20)

3

(3)

– –

Balance at March 31, 2006

5,449

1,342

(1,809)

151

1,136

22,896

29,165

301

29,466

Consolidated statement of changes in equity

for the three years ended March 31, 2006

F-5

Consolidated cash flow statement

for the three years ended March 31, 2006

Restated

Restated

2004

2005

2006

Notes

Rm

Rm

Rm

Cash flows from operating activities

13,884

15,711

9,506

Cash receipts from customers

40,520

43,561

46,958

Cash paid to suppliers and employees

(24,218)

(24,939)

(27,234)

Cash generated from operations

29

16,302

18,622

19,724

Interest received

469

463

482

Dividends received

6

10

14

50

Finance charges paid

30

(1,787)

(1,272)

(1,316)

Taxation paid

31

(562)

(1,487)

(4,550)

Cash generated from operations before dividend paid

14,432

16,340

14,390

Dividend paid

32

(548)

(629)

(4,884)

Cash flows from investing activities

(5,423)

(6,306)

(7,286)

Proceeds on disposal of property, plant and equipment and intangible assets

52

37

92

Proceeds on disposal of investments

29

267

493

Additions to property, plant and equipment and intangible assets

(5,248)

(5,880)

(7,396)

Additions to other investments

(331)

(592)

(475)

Acquisition of subsidiaries

33

75

(138)

–

Cash flows from financing activities

(6,481)

(9,897)

(258)

Purchase of treasury shares

(102)

(1,710)

–

Shares bought back and cancelled

–

–

(1,502)

Loans raised

1,732

1,157

4,123

Loans repaid

(7,428)

(5,027)

(7,399)

Finance lease capital repaid

(5)

(13)

(24)

(Increase)/decrease in net financial assets

(678)

(4,304)

4,544

Net increase/(decrease) in cash and cash equivalents

1,980

(492)

1,962

Net cash and cash equivalents at beginning of the year

837

2,796

2,301

Effect of foreign exchange rate differences

(21)

(3)

(8)

Net cash and cash equivalents at end of the year

18

2,796

2,301

4,255

Change in comparatives

The Group reclassified R463 million of Finance costs accrued from Cash paid to suppliers and employees to Finance charges paid for the year ended
March 31, 2005 (2004: R532 million).

F-6

1.

Overview of business activities

Telkom SA Limited (‘Telkom’) is a limited liability company
incorporated in the Republic of South Africa (‘South Africa’). The
Company, its subsidiaries and joint ventures (‘the Group’) is the
leading provider of fixed-line voice and data communications
services in South Africa and mobile communications services
through Vodacom Group (Proprietary) Limited (‘Vodacom’) in
South Africa and certain other African countries. The Group’s
services and products include:

• fixed-line voice services, including subscriptions and

connections services, local, long distance, fixed-to-mobile and
international voice services, interconnection and hubbing
communications services, international voice over internet
protocol services, subscription based value-added voice
services and customer premises equipment sales and rental;

• fixed-line data services, including domestic and international

data transmission services, such as point to point leased lines,
ADSL services and packet-based services, managed data
networking services and internet access and related
information technology services;

• mobile telephony through Vodacom; and

• e-commerce, including internet access service provider,

application service provider, hosting, data storage, e-mail and
security services.

2.

Significant accounting policies
Basis of preparation

The financial statements comply with International Financial
Reporting Standards (‘IFRS’) of the International Accounting
Standards Board (‘IASB’) and the Companies Act of
South Africa, 1973.

The financial statements are prepared on the historical cost
basis, with the exception of certain financial instruments and
share-based payments which are measured at fair value. Details
of the Group’s significant accounting policies are set out below,
and are consistent with those applied in the previous financial
year except for the following:

• the Group has adopted IAS16 (revised), IAS17 (revised),

IAS24 (revised), IAS40 (revised), IFRS4 and IFRIC1, which
are applicable for financial years beginning on or after
January 1, 2005;

• the Group has early adopted the amendment to IAS19,

which is applicable for financial years beginning on or after
January 1, 2006;

• the Group has made certain voluntary changes in accounting

policies related to fixed-line connection revenues; and

• the Group made certain retrospective changes to its

application of certain accounting standards.

The principal effects of these changes are discussed below.

Adoption of new and revised standards and
interpretations

The following new and revised standards and interpretations
have been adopted for the year under review:

IAS16 Property, Plant and Equipment (revised)

The revised standard clarifies that an entity should consider an
item of property, plant and equipment as a combination of
various components with separate useful lives or consumption
patterns. These separate components are used to calculate
depreciation, test for derecognition and for the treatment of
expenditure to replace or renew a component of that item of
property, plant and equipment. All initial and subsequent costs
incurred are now assessed in terms of one general recognition
principle at the time they are incurred. It further confirms that
the cost of an item of property, plant and equipment should
include not only the initial estimate of the costs relating to
dismantlement, removal or restoration of the property at the
time of installing the item, but also during the period of use for
purposes other than producing inventory. The residual value,
useful life and depreciation method of an asset must now be
reviewed annually. Residual values should not include expected
future inflation. There is no cessation of depreciation when
assets are idle. As a result of the adoption of the revised
standard in the current year the useful lives of all assets are
assessed on an annual basis. The effect of the annual
assessment in the current year is that useful lives of certain
categories of assets were extended which resulted in a decrease
in the current year depreciation charge.

IAS17 Leases (revised)

Based on the revised standard a lease of land and buildings is
required to be split into two elements – a lease of the land and
a separate lease of the buildings – which are considered
separately for the purposes of lease classification. All initial direct
costs incurred by a lessor in negotiating a finance lease need to
be included in the initial measurement of the finance lease
receivables. Initial direct costs incurred by lessors in negotiating
an operating lease are added to the carrying amount of the
leased asset and recognised over the lease term on the same
basis as the lease income. The revised standard also
distinguishes between the inception of a lease (when the lease
is classified) and the commencement of the lease (when
recognition takes place). The standard provides special
transitional provisions, whereby the Group is required to apply
the amendments resulting from the changes to the standard
retrospectively for all leases as it has previously applied IAS17
(revised 1997). No significant changes occurred in the
classification and measurement of leases as a result of the
adoption of the revised standard in the current year.

IAS24 Related Party Disclosures (revised)

Parent companies, investors, venturers and state-controlled
entities are no longer exempt from providing related party
disclosure in separate financial statements. The revised standard
now explicitly requires the disclosure of compensation of key
management personnel (which now includes non-executive
directors).

Notes to the consolidated annual financial statements

for the three years ended March 31, 2006

F-7

2.

Significant accounting policies

(continued)

Adoption of new and revised standards and
interpretations

(continued)

IAS24 Related Party Disclosures (revised)

(continued)

The scope of the revised standard is extended to include,
amongst others, close family members of key management
personnel of the Group. Disclosure of related party relationships
and transactions including the terms and conditions, securing of
outstanding balances, the nature of the consideration payable on
settlement, details of any guarantees and impairments are also
required. These additional requirements are disclosed in note 40.

IAS40 Investment Property (revised)

A property interest that is held by a lessee under an operating
lease that meets the definition of investment property may be
treated as investment property if the operating lease is
accounted for as if it were a finance lease in accordance with
IAS17, and the lessee uses the fair value model in terms of
IAS40. This standard has not had any impact on the Group’s
financial statements.

IFRS4 Insurance Contracts

The standard applies to all insurance contracts that an entity
issues, or to all reinsurance contracts that it holds. IFRS4 is the
first guidance by the IASB on recognition, measurement and
disclosure of insurance contracts. The impact on the Group’s
financial statements is immaterial.

IFRIC1 Changes in Existing Decommissioning,
Restoration and Similar Liabilities

Under IFRIC1 the effect of any changes to an existing obligation
must be added to or deducted from the cost of the related asset
and depreciated prospectively over the asset’s useful life. The
impact of the interpretation is not material, as there have been
no material changes to existing obligations.

Early adoption of International Financial Reporting
Standard

The following revised standard has been early adopted for the
year under review:

IAS19 Employee Benefits (revised)

With effect from April 1, 2005 the Group has early adopted the
amendment to IAS19. This amendment introduces an additional
recognition option for actuarial gains and losses arising in post-
employment defined benefit plans. If an entity adopts a policy
of recognising actuarial gains and losses in the period in which
they occur, it may recognise them outside profit or loss. The
actuarial gains and losses shall be presented in a statement of
changes in equity titled ‘statement of recognised income and
expense’ that comprises only the items specified in
paragraph 96 of IAS1. The Group has elected not to use the new
recognition option and therefore continues to recognise actuarial
gains and losses only when it is in excess of the corridor. The
amendment also requires additional disclosures that provide
information about trends in the assets and liabilities in a defined
benefit plan and the assumptions underlying the components of
the defined benefit cost. The standard has resulted in expanded
disclosures relating to employee benefits (Refer to note 28).

Changes in accounting policies
Connection revenues

To ensure comparability with other telecommunications entities
reporting under IFRS and to better reflect Telkom’s customer
retention focus, Telkom has retrospectively changed its
accounting policy in terms of IAS8.14(b) with regards to the
recognition of fixed-line installation and activation revenues.
Previously such revenue was recognised when the installation
and activation of customers had occurred because it was viewed
as the culmination of a separate earnings process. The revised
accounting policy is to recognise such revenues (and the related
costs) systematically over the expected duration of the customer
relationship because it is considered to be part of the customers’
ongoing rights to telecommunication services and the operator’s
continuing involvement. This treatment provides more reliable
and relevant information about this transaction with the entity’s
customers. The impact of the change in accounting policy is
reflected in the table at the end of this note.

Accounting pronouncements not yet adopted

The Group has not applied the following standards and
interpretations that have been issued and are not yet effective:

IAS1 Presentation of Financial Statements (revised)

This amendment is effective for annual periods beginning on or
after January 1, 2007 and requires an entity to disclose
information that enables users of its financial statements to
evaluate the entity’s objectives, policies and processes for
managing capital. The disclosures include qualitative information
as well as summary quantitative data about what the entity
regards as capital. The impact of this standard will entail more
extensive disclosure of the Group’s capital management.

IAS21 The Effects of Changes in Foreign Exchange
Rates (revised)

The amendment on Net Investment in a Foreign Operation
requires that even if a monetary item (which is part of a net
investment) is denominated in a currency which is neither that
of a reporting entity or a foreign operation, the resulting
exchange difference should be recognised in equity.

This treatment is similar to the treatment where a monetary item
is denominated in the currency of the reporting entity or that of
a foreign operation. This amendment is effective for annual
periods beginning on or after January 1, 2006. The possible
impact of this standard is currently being evaluated.

IAS39 Financial Instruments: Recognition and
Measurement (revised)

The first amendment is intended to ensure that issuers of
financial guarantee contracts include the resulting liabilities in
their balance sheet. The amendment defines a financial
guarantee contract as a contract that requires the issuer to make
specified payments to reimburse the holder for a loss it incurs
because a specified debtor fails to make payment when due in
accordance with the original or modified terms of a debt
instrument. The amendment must be applied for annual periods
beginning on or after January 1, 2006 and is not expected to
have a material effect.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-8

2.

Significant accounting policies

(continued)

Accounting pronouncements not yet adopted

(continued)

IAS39 Financial Instruments: Recognition and
Measurement (revised)

(continued)

The second amendment regarding cash flow hedge accounting

of forecast intragroup transactions is effective for annual periods

beginning on or after January 1, 2006. This amendment is not

expected to have any impact on the Group’s financial statements

since the Group’s derivative transactions do not qualify for hedge

accounting under the specific rules of IAS39.

The fair value option amendment to IAS39 introduces additional

requirements to be met before the fair value option may be

used. The amendment is effective for annual periods beginning

on or after January 1, 2006. The amendment is not expected

to have any impact on the Group’s financial statements since the

Group has not designated any financial assets or liabilities into

the category ‘at fair value through profit or loss’.

IFRS7 Financial Instruments: Disclosures

An entity shall apply this standard for annual periods beginning

on or after January 1, 2007. The standard requires the Group to

provide disclosures in the financial statements that enable users

to evaluate the significance of financial instruments for the

Group’s financial position and performance, and the nature and

extent of risks arising from financial instruments to which the

Group is exposed, and how the Group manages those risks. The

principles in this IFRS complement the principles for recognising,

measuring and presenting financial assets and financial liabilities

in IAS32 and IAS39. The impact of this standard will be to

expand on certain disclosures relating to financial instruments.

IFRIC4 Determining Whether an Arrangement
Contains a Lease

The interpretation is effective for annual periods beginning on or

after January 1, 2006. Under IFRIC4, where an entity enters

into an arrangement that depends on the use of a specific asset

and conveys the right to control this specific asset, the

arrangement should be treated as a lease under IAS17. The

arrangements that are in substance leases should be assessed

against criteria included in IAS17 to determine if the

arrangements should be accounted for as a finance lease or an

operating lease. The interpretation provides transitional

provisions whereby the Group is not required to comply with the

requirements of IAS8 regarding a change in accounting policy

when first applying this interpretation. These transitional

provisions permit the Group to assess existing arrangements at

the beginning of the earliest period for which comparative

information under IFRS is presented on the basis of facts and

circumstances existing at the start of that period. The possible

impact of this interpretation is currently being evaluated.

IFRIC7 Applying the Restatement Approach under
IAS29 Financial Reporting in Hyperinflationary
Economies

The interpretation is effective for annual periods beginning on or
after March 1, 2006. Under IFRIC7 guidance is given on how to
interpret the requirement ‘…stated in terms of the measuring
unit current at the balance sheet date’, as well as how to
account for the opening deferred tax items in restated financial
statements. The interpretation is not expected to have any
impact since the Group does not operate in a hyperinflationary
economy and does not have significant investments in
hyperinflationary economies.

IFRIC8 Scope of IFRS2

The interpretation is effective for annual periods beginning on or
after May 1, 2006. Under IFRIC8 guidance is given as to the
application of IFRS2 to transactions in which the Group cannot
identify specifically some or all of the goods or services received.
The possible impact of this interpretation is not expected to be
material since the Group has not transacted with third parties
using its equity as a purchase consideration for the transaction,
other than those paid to employees in share-based payment
transactions (Refer to note 28).

IFRIC9 Reassessment of Embedded Derivatives

The interpretation is effective for annual periods beginning on or
after June 1, 2006. This interpretation shall be applied
retrospectively. Under IFRIC9 guidance is given as to when to
assess whether an embedded derivative is required to be
separated from the host contract and accounted for as a
derivative when the entity first becomes a party to the contract
and should not be reassessed unless the contract terms change
to significantly modify the cash flows that would otherwise be
required. The possible impact of this interpretation is currently
being evaluated.

Significant accounting judgements and estimates

The preparation of financial statements requires the use of
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods.
Although these estimates are based on management’s best
knowledge of current events and actions that the Group may
undertake in the future, actual results ultimately may differ from
those estimates.

The presentation of the results of operations, financial position
and cash flows in the financial statements of the Group is
dependent upon and sensitive to the accounting policies,
assumptions and estimates that are used as a basis for the
preparation of these financial statements. Management has
made certain judgements in the process of applying the Group’s
accounting policies. These, together with the key assumptions
concerning the future, and other key sources of estimation
uncertainty at the balance sheet date, are discussed as follows:

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-9

2.

Significant accounting policies

(continued)

Significant accounting judgements and
estimates

(continued)

Property, plant and equipment and intangible assets

The useful lives of assets are based on management’s estimation.
Management considers the impact of changes in technology,
ustomer service requirements, availability of capital funding and
required return on assets and equity to determine the optimum
useful life expectation for each of the individual items of property,
plant and equipment. Due to the rapid technological advancement
in the telecommunications industry, the estimation of useful lives
could differ significantly on an annual basis. The impact of the
change in the expected useful life of property, plant and equipment
is described more fully in note 5.6. The estimation of residual
values of assets is also based on management’s judgement that the
assets will be sold and what their condition will be like at that time.

For assets that incorporate both a tangible and intangible
portion, management uses judgement to assess which element
is more significant to determine whether it should be treated as
property, plant and equipment or intangible assets.

Determination of impairments of property, plant and
equipment, and intangible assets

Management is required to make judgements concerning the
cause, timing and amount of impairment. In the identification
of impairment indicators, management considers the impact
of changes in current competitive conditions, cost of
capital, availability of funding, technological obsolescence,
discontinuance of services and other circumstances that could
indicate that an impairment exists. The Group applies the
impairment assessment to its separate cash generating units. This
requires management to make significant judgements concerning
the existence of impairment indicators, identification of separate
cash generating units, remaining useful lives of assets and
estimates of projected cash flows and fair value less costs to sell.
Management judgement is also required when assessing whether
previously recognised impairment loss should be reversed.

Where impairment indicators exist, the determination of the
recoverable amount of a cash generating unit requires
management to make assumptions to determine the fair value
less costs to sell and value in use. Key assumptions on which
management has based its determination of fair value less costs
to sell include the existence of binding sale agreements, and for
the determination of value in use include projected revenues,
gross margins, average revenue per unit, earnings multiple,
capital expenditure, expected customer bases and market share.
The judgements, assumptions and methodologies used can have
a material impact on the fair value and ultimately the amount of
any impairment.

Financial assets

At each balance sheet date management assesses whether there
are indicators of impairment of financial assets, including equity
investments. If such evidence exists, the estimated present value
of the future cash flows of that asset is determined.

Management judgement is required when determining the
expected future cash flows. To determine whether impairment is
prolonged, relies heavily on an assessment by management
regarding the future prospects of the investee. In measuring
impairments, quoted market prices are used, if available, or
projected business plan information from the investee for those
financial assets not carried at fair value.

Impairment of receivables

An impairment is raised for estimated losses on trade receivables
that are deemed to contain a collection risk. The impairment is
based on an assessment of the extent to which customers have
defaulted on payments already due and an assessment of their
ability to make payments based on credit worthiness and
historical write-offs experience. Should the financial condition of
the customers change, actual write-offs could differ significantly
from the impairment.

Taxation

Management judgement is exercised when determining the
probability of future taxable profits which will determine whether
deferred tax assets should be recognised or derecognised. The
utilisation of deferred tax assets will depend on whether it is
possible to generate sufficient taxable income, taking into
account any legal restrictions on the length and nature of the
taxation asset. When deciding whether to recognise unutilised
taxation credits, management needs to determine the extent
that future payments are likely to be available for set-off. In the
event that the assessment of future payments and future
utilisation changes, the change in the recognised deferred
taxation must be recognised in profit or loss.

The tax rules and regulations in South Africa as well as the other
African countries within which the group operates are highly
complex and subject to interpretation. Additionally, for the
foreseeable future, management expects South African tax laws
to further develop through changes in South Africa’s existing tax
structure as well as clarification of the existing tax laws through
published interpretations and the resolution of actual tax cases.

The growth of the Group, following its geographical expansion
into other African countries over the past few years, has made
the estimation and judgement more challenging. The resolution
of taxation issues is not always within the control of the Group
and it is often dependant on the efficiency of the legal processes
in the relevant taxation jurisdictions in which the Group operates.
Issues can, and often do, take many years to resolve. Payments
in respect of taxation liabilities for an accounting period result
from payments on account and on the final resolution of open
items. As a result there can be substantial differences between
the taxation charge in the income statement and taxation
payments. Group entities are subject to evaluation, by the
relevant tax authorities, of its direct and indirect tax filings and
in connection with such reviews, disputes can arise with the
taxing authorities over the interpretation or application of certain
tax rules. These disputes may not necessarily be resolved in a
manner that is favourable for the Group. Additionally the
resolution of the disputes could result in an obligation for the
Group that exceeds management’s estimate.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-10

2.

Significant accounting policies

(continued)

Significant accounting judgements and
estimates

(continued)

Employee benefits

The Group provides defined benefit plans for certain post-
employment benefits. The Group’s net obligation in respect of
defined benefits is calculated separately for each plan by
estimating the amount of future benefits earned in return for
services rendered. The obligation and assets related to each of
the post-retirement benefits are determined through an actuarial
valuation, which relies heavily on assumptions as disclosed in
note 28. The assumptions determined by management make
use of information obtained from the Group’s employment
agreements with staff and pensioners, market related returns on
similar investments, market related discount rates and other
available information. The assumptions concerning the expected
return on assets and expected change in liabilities are
determined on a uniform basis, considering long-term historical
returns and future estimates of returns and medical inflation
expectations. In the event that further changes in assumptions
are required, the future amounts of post-retirement benefits may
be affected materially.

The discount rate reflects the average timing of the estimated
defined benefit payments. The discount rate is based on zero coupon
South African government bonds with a duration and maturity of
20 years as reported by the Bond Exchange of South Africa. The
discount rate is expected to follow the trend of inflation.

Telkom provides equity compensation in the form of the Telkom
Conditional Share Plan to its employees. The related expense
and reserve are determined through an actuarial valuation,
which relies heavily on assumptions as disclosed in note 28. The
assumptions include employee turnover percentages and
whether specified performance criteria will be met. Changes to
these assumptions could affect the fair value of the shares and
compensation expense as calculated by the actuary.

Provisions and contingent liabilities

Management judgement is required when recognising and
measuring provisions and when measuring contingent liabilities
as set out in notes 26 and 36. The probability that an outflow
of economic resources will be required to settle the obligation
must be assessed and a reliable estimate must be made of the
amount of the obligation. Provisions are discounted where the
effect of discounting is material. The discount rate used is the
rate that reflects current market assessments of the time value
of money and, where appropriate, the risks specific to the
liability, all of which requires management judgement. The
Group is required to record provisions for legal contingencies
when the occurrence of the contingency is probable and the
amount of the loss can be reasonably estimated. Liabilities
provided for legal matters require judgements regarding
projected outcomes and ranges of losses based on historical
experience and recommendations of legal counsel. Litigation is
however unpredictable and actual costs incurred could differ
materially from those estimated at the balance sheet date.

Revenue recognition

To reflect the substance of each transaction, revenue recognition
criteria are applied to each separately identifiable component of a
transaction. In order to account for multiple-element revenue
arrangements in developing its accounting policies, the Group
considered the guidance contained in the United States Financial
Accounting Standards Board (‘FASB’) Emerging Issues Task Force
No 00-21 Revenue Arrangements with Multiple Deliverables.
Judgement is required to separate those revenue arrangements
that contain the delivery of bundled products or services into
individual units of accounting, each with its own earnings process,
when the delivered item has stand-alone value and the
undelivered item has fair value. Further judgement is required to
determine the relative fair values of each separate unit of
accounting to be allocated to the total arrangement consideration.
Changes in the relative fair values could affect the allocation of
arrangement consideration between the various revenue streams.

Judgement is also required to determine the expected customer
relationship period.

Any changes in these assessments may have a significant impact
on revenue and deferred revenue.

Asset retirement obligations

Management judgement is exercised when determining the
present value of expected future cash flows when the obligation
to dismantle or restore the site arises, as well as the estimated
useful life of the related asset.

Summary of significant accounting policies
Basis of consolidation

The consolidated financial statements include those of Telkom,
its subsidiaries and joint ventures. Subsidiaries are those entities
over whose financial and operating policies the Group has the
ability to exercise control, so as to obtain benefits from their
activities. Joint ventures are those enterprises over which the
Group exercises joint control in terms of a contractual
agreement. Joint ventures are accounted for using the
proportionate consolidation method on a line-by-line basis. Intra-
group balances and transactions, and any unrealised gains and
losses arising from intra-group transactions, are eliminated in
preparing the consolidated financial statements. Transactions
with jointly controlled entities together with related unrealised
gains and losses and resulting balances are eliminated to the
extent of the Group’s interest in the entities. Business
combinations are accounted for using the purchase method of
accounting. On acquisition of a subsidiary or joint venture, any
excess of the purchase price over the fair value of the Group’s
interest in the net assets is recognised as goodwill. Minority
interests are calculated on the fair value of assets and liabilities.
Where there is loss of control of a subsidiary, the consolidated
financial statements include the results for the part of the
reporting year during which the Group has control.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-11

2.

Significant accounting policies

(continued)

Property, plant and equipment

The cost of an item of property, plant and equipment is
recognised as an asset if it is probable that the future economic
benefits associated with the item will flow to the Group and the
cost of the item can be measured reliably.

Property, plant and equipment is stated at historical cost less
accumulated depreciation and any accumulated impairment
losses. Each part of an item of property, plant and equipment
with a cost that is significant in relation to the total cost of the
item is depreciated separately. Depreciation is charged from the
date the asset is available for use on a straight-line basis over
the estimated useful life and ceases at the earlier of the date
that the asset is classified as held for sale and the date that the
asset is derecognised. Idle assets continue to attract
depreciation. The estimated useful life of individual assets and
the depreciation method thereof are reviewed on an annual
basis. The depreciable amount is determined after taking into
account the residual value of the asset. The residual value is the
estimated amount that the Group would currently obtain from
the disposal of the asset, after deducting the estimated cost of
disposal, if the asset were already of the age and in the
condition expected at the end of its useful life. The residual
values of assets are reviewed on an annual basis.

Assets under construction represents freehold buildings,
operating software, network and support equipment and
includes all direct expenditure as well as related borrowing costs
capitalised, but excludes the costs of abnormal amounts of
waste material, labour, or other resources incurred in the
production of self-constructed assets.

Freehold land is stated at cost and is not depreciated. Amounts
paid by the Group on improvements to assets which are held in
terms of operating lease agreements are depreciated on a
straight-line basis over the shorter of the remaining useful life of
the applicable asset or the remainder of the lease period. Where
it is reasonably certain that the lease agreement will be
renewed, the lease period equals the period of the initial
agreement plus the renewal periods.

The estimated useful lives assigned to groups of property, plant
and equipment are:

Years

Freehold buildings

15 to 50

Leasehold buildings

10 to 25

Network equipment

Cables

15 to 40

Switching equipment

5 to 15

Transmission equipment

5 to 15

Other

2 to 25

Support equipment

8 to 10

Furniture and office equipment

5 to 10

Data processing equipment and software

5 to 7

Other

2 to 10

An item of property, plant and equipment is derecognised upon
disposal or when no future economic benefits are expected from
its use or disposal. Any gain or loss arising on derecognition of
the asset (calculated as the difference between the net disposal
proceeds and the carrying amount of the asset) is included in the
income statement in the year the asset is derecognised.

Assets held under finance leases are depreciated over their
expected useful lives on the same basis as owned assets or,
where shorter, the term of the relevant lease if there is no
reasonable certainty that the Group will obtain ownership by the
end of the lease term.

Depreciation of an asset ceases at the earlier of the date the
asset is classified as held for sale in accordance with IFRS5 Non-
current Assets Held for Sale and Discontinued Operations or the
date the asset is derecognised.

Impairment of non-current assets

The Group regularly reviews its assets, other than financial
instruments, and cash-generating units for any indication of
impairment. When indicators, including changes in technology,
market, economic, legal and operating environments occur and
could result in changes of the asset’s or cash-generating units
estimated recoverable amount, an impairment test is performed.

The recoverable amount of assets or cash-generating units is
measured using the higher of the fair value less costs to sell and
its value in use, which is the present value of projected cash
flows covering the remaining useful lives of the assets.
Impairment losses are recognised when the asset’s carrying
value exceeds its estimated recoverable amount. Where
applicable, the recoverable amount is determined for the cash-
generating unit to which the asset belongs.

Previously recognised impairment losses, other than for
goodwill, are reviewed annually for any indication that it may no
longer exist or may have decreased. If any such indication exists,
the recoverable amount of the asset is estimated. Such
impairment losses are reversed through the income statement if
the recoverable amount has increased as a result of a change in
the estimates used to determine the recoverable amount, but
not to an amount higher than the carrying amount that would
have been determined (net of depreciation or amortisation) had
no impairment loss been recognised in prior years.

Asset retirement obligations

Asset retirement obligations related to property, plant and
equipment and intangible assets are provided for at the present
value of expected future cash flows when the obligation to
dismantle or restore the site arises. The increase in the related
asset’s carrying value is depreciated over its estimated useful
life. The unwinding of the discount is included in finance charges.
Asset retirement obligations are reviewed annually and changes
in the liability are added to, or deducted from, the cost of the
reflected asset. If the amount deducted exceeds the carrying
amount of the asset, the excess is recognised immediately in
profit and loss.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-12

2.

Significant accounting policies

(continued)

Asset retirement obligations

(continued)

Changes in the measurement of an existing liability that result
from changes in the estimated timing or amount of the outflow
of resources required to settle the liability, or a change in the
discount rate, are accounted for as follows:

• changes in the liability are added to, or deducted from, the

cost of the reflected asset. If the amount deducted exceeds
the carrying amount of the asset, the excess is recognised
immediately in profit and loss.

• adjustments that result in additions to the cost of assets, are

tested for impairment if it is considered that the new carrying
value of the asset is not fully recoverable.

Intangible assets
Goodwill

Goodwill on acquisition is initially measured at cost, being the
excess of the cost of the business combination over the Group’s
interest in the net fair value of the identifiable assets, liabilities
and contingent liabilities. Goodwill on the acquisition of
subsidiaries and joint ventures is included in intangible assets.
Following initial recognition, goodwill is measured at cost less
any accumulated impairment losses. Goodwill is tested for
impairment annually, or more frequently if events or changes in
circumstances indicate that the carrying value may be impaired.
Gains and losses on the disposal of an entity include the carrying
amount of goodwill relating to the entity sold. A recognised
impairment loss is not reversed.

Licences, software, trademarks, copyrights and other

Licences, software, trademarks, copyrights and other intangible
assets are stated at cost less accumulated amortisation and any
accumulated impairment losses. Amortisation commences when
the intangible assets are available for their intended use and is
recognised on a straight-line basis over the assets’ expected
useful lives. Amortisation ceases at the earlier of the date that
the asset is classified as held for sale and the date that the asset
is derecognised. The residual value of intangible assets is the
estimated amount that the Group would currently obtain from
the disposal of the asset, after deducting the estimated cost of
disposal, if the asset were already of the age and in the
condition expected at the end of its useful life. The residual value
is assumed to be zero unless there is a commitment by a third
party to purchase the asset at the end of its useful life or when
there is an active market that is likely to exist at the end of the
assets useful life, which can be used to estimate the residual
values. The residual values of intangible assets and their useful
lives are reviewed on an annual basis.

Intangible assets with indefinite useful lives and intangible
assets not yet available for use, are tested for impairment
annually either individually or at the cash-generating unit level.
Such intangibles are not amortised. The useful life of an
intangible asset with an indefinite life is reviewed annually to
determine whether indefinite life assessment continues to be
supportable. If not, the change in the useful life assessment
from indefinite to finite is made on a prospective basis.

Assets under construction represent application and other non
integral software and includes all direct expenditure as well as
related borrowing costs capitalised, but excludes the costs of
abnormal amounts of waste material, labour, or other resources
incurred in the production of self-constructed assets.

Intangible assets are derecognised when they have been disposed
of or when the asset is permanently withdrawn from use and no
future economic benefit is expected from its disposal. Any gains or
losses on the retirement or disposal of an asset are recognised in
the income statement in the year in which they arise.

The expected useful lives assigned to intangible assets are:

Years

Licences

5 to 30

Software

2 to 8

Trademarks, copyrights and other

3 to 15

Repairs and maintenance

The Group expenses all costs associated with the repair and
maintenance of its telecommunications network, unless it is
probable that such costs would result in future economic benefits
flowing to the Group, and the costs can be reliably measured.

Borrowing costs

Financing costs directly associated with the acquisition or
construction of assets that require more than three months to
complete and place in service are capitalised at interest rates
relating to loans specifically raised for that purpose, or at the
weighted average borrowing rate where the general pool of
Group borrowings was utilised. Other borrowing costs are
expensed as incurred.

Non-current assets held for sale

Non-current assets and disposal groups are classified as held for
sale if their carrying amount will be recovered through a sale
transaction rather than through continuing use. This condition is
regarded as met only when the sale is highly probable and the
asset (or disposal group) is available for immediate sale in its
present condition. Management must be committed to the sale,
which should be expected to qualify for recognition as a
complete sale within one year from the date of classification.

Non-current assets (and disposal groups) classified as held for
sale are measured at the lower of the assets’ previous carrying
amount and fair value less cost to sell.

Inventories

Installation material, maintenance and network equipment
inventories are stated at the lower of cost, determined on a
weighted average basis, or estimated net realisable value.
Merchandise inventories are stated at the lower of cost,
determined on a first-in first-out (‘FIFO’) basis, or estimated net
realisable value. Write-down of inventories arises when, for
example, goods are damaged or when net realisable value is
lower than carrying value.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-13

2.

Significant accounting policies

(continued)

Financial instruments
Recognition and initial measurement

All financial instruments are initially recognised at fair value,
plus, in the case of financial assets and liabilities not at fair value
through profit or loss, transaction costs that are directly
attributable to the acquisition or issue. Financial instruments are
recognised when the Group becomes a party to their contractual
arrangements. All regular way transactions are accounted for on
settlement date. Regular way purchases or sales are purchases
or sales of financial assets that require delivery of assets within
the period generally established by regulation or convention in
the marketplace.

Subsequent measurement

Subsequent to initial recognition, the Group classifies financial
assets as ‘at fair value through profit or loss’, ‘held-to-maturity
investments’, ‘loans and receivables’, or ‘available-for-sale’. The
measurement of each is set out below.

Financial assets at fair value through profit or loss

The Group classifies financial assets that are held for trading in
the category 'financial assets at fair value through profit or loss’.
Financial assets are classified as held for trading if they are
acquired for the purpose of selling in the near term. Derivatives
not designated as hedges are also classified as held for trading.
Gains or losses on held for trading financial assets are recognised
in net finance charges for the year.

Held-to-maturity assets

The Group classifies non-derivative financial assets with fixed or
determinable payments and fixed maturity dates as held-to-
maturity when the Group has the positive intention and ability to
hold to maturity. These assets are subsequently measured at
amortised cost. Amortised cost is computed as the amount
initially recognised minus principal repayments, plus or minus
the cumulative amortisation using the effective interest method.
This calculation includes all fees paid or received between parties
to the contract. For investments carried at amortised cost, gains
and losses are recognised in net profit or loss when the
investments are sold or impaired.

Loans and receivables

Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. Such assets are carried at amortised cost using the
effective interest method.

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative assets
that are designated as available-for-sale, or are not classified in
any of the three preceding categories. After initial recognition,
available-for-sale financial assets are measured at fair value,
with gains and losses being recognised as a separate component
of equity.

Financial liabilities

Subsequent to initial recognition, the Group measures all
financial liabilities, including trade and other payables, at
amortised cost using the effective interest rate method, except
for financial liabilities held at fair value through profit and loss.
Such liabilities, including derivative liabilities, are measured at
fair value, with gains and losses arising on the change in fair
value recognised in net finance charges for the year. Financial
liabilities are classified as held for trading if they are acquired for
the purpose of purchasing in the near term.

The fair value of financial assets and liabilities that are actively
traded in financial markets is determined by reference to quoted
market prices at the close of business on the balance sheet date.
Where there is no active market, fair value is determined using
valuation techniques such as discounted cash flow analysis.

Listed investments

Listed investments are subsequently measured at fair value,
which is calculated by reference to the quoted selling price at the
close of business on the balance sheet date.

Trade and other receivables

Trade and other receivables are classified as ‘loans and
receivables’. Short-term trade receivables are subsequently
measured at the original invoice amount where the effect of
discounting is not material. Long-term trade receivables are
subsequently measured at amortised cost.

Bills of exchange and promissory notes

Bills of exchange and promissory notes classified as held to
maturity are measured at amortised cost using the effective
interest rate method. Those that do not have a fixed maturity
are measured at cost. Bills of exchange held as trading
instruments are classified as at fair value through profit or loss.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, deposits held
on call and term deposits with an initial maturity of less than
three months.

For the purpose of the cash flow statement, cash and cash
equivalents consist of cash and cash equivalents defined above,
net of credit facilities utilised.

Derivative financial instruments

All derivative financial instruments are measured at fair value
subsequent to initial recognition with gains and losses taken to
finance charges.

The estimated fair values of derivatives are determined based on
relevant market information. These estimates are calculated
with reference to the market rates using industry standard
valuation techniques.

The fair value of forward exchange contracts is calculated by
reference to current forward exchange rates for contracts with
similar maturity profiles. The fair values of interest rate swap
contracts are determined as the present value of the net future
interest cash flows. The fair value of currency swaps is
determined with reference to the present value of expected
future cash flows. The Group’s derivative transactions, while
providing effective economic hedges under the risk management
policies, do not qualify for hedge accounting under the specific
rules of IAS39.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-14

2.

Significant accounting policies

(continued)

Financial instruments

(continued)

Repurchase agreements

Securities sold under repurchase agreements are not
derecognised. These transactions are treated as collateralised
arrangements and classified as non-trading liabilities and carried
at amortised cost.

Securities purchased under repurchase agreements are not
recognised. These transactions are treated as collateralised
lending arrangements and classified as loans and receivables.
Loans are recorded at amortised cost.

All associated finance charges are taken to the income statement.

Capital and money market transactions

New bonds and commercial paper bills issued are subsequently
measured at amortised cost using the effective interest rate
method.

Bonds and commercial paper bills are derecognised when the
obligation specified in the contract is discharged. The difference
between the carrying value of the bond and the amount paid to
extinguish the obligation is included in finance charges.

Bonds issued where Telkom is a buyer and seller of last resort are
carried at fair value. The Group does not actively trade in bonds.

Derecognition

A financial instrument or a portion of a financial instrument will
be derecognised and a gain or loss recognised when the Group’s
contractual rights expire or financial assets are transferred.

On derecognition of a financial asset or liability, the difference
between the consideration and the carrying amount on the
settlement date is included in finance charges for the year. For
available-for-sale assets, the fair value adjustment relating to
prior revaluations of assets is transferred from equity and
recognised in finance charges for the year.

Impairment of financial assets

At each balance sheet date an assessment is made of whether
there are any indicators of impairment of financial assets based
on observable data about one or more loss events that occurred
after the initial recognition of the asset. If such evidence exists,
the estimated recoverable amount of that asset is determined
and any impairment loss recognised for the difference between
the recoverable amount and the carrying amount. The
recoverable amount of financial assets carried at amortised cost
is calculated as the present value of expected future cash flows
discounted at the original effective interest rate of the asset.

If, in a subsequent period, the amount of the impairment loss for
financial assets other than those classified as available-for-sale
and those carried at cost, decreases and the decrease can be
related objectively to an event occurring after the impairment
was recognised, the previously recognised impairment loss is
reversed. Any subsequent reversal of an impairment loss is
recognised in the income statement, to the extent that the
carrying value of the asset does not exceed its amortised cost at
the reversal date. Impairments of available-for-sale financial
assets and those carried at cost are not reversed through profit
and loss.

Foreign currencies

Each entity within the Group determines its functional currency. The
Group’s presentation currency is the South African Rand (‘ZAR’).

Transactions denominated in foreign currencies are measured at
the rate of exchange at transaction date. Monetary items
denominated in foreign currencies are remeasured at the rate of
exchange at settlement date or balance sheet date. Realised and
unrealised gains and losses on foreign exchange are included in
finance charges.

The annual financial statements of foreign operations are
translated into South African Rand, the Group’s presentation
currency, for incorporation into the consolidated annual financial
statements. Assets and liabilities of foreign operations are
translated at the foreign exchange rates ruling at the balance
sheet date. Income, expenditure and cash flow items are
measured at the actual foreign exchange rate or average foreign
exchange rates for the period. All resulting unrealised exchange
differences are classified as equity. On disposal, the cumulative
amounts of unrealised exchange differences that have been
deferred are recognised in the consolidated income statement as
part of the gain or loss on disposal.

Gains and losses on the translation of loans to foreign
operations that are part of the net investment in the foreign
operation are recognised in equity if the loans are denominated
in one of the entities’ functional currencies. If the loans are
denominated in a third currency, gains or losses are recognised
in the income statement.

Goodwill and intangible assets and liabilities arising on the
acquisition of a foreign operation are treated as assets and
liabilities of the foreign operation and translated at the foreign
exchange rates ruling at balance sheet date.

Treasury shares

Where a group entity acquires or in substance acquires Telkom
shares, such shares are measured at cost and disclosed as a
reduction of equity. No gain or loss is recognised in profit or loss
on the purchase, sale, issue or cancellation of the Group’s own
equity instruments. Such shares are not remeasured for changes
in their fair value.

Insurance contracts

Premiums written comprise the premiums on insurance contracts
entered into during the year, irrespective of whether they relate
in whole or in part to a later accounting period. Premiums are
accounted for gross of commission to intermediaries and exclude
Value Added Tax. Premiums written include adjustments to
premiums written in prior accounting periods. Outward
reinsurance premiums are accounted for in the same accounting
period as the premiums for the related direct insurance business
assumed. The net earned portion of premiums received is
recognised as revenue. Premiums are earned from the date of
attachment of risk, over the indemnity period, based on the
pattern of risks underwritten. Outward reinsurance premiums are
recognised as an expense in accordance with the pattern of
indemnity received.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-15

2.

Significant accounting policies

(continued)

Insurance contracts

(continued)

The provision for unearned premiums comprises the proportion
of premiums written which is estimated to be earned in
subsequent financial years, computed separately for each
insurance contract using a time proportionate basis or another
suitable basis for uneven risk contracts.

Claims incurred consist of claims and claims handling expenses
paid during the financial year together with the movement in the
provision for outstanding claims. Claims outstanding comprise
provisions for the Group’s estimate of the ultimate cost of
settling all claims incurred but unpaid at the balance sheet date
whether reported or not, and an appropriate risk margin.
A reserve in equity is made for the full amount of the
contingency reserve as required by the regulatory authorities in
South Africa. Transfers to and from this reserve are treated as
appropriations of retained income.

Taxation
Current taxation

The charge for current taxation is based on the results for the year
and is adjusted for non-taxable income and non-deductible
expenditure. Current taxation is measured at the amount
expected to be paid, using taxation rates and laws that have
been enacted or substantively enacted by the balance sheet date.

Deferred taxation

Deferred taxation is accounted for using the balance sheet
liability method on temporary differences at the balance sheet
date between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes. A deferred tax
asset is recognised to the extent that it is probable that future
taxable profits will be available against which the associated
unused tax losses, unused tax credits and deductible temporary
differences can be utilised. Deferred tax assets are reduced to
the extent that it is no longer probable that the related tax
benefit will be realised.

Deferred tax assets and liabilities are measured at the tax rates
that are expected to apply to the period when the asset is
realised or the liability is settled, based on tax rates (and tax
laws) that have been enacted or substantively enacted by the
balance sheet date.

Income tax relating to items recognised directly in equity is
recognised in equity and not in the income statement. Deferred
tax assets and deferred tax liabilities are offset, if a legally
enforceable right exists to set off current tax assets against
current tax liabilities and the deferred taxes relate to the same
taxable entity and the same taxation authority.

Exchange differences arising from the translation of foreign
taxation assets and liabilities of foreign entities are classified as
deferred taxation expense or income.

Secondary Taxation on Companies

Secondary Taxation on Companies (‘STC’) is provided for at a
rate of 12.5% on the amount by which dividends declared by
the Group exceeds dividends received. Deferred tax on unutilised
STC credits is recognised to the extent that STC payable on
future dividend payments is likely to be available for set-off.

Employee benefits
Post-employment benefits

The Group provides defined benefit and defined contribution
plans for the benefit of employees. These plans are funded by
the employees and the Group, taking into account
recommendations of the independent actuaries. The post-
retirement telephone rebate liability is unfunded.

Defined contribution plans

The Group’s funding of the defined contribution plans is charged
to employee expenses in the same year as the related service is
provided.

Defined benefit plans

The Group provides defined benefit plans for pension,
retirement, post-retirement medical aid benefits and telephone
rebates to qualifying employees. The Group’s net obligation in
respect of defined benefits is calculated separately for each plan
by estimating the amount of future benefits earned in return for
services rendered.

The amount recognised in the balance sheet represents the
present value of the defined benefit obligations, calculated by
using the projected unit credit method, as adjusted for
unrecognised actuarial gains and losses, unrecognised past
service costs and reduced by the fair value of plan assets. The
amount of any surplus recognised is limited to unrecognised
actuarial losses and past service costs plus the present value of
available refunds and reductions in future contributions to the
plan. To the extent that there is uncertainty as to the entitlement
to the surplus (i.e. no economic benefit is available), no asset is
recognised. No gain is recognised solely as a result of an
actuarial loss or past service cost in the current period and no
loss is recognised solely as a result of an actuarial gain or past
service cost in the current period.

Actuarial gains and losses are recognised as employee expenses
when the cumulative unrecognised gains and losses for each
individual plan exceed 10% of the greater of the present value
of the Group’s obligation and the fair value of plan assets. These
gains or losses are amortised on a straight-line basis over ten
years for all the defined benefit plans.

Past service costs are recognised immediately to the extent
that the benefits are vested, otherwise they are recognised on
a straight-line basis over the average period the benefits
become vested.

Leave benefits

Annual leave is provided for over the period that the leave
accrues and is subject to a cap of 25 days.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-16

2.

Significant accounting policies

(continued)

Employee benefits

(continued)

Workforce reduction

Workforce reduction expenses are payable when employment is
terminated before the normal retirement age or when an
employee accepts voluntary redundancy in exchange for
benefits. Workforce reduction benefits are recognised when the
entity is demonstrably committed and it is probable that the
expenses will be incurred.

Deferred bonus incentives

Employees of the wholly owned subsidiaries of Vodacom,
including executive directors, are eligible for compensation
benefits in the form of a Deferred Bonus Incentive Scheme. The
benefit is recorded at the present value of the expected future
cash outflows.

Share-based compensation

The grants of equity instruments, made to employees in terms
of the Telkom Conditional Share Plan, are classified as equity-
settled share-based payment transactions. The expense relating
to the services rendered by the employees, and the
corresponding increase in equity, is measured at the fair value of
the equity instruments at their date of grant based on the
market price at grant date, adjusted for the lack of entitlement
to dividends during the vesting period. This compensation cost is
recognised over the vesting period, based on the best available
estimate at each balance sheet date of the number of equity
instruments that are expected to vest.

Short-term employee benefits

The cost of all short-term employee benefits is recognised during
the year the employees render services, unless the Group uses
the services of employees in the construction of an asset and the
benefits received meet the recognition criteria of an asset, at
which stage it is included as part of the related property, plant
and equipment item.

Long-term incentive provision

The Vodacom group provides long-term incentives to eligible
employees payable on termination or retirement. The Group’s
liability is based on an actuarial valuation. Actuarial gains and
losses are recognised as employee expenses when the
cumulative unrecognised gains and losses for each individual
plan exceed 10% of the greater of the present value of the
Group’s obligation and the fair value of plan assets. These gains
or losses are amortised on a straight-line basis over ten years.

Provisions

Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it is
probable that an outflow of resources will be required to settle
the obligation, and a reliable estimate can be made of the
amount of the obligation. Provisions are reviewed at each
balance sheet date and adjusted to reflect the current best
estimate. Where the effect of the time value of money is
material, the amount of the provision is the present value of the
expenditures expected to be required to settle the obligation.

Deferred revenue and expenses

Activation revenue and costs are recognised in accordance with
the principles contained in Emerging Issues Task Force Issue
No. 00-21, Revenue Arrangements with Multiple Deliverables
(‘EITF 00-21’), issued in the United States. This results in
activation revenue and costs up to the amount of the deferred
revenue being deferred and recognised systematically over the
expected duration of the customer relationship because it is
considered to be part of the customers’ ongoing rights to
telecommunication services and the operator’s continuing
involvement. The excess of the costs over revenues is expensed
immediately.

Operating revenue

The Group provides fixed-line and data communication services
and mobile communication services, directory services and
communication related products. The Group provides such
services to business, residential, payphone and mobile customers.
Revenue represents the value of fixed or determinable
consideration that has been received or is receivable.

Revenue for services is stated at amounts invoiced to customers
and excludes Value Added Tax.

Revenue is recognised when there is evidence of an arrangement,
collectability is reasonably assured, and the delivery of the
product or service has occurred. In certain circumstances revenue
is split into separately identifiable components and recognised
when the related components are delivered in order to reflect the
substance of the transaction. The value of components is
determined using verifiable objective evidence. The Group does
not provide customers with the right to a refund.

Fixed-line

Subscriptions, connections and other usage
The Group provides telephone and data communication services
under postpaid and prepaid payment arrangements. Revenue
includes fees for installation and activation, which are deferred
over the expected customer relationship period. Costs incurred
on first time installations that form an integral part of the
network are capitalised and depreciated over the expected
average customer relationship period. All other installation and
activation costs are expensed as incurred.

Postpaid and prepaid service arrangements include subscription
fees, typically monthly fees, which are recognised over the
subscription period.

Revenue related to sale of communication equipment, products
and value-added services is recognised upon delivery and
acceptance of the product or service.

Traffic (Domestic, Fixed-to-mobile and International)

Prepaid
Prepaid traffic service revenue collected in advance is deferred
and recognised based on actual usage or upon expiration of the
usage period, whichever comes first. The terms and conditions of
certain prepaid products allow the carry over of unused minutes.
Revenue related to the carry over of unused minutes is deferred
until usage or expiration.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-17

2.

Significant accounting policies

(continued)

Operating revenue

(continued)

Fixed-line

(continued)

Traffic (Domestic, Fixed-to-mobile and International)

(continued)

Payphones
Payphone service coin revenue is recognised when the service is
provided.

Payphone service card revenue collected in advance is deferred
and recognised based on actual usage or upon expiration of the
usage period, whichever comes first.

Telkom provides incentives to its retail payphone card distributors
as trade discounts. Revenue for retail payphone cards is recorded
as traffic revenue, net of these discounts as the cards are used.

Postpaid
Revenue related to local, long distance, network-to-network,
roaming and international call connection services is recognised
when the call is placed or the connection provided.

Interconnection
Interconnection revenue for call termination, call transit, and
network usage is recognised in the year the traffic occurs.

Data
The Group provides data communication services under postpaid
and prepaid payment arrangements. Revenue includes fees for
installation and activation, which are deferred over the expected
average customer relationship period. Costs incurred on first time
installations that form an integral part of the network are
capitalised and depreciated over the life of the expected average
customer relationship period. All other installation and activation
costs are expensed as incurred. Postpaid and prepaid service
arrangements include subscription fees, typically monthly fees,
which are recognised over the subscription period.

Directory services
Revenue is recognised when paper directories are released for
distribution, as the significant risks and rewards have passed.
Electronic directories’ revenue is recognised on a monthly basis,
as earned.

Other

Other revenue is recognised when the economic benefit flows to
the entity and the earnings process is complete.

Mobile

Contract products
Contract products that may include deliverables such as a
handset and 24-month service are defined as arrangements with
multiple deliverables. The arrangement consideration is allocated
to each deliverable, based on the fair value of each deliverable
on a stand alone basis as a percentage of the aggregated fair
value of the individual deliverables. Revenue allocated to the
identified deliverables in each revenue arrangement and the cost
applicable to these identified deliverables are recognised based
on the same recognition criteria of the individual deliverable at
the time the product or service is delivered.

Revenue from the handset is recognised when the product is
delivered. Monthly service revenue received from the customer
is recognised in the period in which the service is delivered.
Airtime revenue is recognised on the usage basis. The terms and
conditions of the bundled airtime products, where applicable,
allow the carry over of unused airtime. The unused airtime is
deferred in full. Deferred revenue related to unused airtime is
recognised when utilised by the customer. Upon termination of
the customer contract, all deferred revenue for unused airtime is
recognised in income.

Prepaid products
Prepaid products that may include deliverables such as a SIM-
card and airtime are defined as arrangements with multiple
deliverables. The arrangement consideration is allocated to each
deliverable, based on the fair value of each deliverable on a
stand alone basis as a percentage of the aggregated fair value
of the individual deliverables. Revenue allocated to the identified
deliverables in each revenue arrangement and the cost
applicable to these identified deliverables are recognised based
on the same recognition criteria of the individual deliverable at
the time the product or service is delivered.

• Revenue from the SIM-card is recognised over the period of

the average customer relationship of a prepaid customer.

• Airtime revenue is recognised on the usage basis. Unused

airtime is deferred in full.

• Deferred revenue related to unused airtime is recognised

when utilised by the customer. Upon termination of the
customer relationship, all deferred revenue for unused airtime
is recognised in revenue.

Upon purchase of an airtime voucher the customer receives the
right to make outgoing voice and data calls to the value of the
airtime voucher. Revenue is recognised as the customer utilises
the voucher.

Deferred revenue and costs related to unactivated starter packs
which do not contain any expiry date, is recognised in the period
when the probability of these starter packs being activated by a
customer becomes remote. In this regard the Group applies a
period of 36 months before these revenue and costs are
released to the income statement.

Equipment sales
All equipment sales are recognised only when delivery and
acceptance has taken place. Equipment sales to third party
service providers are recognised when delivery is accepted. No
rights of return exist on sales to third party service providers.

Investment income

Dividends from investments are recognised on the date that the
Group is entitled to the dividend. Interest is recognised on a time
proportion basis taking into account the principal amount
outstanding and the effective interest rate.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-18

2.

Significant accounting policies

(continued)

Operating revenue

(continued)

Interest on debtor’s accounts

Interest is raised on overdue accounts on a time proportion basis
and recognised in the income statement.

Leases

The land and buildings elements of a lease of land and buildings
are considered separately for the purposes of lease classification.

Initial direct costs incurred in negotiating and securing lease
arrangements are added to the amount recognised as an asset.

Operating lease payments are recognised in the income
statement on a straight-line basis over the lease term. Assets
subject to operating leases are presented according to the nature
of the asset.

Assets acquired in terms of finance leases are capitalised at the
lower of fair value or the net present value of the minimum lease
payments at inception of the lease and depreciated over the
lesser of the useful life of the asset or the lease term. The capital
element of future obligations under the leases is included as a
liability in the balance sheet. Lease finance costs are amortised
in the income statement over the lease term using the effective
interest rate method. Where a sale and leaseback transaction
results in a finance lease, any excess of sale proceeds over the
carrying amount is deferred and recognised in the income
statement over the term of the lease.

Where the Group is the lessor, assets held under a finance lease
are recognised in the balance sheet and presented as a
receivable at an amount equal to the net investment in the
lease. The recognition of finance income is based on a pattern
reflecting a constant periodic rate of return on the net
investment in the finance lease.

Segmental reporting

The Group is managed in two business segments, which form
the primary segment reporting basis: Fixed-line and Mobile. The
Group’s two segments operate mainly in South Africa, but the
mobile segment has businesses in certain other African
countries. The geographical location of the Group’s customers
has been identified as the secondary basis of segment reporting.
The basis of segment reporting is representative of the Group’s
internal reporting structure.

The Fixed-line business segment provides local telephony,
domestic and international long-distance services as well as leased
lines, data transmission, directory services and internet access.

The Mobile business segment provides mobile telephony services
as well as the sale of mobile equipment.

Inter-segment sales are accounted for in the same way as sales
to third parties at current market prices.

Marketing

Marketing costs are recognised as an expense as incurred.

Incentives

Incentives paid to service providers and dealers for products
delivered to the customer are expensed as incurred. Incentives
paid to service providers and dealers for new activations and
retention of existing customers for services delivered are
expensed in the period that the related revenue is recognised.

Distribution incentives paid to service providers and dealers for
exclusivity are deferred and expensed over the contractual
relationship period.

Prior period errors

The Group made certain retrospective changes to its application
of certain accounting standards. The changes were:

• Lease payments and receipts under operating leases have been

restated in order to recognise the expenses and income on a
straight-line basis over the lease terms. This ensures that the
income statement charge/income is more representative of the
time pattern of the operating lease benefit/cost to the Group.
The Group previously recognised the expenses and the income
based on the amount paid or payable and received or
receivable for each period. The restatement impacts the Group’s
results for the years ended March 31, 2005 and 2004.

• IT Software items have been reclassified from Property, plant

and equipment to Intangible assets and the related
depreciation from Depreciation to Amortisation. The Group
has identified and recorded certain software that was
previously included as part of Property, plant and equipment
as a separate intangible asset because it is not considered an
integral part of the related hardware;

• Investment properties have been restated to Property, plant

and equipment. The Vodacom Group previously classified its
Vodaworld property as an investment property. However, the
primary purpose of the property is to service and connect
Vodacom customers. The property, therefore, does not meet
the criteria of IAS 40: Investment Property, i.e. to earn
rentals or for capital appreciation; and

• Other financial assets and liabilities, previously classified as non-

current, have been reclassified to current assets and liabilities, as
they represent derivatives classified as held for trading.

The following table reflects the values of the different line items
prior and subsequent to the change in accounting policy and
prior period errors as discussed in this note:

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-19

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2.

Significant accounting policies

(continued)

Change in

accounting

policy

Prior period errors

Balances

Financial

Balances

as previously

Revenue

Operating

Investment

assets/

as

reported

recognition

leases

Software

properties

liabilities

restated

Rm

Rm

Rm

Rm

Rm

Rm

Rm

March 31, 2004
Income statement

Operating revenue

40,484

98

40,582

Selling, general and
administrative expenses

7,660

5

7,665

Taxation

1,711

29

(2)

1,738

Profit attributable to equity
holders of Telkom

4,523

69

(3)

4,589

Balance sheet

Non-current assets

Property, plant and equipment

39,024

(1,300)

32

37,756

Investment properties

32

(32)

–

Intangible assets

564

1,300

1,864

Other financial assets

1,101

(1,101)

–

Deferred expenses

202

11

213

Current assets

Other financial assets

140

1,101

1,241

Equity

Retained earnings

14,225

(713)

(30)

13,482

Non-current liabilities

Deferred taxation

773

(291)

(13)

469

Deferred revenue

353

690

54

1,097

Other financial liabilities

153

(153)

–

Current liabilities

Current portion of deferred
revenue

1,404

314

1,718

Other financial liabilities

492

153

645

F-20

2.

Significant accounting policies

(continued)

Change in

accounting

policy

Prior period errors

Balances

Financial

Balances

as previously

Revenue

Operating

Investment

assets/

as

reported

recognition

leases

Software

properties

liabilities

restated

Rm

Rm

Rm

Rm

Rm

Rm

Rm

March 31, 2005
Income statement

Operating revenue

43,117

43

43,160

Selling, general and
administrative expenses

8,820

4

8,824

Taxation

3,071

12

(1)

3,082

Profit attributable to equity
holders of Telkom

6,723

31

(3)

6,751

Balance sheet

Non-current assets

Property, plant and equipment

39,073

(2,650)

25

36,448

Investment properties

25

(25)

–

Intangible assets

532

2,650

3,182

Other financial assets

134

(134)

–

Deferred expenses

118

15

133

Current assets

Other financial assets

4,940

134

5,074

Equity

Retained earnings

19,946

(682)

(33)

19,231

Non-current liabilities

Deferred taxation

1,239

(279)

(13)

947

Deferred revenue

260

638

61

959

Other financial liabilities

83

(83)

–

Current liabilities

Current portion of deferred
revenue

1,394

323

1,717

Other financial liabilities

230

83

313

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-21

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

3.

Revenue

3.1 Total revenue

41,115

43,696

48,260

Operating revenue

40,582

43,160

47,625

Other income (excluding profit on disposal of
property, plant and equipment and investments, refer to note 4)

211

186

238

Investment income (Refer to note 6)

322

350

397

3.2 Operating revenue

40,582

43,160

47,625

Fixed-line

30,541

30,888

32,039

Mobile

10,041

12,272

15,586

Fixed-line

30,541

30,888

32,039

Subscriptions, connections and other usage

5,117

5,385

5,803

Traffic

18,313

17,723

17,534

Domestic (local and long distance)

9,680

9,286

8,886

Fixed-to-mobile

7,321

7,302

7,647

International (outgoing)

1,312

1,135

1,001

Interconnection

1,441

1,320

1,433

Data

4,792

5,484

6,223

Directories and other

878

976

1,046

Change in comparatives

Operating revenue has increased by R43 million in 2005
(2004: R98 million) due to the change in fixed-line policy for
recognising connection revenues (Refer to note 2).

4.

Other income

255

280

480

Other income (Included in Total revenue, refer to note 3)

211

186

238

Interest received from debtors

157

129

136

Sundry income

54

57

102

Profit on disposal of property, plant and equipment and intangible assets

19

30

79

Profit on disposal of investment

25

64

163

Sundry income includes rental received for the partial sub-letting of
commercial properties (Refer to note 35).

The profit on disposal of property, plant and equipment and intangible
assets is mainly due to the sale of land and buildings as part of the
Group’s strategy of selling non-core properties as well as a profit
realised on the trade-in of software licenses as part of an upgrade of
reporting software utilised.

F-22

2004

2005

2006

Rm

Rm

Rm

5.

Operating expenses

Operating expenses comprise:

5.1 Employee expenses

7,408

8,111

7,489

Salaries and wages

5,424

5,573

5,566

Medical aid contributions

408

406

371

Retirement contributions (Refer to note 28)

466

474

435

Post-retirement pension and retirement fund (Refer to note 28)

22

12

(58)

Current service cost

3

3

4

Interest cost

297

320

364

Expected return on plan assets

(452)

(360)

(454)

Actuarial losses

2

34

78

Asset limitation

172

15

(50)

Post-retirement medical aid (Refer to note 26 and 28)

272

182

361

Current service cost

24

27

48

Interest cost

249

249

249

Actuarial loss

–

–

63

Settlement (gain)/loss

(3)

18

7

Curtailment loss/(gain)

2

(112)

(6)

Retirement and pension fund deficit (Refer to note 26 and 28)

Interest cost

44

–

–

Telephone rebates (Refer to note 26 and 28)

2

15

19

Current service cost

4

2

3

Interest cost

19

16

16

Curtailment gain

–

(3)

–

Actuarial gain

(21)

–

–

Share-based compensation expense

–

68

127

Other benefits

982

992

1,200

Workforce reduction expense

302

961

88

Employee expenses capitalised

(514)

(572)

(620)

Curtailment loss/(gain)

The curtailment loss/(gain) resulted from a reduction in the number of participants covered by the post-retirement medical aid and telephone rebates.

Settlement (gain)/loss

The settlement (gain)/loss resulted from a transaction between the Group and participants of the post-retirement medical aid. The participants were
offered a lump sum in exchange for the right to receive specified post-employment benefits.

Other benefits

Other benefits include skills development, annual leave, performance incentive and service bonuses.

Workforce reduction expense

The Group recognises the cost of workforce reduction associated with management’s plan to reduce the size of its workforce to a comparable level
for international telecommunications companies.

In concluding the Group’s workforce reduction initiatives of the previous year, an additional 245 employees have left the Group (2005: 5,041;
2004: 1,633). These employees include management and operating staff.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-23

2004

2005

2006

Rm

Rm

Rm

5.

Operating expenses

(continued)

5.2 Payments to other operators

5,985

6,132

6,826

Payments to other network operators consist of expenses in respect of
interconnection with other network operators.

5.3 Selling, general and administrative expenses

7,665

8,824

10,273

Selling and administrative expenses

4,862

5,863

7,574

Maintenance

1,868

1,993

1,594

Marketing

657

740

899

Bad debts

278

228

206

Change in comparatives

Selling and administrative expenses has increased by R4 million in
2005 (2004: R5 million) due to the restatement of expenses relating
to operating leases (Refer to note 2).

5.4 Services rendered

2,269

2,021

2,114

Facilities and property management

1,164

1,069

1,110

Consultancy services – managerial fees

239

159

182

Security and other

806

759

772

Auditor’s remuneration

60

34

50

Audit services

41

31

38

Company auditors

32

19

28

Current year

31

19

26

Prior year underprovision

1

–

2

Other auditors – current year

9

12

10

Audit related services

6

3

9

Company auditors

4

–

6

Other auditors

2

3

3

Tax services – other auditors

1

–

–

Other services

7

–

3

Company auditors

7

–

–

Other auditors

–

–

3

Telkom IPO related fees

Other auditors – prior year underprovision

5

–

–

Audit related services include the review of new systems related controls,
as well as services performed to assist management in assessing the
status of its compliance with the requirements of the Sarbanes-Oxley
Act.

5.5 Operating leases

924

803

850

Buildings

196

204

221

Transmission and data lines

16

16

42

Equipment

85

81

78

Vehicles

627

502

509

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-24

2004

2005

2006

Rm

Rm

Rm

5.

Operating expenses

(continued)

5.6 Depreciation, amortisation, impairment and write-offs

7,248

6,288

5,876

Depreciation of property, plant and equipment (Refer to note 10)

6,092

5,442

5,154

Amortisation of intangible assets (Refer to note 11)

806

502

560

Impairment of intangible assets (Refer to note 11)

–

49

–

Impairment of property, plant and equipment (Refer to note 10)

149

85

–

Reversal of impairment of property, plant and equipment (Refer to note 10)

–

–

(26)

Write-offs of property, plant and equipment (Refer to note 10)

201

210

188

In recognition of the changed usage patterns of certain items of
property, plant and equipment, the Group reviewed their remaining
useful lives in the current year. The assets affected were certain items
included in network and support equipment. The revised estimated
useful lives of these assets as set out below, resulted in a decrease of
the current year depreciation charge.

Original life

Revised life

Years

Years

Network equipment

2 – 15

5 – 22

Support equipment

5

8

2004

2005

2006

Rm

Rm

Rm

6.

Investment income

322

350

397

Interest received

312

336

347

Dividends received

10

14

50

7.

Finance charges

3,264

1,695

1,233

Interest

2,488

1,686

1,346

Local debt

2,253

1,515

1,506

Foreign debt

303

281

9

Less: Finance costs capitalised

(68)

(110)

(169)

Foreign exchange gains and losses and fair value adjustments

776

9

(113)

Foreign exchange (gains)/losses

(368)

112

57

Fair value adjustments on derivative instruments

1,144

(103)

(170)

Capitalisation rate

15.14%

15.23%

13.91%

8.

Taxation

1,738

3,082

4,520

South African normal company taxation

953

2,492

3,760

Current taxation

960

2,496

3,751

(Overprovision)/underprovision for prior year

(7)

(4)

9

Deferred taxation

631

346

173

Temporary differences – normal company taxation

893

607

229

Temporary difference – Secondary Taxation on Companies
(‘STC’) tax credits (raised)/utilised

(199)

(151)

51

Overprovision for prior year

(63)

(73)

(107)

Change in tax rate from 30% to 29%

–

(37)

–

Secondary Taxation on Companies

151

238

585

Foreign taxation

3

6

2

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-25

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

8.

Taxation

(continued)

Reconciliation of taxation rate

%

%

%

Effective rate

27.2

31.1

32.7

South African normal rate of taxation

30.0

30.0

29.0

Adjusted for:

(2.8)

1.1

3.7

Exempt income

(3.1)

(1.0)

(1.3)

Disallowable expenditure

2.7

2.0

0.9

Tax losses not utilised

0.2

0.3

0.6

Utilisation of assessed losses

(0.6)

(0.1)

–

STC paid

2.4

2.4

4.2

STC tax credits (raised)/utilised

(3.2)

(1.5)

0.4

Change in tax rate from 30% to 29%

–

(0.4)

–

Overprovision for prior year

(1.2)

(0.6)

(1.1)

The Group operates in several African countries, and accordingly is subject to, and pays annual income taxes under the tax regimes of those countries.
The Group has historically filed, and continues to file, all required income tax returns. Management believes that the principles applied in determining
the Group’s tax obligations are consistent with the principles and interpretations of the relevant countries’ tax laws. The tax rules and regulations in
these countries are highly complex and subject to interpretation. Additionally, for the foreseeable future, management expects such tax laws to further
develop through changes in the countries’ existing tax structure as well as clarification of the existing tax laws through published interpretations and
the resolution of actual tax cases.

During each of the years presented, provisions have been made or adjusted for anticipated obligations related to various ongoing investigations by
tax authorities. The provisions made include estimates of anticipated interest and penalties where appropriate. As of March 31, 2006, 2005 and
2004, the Group has accrued for tax obligations in the amount of R199 million, R262 million and R176 million, respectively. These amounts
represent, what management believes will be the probable outcome of such disputes for all tax years for which additional taxes can be assessed. To
the extent management determines the estimated obligations should be revised, disputes are resolved in a manner that is favourable to the Group
or the statute of limitations related to a dispute expires, these obligations will be adjusted accordingly at that time.

During the 2005 financial year, Telkom entered into an agreement with its subsidiary Rossal No. 65 (Proprietary) Limited, to manage, hold and
transfer shares to employees in terms of the Telkom Conditional Share Plan. A deferred tax liability of R20 million (2005: R26 million) has been
recorded related to this agreement.

Change in comparatives

Deferred taxation has increased by R11 million in 2005 (2004: R27 million) due to the change in fixed-line policy for recognising connection
revenues and the restatement on operating leases (Refer to note 2).

9.

Earnings per share
Basic earnings per share (cents)

823.9

1,246.7

1,744.7

The calculation of earnings per share is based on profit attributable to
equity holders of Telkom for the year of R9,182 million
(2005: R6,751 million; 2004: R4,589 million) and 526,271,093
(2005: 541,498,547; 2004: 556,994,962) weighted average
number of ordinary shares in issue.

Reconciliation of weighted average number of ordinary shares

Ordinary shares in issue

557,031,819

557,031,819

544,944,899

Weighted average number of treasury shares

(36,857)

(15,533,272)

(18,673,806)

Weighted average number of shares outstanding

556,994,962

541,498,547

526,271,093

F-26

2004

2005

2006

9.

Earnings per share

(continued)

Diluted earnings per share (cents)

823.9

1,244.3

1,735.2

The calculation of diluted earnings per share is based on earnings for
the year of R9,182 million (2005: R6,751 million; 2004:
R4,589 million) and 529,152,318 diluted weighted average number
of ordinary shares (2005: 542,537,579; 2004: 556,994,962).

he adjustment in the weighted average number of shares is as a result

of the expected future vesting of shares already allocated to employees
under the Telkom Conditional Share Plan.

Headline earnings per share (cents)

*

875.2

1,279.0

1,727.2

The calculation of headline earnings per share is based on headline
earnings of R9,090 million (2005: R6,926 million; 2004:
R4,875 million) and 526,271,093 (2005: 541,498,547; 2004:
556,994,962) weighted average number of ordinary shares in issue.

Diluted headline earnings per share (cents)

875.2

1,276.6

1,717.8

The calculation of diluted headline earnings per share is based on
headline earnings of R9,090 million (2005: R6,926 million; 2004:
R4,875 million) and 529,152,318 (2005: 542,537,579; 2004:
556,994,962) diluted weighted average number of ordinary shares in
issue. The adjustment in the weighted average number of shares is as

result of the expected future vesting of shares already allocated to

employees under the Telkom Conditional Share Plan.

Reconciliation between earnings and headline earnings

Rm

Rm

Rm

Earnings as reported

4,589

6,751

9,182

Adjustments:
Profit on disposal of investment

(25)

(64)

(163)

Profit on disposal of property, plant and equipment and intangible assets

(19)

(30)

(79)

Impairment of property, plant and equipment and intangible assets

149

134

(26)

Write-offs of property, plant and equipment

201

210

188

Acquisition of subsidiary

–

–

(35)

Amortisation of goodwill

72

–

–

Tax and minority interest effects

(92)

(75)

23

Headline earnings

4,875

6,926

9,090

Reconciliation of diluted weighted average number of ordinary shares

Ordinary shares in issue

557,031,819

557,031,819

544,944,899

Expected future vesting of shares

–

1,039,032

2,881,225

Weighted average number of treasury shares

(36,857)

(15,533,272)

(18,673,806)

Weighted average number of shares outstanding

556,994,962

542,537,579

529,152,318

Dividend per share (cents)

90.0

110.0

900.0

The calculation of dividend per share is based on dividends of R4,801 million (2005: R606 million; 2004: R501 million) declared on June 2, 2005
and 533,465,571 (2005: 551,509,083; 2004: 557,031,819) number of ordinary shares outstanding. The reduction in the number of shares
represents the number of treasury shares held on date of payment.

* The disclosure of headline earnings is a requirement of the JSE Securities Exchange of South Africa and is not a recognised measure under IFRS
and US GAAP. It has been calculated in accordance with the South African Institute of Chartered Accountant’s circular issued in this regard.

Change in comparatives

The amounts for basic, diluted, headline and diluted headline earnings per share for 2005 and 2004 have changed as a result of the change in
accounting policies and restatements as discussed in note 2. The effect of the change on previously reported numbers is immaterial.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-27

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Accumulated

Carrying

Accumulated

Carrying

Accumulated Carrying

Cost

depreciation

value

Cost

depreciation

value

Cost

depreciation

value

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

10. Property, plant and

equipment

Freehold land and buildings

4,154

(1,364)

2,790

4,280

(1,615)

2,665

4,510

(1,811)

2,699

Leasehold buildings (Refer to note 24)

870

(222)

648

869

(251)

618

940

(322)

618

Network equipment

56,108

(26,974) 29,134 58,318

(29,982) 28,336

59,418

(30,477) 28,941

Support equipment

4,032

(2,611)

1,421

3,790

(2,435)

1,355

3,740

(2,419)

1,321

Furniture and office equipment

450

(260)

190

456

(301)

155

469

(335)

134

Data processing equipment
and software

5,905

(3,698)

2,207

5,288

(3,253)

2,035

5,612

(3,530)

2,082

Under construction

1,197

–

1,197

1,084

–

1,084

1,320

–

1,320

Other

510

(341)

169

585

(385)

200

552

(393)

159

73,226

(35,470) 37,756 74,670

(38,222) 36,448

76,561

(39,287) 37,274

The carrying amounts of property, plant and equipment can be reconciled as follows:

Carrying

Business

Transfer

Impair-

Carrying

value at

combina-

from/(to)

Foreign

ment

value at

beginning

tions/con-

intangible

currency

and

Depre-

end of

of year Additions solidations

Transfers

assets* translation write-offs Disposals

ciation

year

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

2006

Freehold land and buildings

2,665

105

–

174

–

–

(22)

(21)

(202) 2,699

Leasehold buildings

618

75

–

(1)

–

–

–

–

(74)

618

Network equipment

28,336

2,622

–

2,228

–

(122)

(49)

(21) (4,053) 28,941

Support equipment

1,355

130

–

106

–

(1)

(6)

(5)

(258) 1,321

Furniture and office equipment

155

19

–

4

–

–

–

–

(44)

134

Data processing equipment
and software

2,035

381

1

140

13

(2)

(10)

(1)

(475) 2,082

Under construction

1,084

2,933

–

(2,622)

–

–

(75)

–

–

1,320

Other

200

45

–

(29)

–

(1)

–

(8)

(48)

159

36,448

6,310

1

–

13

(126)

(162)

(56) (5,154) 37,274

2005

Freehold land and buildings

2,790

42

3

137

–

–

(16)

(7)

(284)

2,665

Leasehold buildings

648

–

–

–

–

–

–

–

(30)

618

Network equipment

29,134

1,742

207

1,719

(135)

29

(194)

(6)

(4,160) 28,336

Support equipment

1,421

95

22

160

(51)

1

(8)

–

(285)

1,355

Furniture and office equipment

190

10

2

2

–

–

(3)

–

(46)

155

Data processing equipment
and software

2,207

379

59

141

(162)

2

(20)

(1)

(570)

2,035

Under construction

1,197

2,123

–

(2,187)

–

–

(49)

–

–

1,084

Other

169

73

7

28

–

–

(5)

(5)

(67)

200

37,756

4,464

300

–

(348)

32

(295)

(19)

(5,442) 36,448

F-28

Carrying

Business

Transfer

Impair-

Carrying

value at

combina-

from/(to)

Foreign

ment

value at

beginning

tions/con-

intangible

currency

and

Depre-

end of

of year Additions solidations

Transfers

assets* translation write-offs Disposals

ciation

year

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

10. Property, plant and

equipment

(continued)

2004

Freehold land and buildings

2,722

64

3

287

–

(1)

(5)

(5)

(275)

2,790

Leasehold buildings

635

59

5

–

–

–

–

–

(51)

648

Network equipment

31,009

1,524

–

1,374

–

(143)

(333)

(18)

(4,279) 29,134

Support equipment

1,587

140

–

252

–

(4)

(4)

–

(550)

1,421

Furniture and office equipment

206

9

–

23

–

–

(1)

–

(47)

190

Data processing equipment
and software

1,980

491

–

574

–

(14)

(5)

(2)

(817)

2,207

Under construction

1,077

2,598

–

(2,503)

25

–

–

–

–

1,197

Other

203

51

–

(7)

–

(2)

(2)

(1)

(73)

169

39,419

4,936

8

–

25

(164)

(350)

(26)

(6,092) 37,756

Fully depreciated assets with a cost of R3,724 million were derecognised in the 2006 financial year. This has reduced both the cost price and
accumulated depreciation of property, plant and equipment accordingly.

The average time taken to construct assets varies from three to four months.

Full details of land and buildings are available for inspection at the registered offices of the Group.

Change in comparatives

The comparatives have been restated due to the reclassification of software with a carrying value of R2,650 million in 2005 (2004: R1,300 million)
to Intangible assets. Depreciation of R286 million (2004: R673 million) has also been reclassified to amortisation (Refer to note 11). This
restatement excludes the mobile segment for 2004.

*The mobile portion of the restatement for 2004 was not done as it was considered impracticable to reliably determine these amounts. Therefore

the cumulative correction for the mobile portion is reflected as a transfer in 2005.

The comparatives have also been restated for the reclassification of investment properties to property, plant and equipment with a carrying value of
R25 million (2004: R32 million) as the property’s primary purpose was deemed to have always been for the service and connection of customers
and not for capital appreciation or rental income.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-29

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

10. Property, plant and equipment

(continued)

Impairment and write-offs of assets

350

295

162

Assets under construction written-off

–

49

75

Data processing equipment and software

5

20

10

Assets relating to Vodacom Mozambique, S.A.R.L. *

–

12

–

Data processing equipment and software written off

5

8

10

Network equipment

333

194

49

Assets relating to Vodacom Mozambique, S.A.R.L. *

–

71

–

Reversal of impairment

–

–

(26)

*Due to the competitive, regulatory and economic environment in
which VM, S.A.R.L. operates in Mozambique, the Group assessed
the assets for impairment in accordance with the requirements of
IAS36 Impairment of Assets (‘IAS36’). The recoverable amount of
these assets has been determined based on the fair value of the
assets less costs to sell at March 31, 2006. The fair value of the
assets was obtained from a knowledgeable, willing party on an
arm’s length basis, based on the assumption that the assets would
be disposed of on an item by item basis. The amount with which the
carrying amount exceeded the recoverable amount is recognised as
an impairment loss. The reversal of the impairment loss related to
an increase in the fair value of infrastructure assets.

Telkom recognised an impairment loss for an earth station. This asset

149

–

–

was developed to route traffic between the Public Switch Telephone
Network (‘PSTN’) of Telkom and the Satellite Access Node (‘SAN’)
of a satellite company. The satellite company has not met its current
outstanding financial obligations to Telkom and management is of
the opinion that no future payments will be received. Management
has assessed the asset and it appears unlikely that there will be
future economic benefits flowing to the Company to recover the
carrying value.

Decommissioned and obsolete equipment written-off

184

123

75

Other

Support equipment, land, buildings and other assets written-off

12

32

28

2004

2005

2006

Accumulated

Carrying

Accumulated

Carrying

Accumulated

Carrying

Cost

amortisation

value

Cost amortisation

value

Cost

amortisation

value

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

11. Intangible assets

Goodwill

553

(319)

234

269

–

269

305

–

305

Trademarks and copyrights

519

(280)

239

588

(389)

199

685

(472)

213

Licences

133

(42)

91

171

(107)

64

155

(95)

60

Software

3,103

(1,939)

1,164

4,674

(2,929)

1,745

5,607

(3,338)

2,269

Assets under construction

136

–

136

905

–

905

1,063

–

1,063

4,444

(2,580)

1,864

6,607

(3,425)

3,182

7,815

(3,905)

3,910

F-30

Transfer

from

Carrying

property

Carrying

value at

Business

Foreign

plant,

value at

beginning

combi-

Impair-

currency

Amorti-

and

end of

of year

Additions

Disposals

nations

ment translation

sation

Transfers equipment*

year

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

11. Intangible assets

(continued)

The carrying amounts of intangible
assets can be reconciled as follows:

2006

Goodwill

269

–

–

37

–

(1)

–

–

–

305

Trademarks, copyrights and other

199

2

–

91

–

–

(81)

2

–

213

Licences

64

1

–

–

–

(1)

(4)

–

–

60

Software

1,745

219

(19)

–

–

(2)

(475)

801

–

2,269

Assets under construction

905

974

–

–

–

–

–

(816)

–

1,063

3,182

1,196

(19)

128

–

(4)

(560)

(13)

–

3,910

2005

Goodwill

234

–

–

35

–

–

–

–

–

269

Trademarks, copyrights and other

239

–

–

68

–

–

(108)

–

–

199

Licences

91

–

–

26

(49)

5

(9)

–

–

64

Software

1,164

103

–

–

–

–

(385)

515

348

1,745

Assets under construction

136

1,284

–

–

–

–

–

(515)

–

905

1,864

1,387

–

129

(49)

5

(502)

–

348

3,182

2004

Goodwill

211

–

–

112

–

(9)

(72)

(8)

–

234

Trademarks, copyrights and other

94

4

–

194

–

–

(53)

–

–

239

Licences

51

57

–

–

–

(17)

(8)

8

–

91

Software

1,241

–

(25)

–

–

–

(673)

621

–

1,164

Assets under construction

386

371

–

–

–

–

–

(621)

–

136

1,983

432

(25)

306

–

(26)

(806)

–

–

1,864

The carrying amounts of intangible assets pledged as security for liabilities at March 31, 2006 is R19 million, which consist of software items with
a carrying value of R16 million and licenses with a carrying value of R3 million (Refer to note 24).

Fully amortised assets still in use at March 31, 2006 consist of trademarks, copyrights and certain software items.

Goodwill has been allocated for impairment testing purposes to six cash generating units of which four are in South Africa, one in the Democratic
Republic of the Congo and one in Tanzania.

South Africa

The recoverable amounts of goodwill relating to Vodacom Service Provider Company (Proprietary) Limited, Smartphone SP (Proprietary) Limited,
Smartcom (Proprietary) Limited and Cointel VAS (Proprietary) Limited have been determined on the basis of value in use calculations. These
companies operate in the same economic environment for which the same key assumptions were used. These value in use calculations use cash flow
projections based on financial budgets approved by management covering a four to five year period and discount rates of between 10.6% and 14.9%
in South African Rand terms. None of the cash flows were extrapolated beyond a five year period and therefore no nominal growth rates are
applicable. Cash flow projections during the budget period for these companies are also based on the same expected growth in operating profit and
Earnings before Interest, Taxation, Depreciation and Amortisation (‘EBITDA’). Management believes that any reasonable change in any of these key
assumptions would not cause the aggregate carrying amount of these companies to exceed the aggregate recoverable amount of these units.

Democratic Republic of Congo

The recoverable amount of this cash generating unit was based on a value in use calculation for Vodacom Congo (RDC) s.p.r.l. The calculation uses
cash flow projections based on financial budgets approved by management covering a five year period and a discount rate of 19.3% in US Dollar
terms. Cash flows beyond this period have been extrapolated using annual nominal growth rates of between 2.5% and 4.4%. Management believes
that these growth rates do not exceed the long-term average growth rate for the market in which this company operates. Management believes that
any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed
its recoverable amount.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-31

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

11. Intangible assets

(continued)

Tanzania

The recoverable amount of this cash generating unit was based on a value in use calculation for Vodacom Tanzania Limited. The calculation uses cash
flow projections based on financial budgets approved by management covering a five year period and a discount rate of 14.6% in US Dollar terms.
Cash flows were not extrapolated beyond this initial five year period and therefore no nominal growth rate is applicable. Management believes that
any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed
its recoverable amount.

Change in comparatives

The comparatives have been restated due to the reclassification of software with a carrying value of R2,650 million (2004: R1,300 million) from
Property, plant and equipment to Intangible assets. Depreciation of R286 million in 2005 (2004: R673 million) has also been reclassified to
amortisation. (Refer to note 10)

* The mobile portion of the restatement for 2004 was not done as it was considered impracticable to reliably determine these amounts. Therefore

the cumulative correction for the mobile portion is reflected as a transfer in 2005.

2004

2005

2006

Rm

Rm

Rm

12. Investments

1,567

2,277

2,894

Available for sale
Unlisted investments

60

–

–

Rascom

–

–

–

0.70% (2005: 1.07%, 2004: 1.07%) interest in Regional African Satellite
Communications Organisation, headquartered in Abidjan, Ivory Coast, at cost.

Cost

1

1

1

Impairment

(1)

(1)

(1)

The fair value of the unlisted investments cannot be practicably
determined. The directors’ valuations are based on the Group’s interest
in the entities’ net asset values converted at year-end exchange rates.
The aggregate directors’ valuation of the above unlisted investment is
RNil (2005: RNil; 2004: RNil).

Preference shares in Vodacom Congo (RDC) s.p.r.l.

60

–

–

The preference shares of USD19 million (Group share: USD9 million)
bore interest at a rate of 4% per annum. The preference shares are
redeemable, but only after the first three years from date of inception
and only on the basis that the shareholders are repaid simultaneously
and in proportion to their shareholding. With effect from April 1, 2004
Vodacom’s control over the company changed resulting in Vodacom
Congo (RDC) s.p.r.l. being accounted for as a subsidiary from this date.

Listed investments

57

8

–

New Skies N.V.

49

–

–

Nil% (2005: Nil%; 2004: 0.89%) interest in New Skies Satellite N.V.,
headquartered in The Hague, Netherlands, at fair value. Market value: RNil
(2005: RNil; 2004: R49 million) New Skies Satellites N.V. was liquidated
and a liquidation distribution of R55 million was received during 2005.

Accordingly, the investment was derecognised and the gain recognised in
Other income (Refer to note 4).

SAGE Limited

8

8

–

9 090 909 ordinary shares of R0.01 each.

The SAGE shares were classified as an available-for-sale investment in
prior periods. They were sold during the year at a loss of R1,85 million
(Group share: R1 million) as a result of the delisting of SAGE.

F-32

2004

2005

2006

Rm

Rm

Rm

12. Investments

(continued)

Loans and receivables

208

80

89

ABSA Bank Limited

39

–

–

At March 31, 2004, Vodacom Congo (RDC) s.p.r.l.’s deposit account
amounted to€10 million (Group share:€5 million), which was charged
as security for the extended credit facility of Vodacom Congo (RDC) s.p.r.l,
and bore interest at EURIBOR less 0.2%. The deposit was refunded when
the facility was replaced by a medium-term loan from Standard Bank
London Limited and RMB International (Dublin) Limited on July 30, 2004.

Planetel Communications Limited

22

22

21

The loan with a nominal value of USD7 million (Group share:
USD3 million) issued during the 2003 year, bears interest at LIBOR
plus 5%. Planetel Communications Limited utilised this loan to ensure
sufficient shareholder loan funding by itself as a shareholder of
Vodacom Tanzania Limited. The loans and capitalised interest are
collateralised by cession over all shareholder distributions and a pledge
over the shares of Vodacom Tanzania Limited. All the shareholders
subordinated their loans to Vodacom Tanzania Limited for the duration
of the project finance funding period (Refer to note 24).

Caspian Construction Company Limited

25

26

25

The loan with a nominal value of USD8 million (Group share:
USD4 million) issued during the 2003 year, bears interest at LIBOR
plus 5%. Caspian Construction Company Limited utilised this loan to
ensure sufficient shareholder loan funding by itself as a shareholder of
Vodacom Tanzania Limited. The loans and capitalised interest are
collateralised by cession over all shareholder distributions and a pledge
over the shares of Vodacom Tanzania Limited. All the shareholders
subordinated their loans to Vodacom Tanzania Limited for the duration
of the project finance funding period (Refer to note 24).

Vodacom Congo (RDC) s.p.r.l.

76

–

–

The joint venture partner’s share of the loan issued by Vodacom
International Limited to Vodacom Congo (RDC) s.p.r.l. amounted to
USD24 million (Group share: USD12 million). The loan bore interest at
LIBOR plus 6.5%. With effect from April 1, 2004 Vodacom’s control
over the company changed resulting in Vodacom Congo (RDC) s.p.r.l.
being accounted for as a subsidiary from this date.

Tel.One (Pvt) Limited

46

32

32

The loan to Tel.One (Pvt) Limited is unsecured, interest-free and will be
repaid through traffic revenue from June 2004 over 5 years. No traffic
has been set off against the loan in the current financial year.

Other receivables

–

–

11

Held-for-trading

1,410

2,258

2,874

Linked insurance policies – Coronation

553

765

1,182

Linked insurance policies – Investec

39

22

24

Ordinary shares – listed

234

667

1,059

Cash

88

559

229

Other money market investments

489

118

284

Government stock

–

68

44

Other unlisted investments

7

59

52

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-33

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

12. Investments

(continued)

Less: Short-term investments

(168)

(69)

(69)

Tel.One (Pvt) Limited

(10)

(10)

(13)

ABSA Bank Limited

(39)

–

–

Vodacom Congo (RDC) s.p.r.l.

(76)

–

–

Other money market investments

(35)

(51)

(56)

SAGE Limited

(8)

(8)

–

Included in held-for-trading investments is R2,819 million
(2005: R2,208 million; 2004: R1,370 million) that will be used to
fund the post-retirement medical aid liability. These investments have
been made through a cell captive that has been consolidated in full.

13. Deferred revenue and Deferred expenses

Deferred expenses

643

347

480

Long-term deferred expenses

213

133

254

Current portion of deferred expenses

430

214

226

The current portion of deferred expenses represents the deferral of
connection costs (Refer to note 2).

Deferred revenue

2,815

2,676

2,966

Long-term deferred revenue

1,097

959

991

Current portion of deferred revenue

1,718

1,717

1,975

Included in deferred revenue is profit on the sale and lease-back of certain Telkom buildings of R140 million (2005: R151 million; 2004: R162 million).
A profit of R11 million per annum is recognised in income on a straight-line basis, over the period of the lease ending 2019 (Refer to note 35).

Change in comparatives

Long-term deferred revenue and Current portion of deferred revenue have increased by R638 million and R323 million in 2005 (2004: R690 million
and R314 million) respectively due to the change in the fixed-line policy for recognising connection revenue (Refer to note 2).

Long-term deferred expenses and long-term deferred revenue have been restated by R15 million (2004: R11 million) and R61 million (2004: R54 million)
respectively due to recognition of operating lease assets and liabilities.

F-34

2004

2005

2006

Rm

Rm

Rm

14. Deferred taxation

(118)

(435)

(587)

Opening balance

240

(118)

(435)

Change in accounting policy (Refer to note 2)

331

–

–

Income statement movements

(631)

(346)

(173)

Temporary differences

(694)

(456)

(280)

Underprovision prior year

63

73

107

Change in tax rate

–

37

–

Business combinations

(63)

(19)

21

Acquired from the minorities of Vodacom Congo (RDC) s.p.r.l.

–

48

–

Foreign equity revaluation

5

–

–

The balance comprises:

(118)

(435)

(587)

Capital allowances

(2,655)

(2,739)

(2,634)

Provisions, deferred income and other allowances

1,932

1,813

1,634

Tax losses

406

139

112

Secondary Taxation on Companies tax credits

199

352

301

Deferred tax balance is made up as follows:

(118)

(435)

(587)

Deferred tax assets

351

512

481

Deferred tax liabilities

(469)

(947)

(1,068)

Tax losses available for set-off against future taxable profits

1,517

178

–

Unutilised STC credits

1,594

2,801

2,393

Under South African tax legislation, tax losses for companies continuing to do business do not expire. The unused taxation losses available to reduce
the net deferred taxation liability is R876 million (Group share: R438 million) (2005: R355 million; 2004: R165 million) (Group share 2005:
R178 million; 2004: R83 million). The effect of this would be a R279 million (Group share: R140 million) (2005: R109 million; 2004: R25 million)
(Group share: 2005: R55 million; 2004: R12 million) reduction in the net deferred taxation liability.

Secondary Taxation on Companies (‘STC’) is provided for at a rate of 12.5% on the amount by which dividends declared by the Group exceeds
dividends received. The deferred tax asset is raised as it is considered probable that it will be utilised in the future. The asset will be released as a
tax expense when dividends are declared.

Vodacom Congo (RDC) s.p.r.l. has recorded a deferred taxation asset for the 2006, 2005 and 2004 financial years even though the company was
incurring losses in the past, it is currently generating taxable income. The Group has performed a detailed calculation of future taxable income to
support the recognition of the deferred taxation asset.

Change in comparatives

Deferred taxation has decreased by R279 million in 2005 (2004: R291 million) due to the change in fixed line policy for recognising connection
revenues (Refer to note 2).

Deferred taxation has decreased by R13 million in 2005 (2004: R13 million) due to the mobile change in policy for recognising operating leases
(Refer to note 2).

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-35

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

15. Other financial instruments

Other financial assets consist of:

1,241

5,074

275

Held-to-maturity

Repurchase agreements

12

3,769

–

At fair value through profit or loss

1,229

1,305

275

Bills of exchange

19

77

107

Derivative instruments (Refer to note 37)

1,210

1,228

168

Repurchase agreements

Telkom manages a portfolio of repurchase agreements in the South
African capital and money markets, with a view to generating
additional investment income on the favourable interest rates provided
on these transactions. Interest received from the borrower is based on
the current market related yield.

2006

There were no repurchase agreements held at March 31, 2006.

2005

Maturity period

Yield

7 days

7.35%

3,769

2004

Maturity period

Yield

7 days

9.21%

12

Due to the short-term nature of these transactions and the fact that the
transactions are initiated based on market-related interest rates, the
carrying value approximates the fair value. Collateral in the form of
publicly traded bonds has been received in respect of the above
transactions.

The terms and conditions of these transactions are governed by signed
International Securities Market Association (‘ISMA’) agreements with
all counter parties and the regulations of the Bond Exchange of South
Africa (‘BESA’).

Bills of exchange

The fair value of bills of exchange has been derived at with reference
to BESA quoted prices.

Other financial liabilities consist of:

At fair value through profit or loss

Derivative instruments (Refer to note 37)

(645)

(313)

(235)

Change in comparatives

R134 million in 2005 (2004: R1,101 million) of other financial assets has been reclassified from non-current assets to current assets. R83 million
in 2005 (2004: R153 million) of other financial liabilities has been reclassified from non-current liabilities to current liabilities (Refer to note 2).

F-36

2004

2005

2006

Rm

Rm

Rm

16. Inventories

520

658

814

Gross inventories

597

725

916

Write down of inventory to net realisable value

(77)

(67)

(102)

Inventories consist of the following categories:

520

658

814

Installation material, maintenance material and network equipment

265

313

487

Merchandise

255

345

327

Write down of inventory to net realisable value

77

67

102

Opening balance

75

77

67

Charged to selling, general and administrative expenses

28

30

64

Inventories written-off

(26)

(40)

(29)

17. Trade and other receivables

5,846

5,820

6,399

Trade receivables

5,222

5,222

5,798

Gross trade receivables

5,547

5,507

6,088

Impairment of receivables

(325)

(285)

(290)

Prepayments and other receivables

624

598

601

Impairment of receivables

325

285

290

Opening balance

337

325

285

Charged to selling, general and administrative expenses

278

228

206

Business combination

–

3

–

Write-off

(290)

(271)

(201)

18. Net cash and cash equivalents

2,796

2,301

4,255

Cash shown as current assets

3,218

3,210

4,948

Cash and bank balances

1,219

2,375

1,853

Short-term deposits

1,999

835

3,095

Credit facilities utilised

(422)

(909)

(693)

Undrawn borrowing facilities

2,995

4,750

9,519

The undrawn borrowing facilities are unsecured, bear interest at a rate linked to the prime interest rate, have no specific maturity date and are subject
to annual review. The facilities are in place to ensure liquidity (Refer to note 37).

Borrowing powers

To borrow money, Telkom’s directors may mortgage or encumber Telkom’s property or any part thereof and issue debentures, whether secured or
unsecured, whether outright or as security for debt, liability or obligation of Telkom or any third party. For this purpose the borrowing powers of Telkom
are unlimited, but are subject to the restrictive financial covenants of the TL20 loan (Refer to note 24).

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-37

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

19. Share capital and premium

Authorised and issued share capital and share premium are made up as follows:

Authorised

10,000

10,000

10,000

999,999,998 ordinary shares of R10 each

10,000

10,000

10,000

1 (2005:1; 2004:1) Class A ordinary share of R10

–

–

–

1 (2005:1; 2004:1) Class B ordinary share of R10

–

–

–

Issued and fully paid

8,293

8,293

6,791

544,944,897 (2005: 557,031,817; 2004:557,031,817)
ordinary shares of R10 each

5,570

5,570

5,449

1 (2005: 1; 2004:1) Class A ordinary share of R10

–

–

–

1 (2005: 1; 2004:1) Class B ordinary share of R10

–

–

–

Share premium

2,723

2,723

1,342

Number of

Number of

Number of

shares

shares

shares

The following table illustrates the movement within the number of shares issued:
Shares in issue at beginning of year

557,031,819

557,031,819

557,031,819

Shares bought back and cancelled

–

–

(12,086,920)

Shares in issue at end of year

557,031,819

557,031,819

544,944,899

The class A and B ordinary shares rank equally with the ordinary shares
in respect of rights to dividends but differ in respect of the right to
appoint directors. Full details of the voting rights of ordinary, class A and
class B shares are documented in the Articles of Association of Telkom.

The unissued shares are under the control of the Directors of Telkom
until the next Annual General Meeting. The directors have been given
the authority by the shareholders to buy back Telkom’s own shares up
to a limit of 20% of the current issued share capital. This authority
expires at the next annual general meeting.

Share buy-back

During the year Telkom bought back 12,086,920 ordinary shares at a
total consideration of R1,502 million. This reduced the share capital by
R121 million and the share premium by R1,381 million.

The shares bought back have been cancelled from the issued share
capital by the Registrar of Companies.

2004

2005

2006

Rm

Rm

Rm

Treasury shares

(238)

(1,812)

(1,809)

12,687,521 (2005: 12,717,190; 2004: 3,185,736) and
10,849,058 (2005:10,849,058; 2004: Nil) ordinary shares in
Telkom, with a fair value of R2,038 million (2005: R1,366 million;
2004: R251 million) and R1,743 million (2005: R1,166 million;
2004: RNil) are currently held as treasury shares by its subsidiaries
Rossal No 65 (Proprietary) Limited and Acajou Investments
(Proprietary) Limited, respectively.

The shares held by Rossal no 65 (Proprietary) Limited are reserved for

issue in terms of the Telkom Conditional Share Plan (Refer to note 28).

F-38

2004

2005

2006

Rm

Rm

Rm

20. Share-based compensation reserve

–

68

151

This reserve represents the cumulative fair value of the equity-settled
share-based payment transactions recognised in employee expenses
during the vesting period of the equity instruments granted to
employees in terms of the Telkom Conditional Share Plan (Refer to note 28).

The following table illustrates the movement within the Share-based
compensation reserve:

Balance at beginning of year

–

68

Employee cost

68

120

Accelerated vesting of shares

–

(37)

Balance at end of year

–

68

151

21. Non-distributable reserves

91

361

1,136

Balance at beginning of year

(15)

91

361

Movement during year

106

270

775

Foreign currency translation reserve (net of tax of RNil; 2005: RNil; 2004: R5 million)

(92)

13

59

Fair value adjustment on investments

9

(22)

–

Life fund reserve (Cell Captive)

189

279

716

The balance comprises:

91

361

1,136

Foreign currency translation reserve

(168)

(155)

(96)

Fair value adjustment on investments

22

–

–

Cell Captive reserve

237

516

1,232

The Group has two consolidated cell captives, one used as an investment to fund Telkom’s post-retirement medical aid liability and the other is for
Vodacom’s short-term insurance obligation in respect of handsets.

In terms of the Short-term Insurance Act, 1998, the Vodacom cell captive partner, Nova Risk Partners Limited is required to raise a contingency reserve
equal to 10% of premiums written less approved reinsurance (as defined in the Act). This reserve can be utilised only with the prior permission of
the Registrar of Short-term Insurance.

The earnings from the cell captives are recognised in the income statement and then transferred to non-distributable reserves.

Gains and losses from changes in fair value of available-for-sale investments are recognised directly in equity until the financial asset is disposed.

22. Retained earnings

13,482

19,231

22,896

Opening balance as previously stated

10,392

13,482

19,231

Change in accounting policy – Connection revenue

(809)

–

–

Opening balance as restated

9,583

13,482

19,231

Movement during year

3,899

5,749

3,665

Net profit for the year

4,589

6,751

9,182

Transfer to non-distributable reserves

(189)

(279)

(716)

Dividend declared

(501)

(606)

(4,801)

Change in shareholding in Vodacom Congo (RDC) s.p.r.l.

–

(117)

–

The balance comprises:

13,482

19,231

22,896

Company

9,366

15,033

18,534

Joint venture

3,918

4,029

4,285

Subsidiaries

198

169

77

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-39

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

23. Minority interest

200

220

301

Opening balance

194

200

220

Movement during the year

6

20

81

Reconciliation

200

220

301

Balance at beginning of year

194

200

220

Share of earnings

69

83

139

Acquisition of subsidiary

–

5

27

Foreign currency translation reserves

(9)

(1)

(7)

Dividend declared

(54)

(67)

(78)

24. Interest-bearing debt

Long-term interest-bearing debt

12,703

9,504

7,655

Total interest-bearing debt

16,754

14,003

11,123

Gross interest-bearing debt (Refer to note 25)

20,151

16,914

13,686

Discount on debt instruments issued

(3,397)

(2,911)

(2,563)

Less: Current portion of interest-bearing debt

(4,051)

(4,499)

(3,468)

Local debt

(3,628)

(264)

(2,642)

Locally registered Telkom debt instruments

(2,286)

–

(2,211)

Repurchase agreements

(27)

–

–

Commercial paper bills

(1,313)

(262)

(429)

Short-term interest free loans

(2)

(2)

(2)

Foreign debt

(408)

(4,210)

(786)

Finance leases

(15)

(25)

(40)

F-40

2004

2005

2006

Rm

Rm

Rm

24. Interest-bearing debt

(continued)

Total interest-bearing debt is made up as follows:

16,754

14,003

11,123

(a) Local debt

10,983

7,790

8,938

Locally registered Telkom debt instruments

9,412

7,526

8,507

Name, maturity, rate p.a., nominal value
TK01, 2008, 10%, R4,689 million (2005: R4,658 million; 2004: R4,609 million)

3,812

4,018

4,230

TL08, 2004, 13%, RNil (2005: RNil; 2004: R2,299 million)

2,286

–

–

TL06, 2006, 10.5%, R2,100 million (2005: R1,500 million; 2004: R1,455 million)

1,440

1,492

2,103

TL20, 2020, 6%, R2,500 million (2005: R2,500 million; 2004: R2,500 million)

1,155

1,186

1,214

PP02, 2010, 0%, R430 million (2005: R430 million; 2004: R430 million)

174

200

230

PP03, 2010, 0%, R1,350 million (2005: R1,350 million; 2004: R1,350 million)

545

630

730

Local bonds

The local Telkom bonds are unsecured, but contain a number of
restrictive covenants, which limit Telkom’s ability to create
encumbrances on revenues or assets, and to secure any indebtedness
without securing the outstanding bonds equally and rateably with such
indebtedness. The TL20 loan contains restrictive financial covenants
which, if not met, could result in the early redemption of the loan.

Telkom is a buyer or seller of last resort in the Telkom bond TK01. To
economically hedge the resultant exposure Telkom sells or buys government
bonds which are included in bills of exchange. The objective of the hedging
relationship is to eliminate price risk whereby value changes on the TK01
transactions are in total offset by value changes in the government stock.

Repurchase agreements

27

–

–

Commercial paper bills

1,542

262

429

Maturity, rate p.a., nominal value
2006, 7% (2005: 14.06%; 2004: 13.5% to 15.13%), R430 million
(2005: R263 million; 2004: R1,708 million).

Interest free long-term loans
Vodacom Lesotho (Proprietary) Limited

2

2

2

The minority shareholder’s loan is uncollateralised and no repayment
terms have been determined.

(b) Foreign debt

4,574

5,004

913

Name, maturity, rate p.a., nominal value
Euro: 2006 – 2025, 0.10% – 6.81% (2002 – 2005, 0.10% – 7.13%),
€11 million (2005: €512 million; 2004: €512 million)

3,988

4,135

85

Planetel Communications Limited

18

19

21

The shareholder loan of USD8 million (2005: USD8 million; 2004:
USD8 million) (Group share: USD4 million, 2005: USD4 million;
2004: USD4 million) is subordinated for the duration of the project
finance funding period of Vodacom Tanzania Limited, bears no interest
from April 1, 2002, and is thereafter available for repayment, by
approval of at least 60% of the shareholders of Vodacom Tanzania
Limited. The loan was remeasured at amortised cost at an effective
interest rate of LIBOR plus 5%. The gain on remeasurement was
included in equity.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-41

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

24. Interest-bearing debt

(continued)

(b) Foreign debt

(continued)

Caspian Construction Company Limited

21

23

25

The shareholder loan of USD10 million; (2005: USD10 million; 2004:
USD10 million) (Group share: USD5 million; 2005: USD5 million;
2004: USD5 million) is subordinated for the duration of the project
finance funding period of Vodacom Tanzania Limited, bears no interest
from April 1, 2002, and is thereafter available for repayment, by
approval of at least 60% of the shareholders of Vodacom Tanzania
Limited. The loan was re-measured at amortised cost at an effective
interest rate of LIBOR plus 5%. The gain on re-measurement was
included in equity.

Extended credit facility of Vodacom Congo (RDC) s.p.r.l.

155

–

–

Vodacom Congo (RDC) s.p.r.l’s extended credit facility amounted to
€39 million (Group share:€20 million) at March 31, 2004, which was
partially collateralised by guarantees and a cash deposit, and bore
interest at a rate between EURIBOR plus 1.50% and EURIBOR plus
1.75%. The facility was replaced by a medium-term loan from Standard
Bank London Limited and RMB International (Dublin) Limited on
July 30, 2004.

Revolving credit facility of Vodacom Congo (RDC) s.p.r.l.

156

–

–

(a) Vodacom’s share of the short-term revolving credit facility provided

by ABSA amounted to USD16 million (Group share: USD8 million)
at March 31, 2004. The credit facility was collateralised by
guarantees provided by the Group, which bore interest at an
effective interest rate of LIBOR plus 1.5%. The facility was replaced
by a medium-term loan from Standard Bank London Limited and
RMB International (Dublin) Limited on July 30, 2004.

(b) Vodacom’s share of the short-term Euro revolving credit facility

provided by Standard Finance (Isle of Man) Limited amounted to
€12 million (Group share:€6 million) at March 31, 2004. The
credit facility was collateralised by guarantees provided by
Vodacom and bore interest at an effective interest rate of EURIBOR
plus 1.5%.

(c) Vodacom’s share of the short-term Dollar revolving credit facility

provided by Standard Finance (Isle of Man) Limited amounts to
USD19 million (Group share: USD10 million). At March 31, 2004,
the credit facility was collateralised by guarantees provided by
Vodacom and bore interest at an effective interest rate of LIBOR
plus 1.5%.

Loan to Vodacom International Limited

–

564

557

The loan provided by Standard Bank London Limited and RMB
International (Dublin) Limited that amounts to USD180 million (2005:
USD180 million (Group share USD90 million; 2005: USD90 million))
is collateralised by guarantees provided by the Vodacom Group. The
loan is repayable on July 19, 2006 and bears interest at an effective
interest rate of LIBOR plus 0.6%.

F-42

2004

2005

2006

Rm

Rm

Rm

24. Interest-bearing debt

(continued)

(b) Foreign debt

(continued)

Project finance funding for Vodacom Tanzania Limited

174

143

92

The drawn down portions of the project finance funding from external
parties include the following:

(a) Netherlands Development Finance Company USD8 million (Group

share: USD4 million) (2005: USD10 million; Group share:
USD5 million; 2004: USD11 million; Group share: USD6 million)

(b) Deutsche Investitions – Und Entwicklungsgesellschaft mbH

€

8 million (Group share:

€

4 million) (2005:

€

10 million; Group

share:

€

5 million; 2004:

€

12 million; Group share:

€

6 million)

(c) Standard Corporate and Merchant Bank USD8 million (Group

share: USD4 million) (2005: USD12 million, Group share:
USD6 million; 2004: USD16 million; Group share: USD8 million)

(d) Barclays Bank (Local Syndicate Tanzania) TSH5,704 million

(Group share: TSH2,852 million) (2005: TSH10,969 million;
Group share: TSH5,485 million; 2004: TSH15,356 million; Group
share: TSH7,678 million)

These are collateralised by a charge over 100% of the shares, the license
with a carrying value of R6 million and Vodacom Tanzania Limited’s
tangible assets with a carrying value of R896 million and intangible
assets with a carrying value of R32 million. The loans bear interest
based upon the foreign currency denomination of the project financing
between 6% and 14.5% per annum and will be fully repaid by March
2008. The full amount of R92 million has been classified as current
liabilities due to the Group not having an unconditional right to defer its
settlement for at least twelve months after the balance sheet date.

Vodacom Congo (RDC) s.p.r.l.

2

4

19

Vodacom‘s share of the short-term facility amounts to USD6 million
(2005: USD1 million; 2004: USD0.5 million) (Group share:
USD3 million; 2005: USD 0.5 million; 2004: USD0.25 million).
USD1 million (Group share: USD0.5 million) of these facilities bears
interest at 18% per annum with no fixed repayment terms.
USD5 million (Group share: USD2.5 million) of these facilities is repayable
on June 15, 2006 and bears interest at LIBOR plus 6% per annum.

Preference shares issued by Vodacom Congo (RDC) s.p.r.l. The

60

116

114

preference shares of USD37 million (2005: USD37 million; 2004:
USD19 million) (Group share: USD19 million; 2005:USD19 million;
2004: USD10 million) bear interest at a rate of 4% per annum. The
preference shares are redeemable, but only after the first three years
from date of inception and only on the basis that the shareholders are
repaid simultaneously and in proportion to their shareholding.

(c) Finance leases

1,197

1,209

1,272

The finance leases are secured by buildings and office equipment with
a book value of R618 million (2005: R618 million; 2004:
R648 million) (Refer to note 10). These amounts are repayable within
periods ranging from 1 to 13 years. Interest rates vary between 11.3%
and 37.7%.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-43

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

24. Interest-bearing debt

(continued)

Included in long-term and short-term debt is:
Debt guaranteed by the South African Government

3,906

4,113

4,315

A major portion of the guaranteed debt relates to the TK01 debt
instrument.

Telkom may issue or reissue locally registered debt instruments in terms
of the Post Office Amendment Act 85 of 1991. The borrowing powers
of Telkom are set out in note 18.

Repurchase agreements

The Group manages a portfolio of repurchase agreements in the South
African capital and money markets with a view to financing short-term
liquidity gaps. Interest paid by the Group is based on the current market
related yield.

2004

Maturity period

Yield

7 days

9.3%

27

–

–

Due to the short-term nature of these transactions and the fact that the transactions are initiated based on market related interest rates, the carrying
value approximates the fair value.

Collateral in the form of publicly tradable bonds has been delivered in respect of the above transactions.

The terms and conditions of these transactions are governed by signed ISMA agreements with all counter parties and the regulations of the BESA.
The fair value has been derived at with reference to BESA quoted prices.

25. Repayment of gross interest-bearing debt

2004

2005

2006

2006

2006

Total

Total

Foreign

Local

Total

Year repayable

Rm

Rm

Rm

Rm

Rm

2004/2005

4,197

–

–

–

–

2005/2006

4,227

4,499

–

–

–

2006/2007

1,553

2,162

786

2,685

3,471

2007/2008

4,710

4,755

–

4,649

4,649

2008/2009

135

97

–

112

112

2009/2010

49

92

–

50

50

2010/2011

1,873

1,874

12

1,872

1,884

Thereafter

3,407

3,435

115

3,405

3,520

20,151

16,914

913

12,773

13,686

The Euro Bond with a nominal value of €500 million at March 31, 2005 was redeemed on April 11, 2005. The facility was refinanced with

commercial paper bills ranging in maturities from one month to one year, with yields of between 7.0% and 7.5%, and an additional R600 million
(nominal amount) of the existing TL06 bond.

Commercial paper bills with a nominal value of R2,720 million were redeemed in the current financial year. Of these, R262 million was outstanding
at March 31, 2005. These redemptions were financed with cash flow from operations.

Repayment/refinancing of current portion of interest-bearing debt

The repayment/refinancing of R3,468 million of the current portion of interest-bearing debt will depend on the market circumstances at the time of
repayment. Management believes that sufficient funding facilities will be available at the date of repayment/refinancing.

The Bond Exchange of South Africa granted a listing effective from April 1, 2005 on the TL20 Bonds.

F-44

2004

2005

2006

Rm

Rm

Rm

26. Provisions

2,438

2,460

2,677

Employee related

3,670

3,772

4,232

Annual leave

401

337

356

Balance at beginning of year

417

401

337

Charged to employee expenses

162

74

88

Leave utilised or paid

(178)

(138)

(69)

Post-retirement medical aid (Refer to note 28)

2,420

2,430

2,607

Balance at beginning of year

2,289

2,420

2,430

Interest cost

249

249

249

Current service cost

24

27

48

Actuarial loss

–

–

63

Settlement and curtailment gain

(1)

(94)

(1)

Termination settlement

(9)

(13)

(29)

Contributions

(132)

(159)

(153)

Retirement and pension fund deficits (Refer to note 28)

–

–

–

Balance at beginning of year

474

–

–

Repayment of the deficit

(518)

–

–

Interest cost

44

–

–

Telephone rebates (Refer to note 28)

164

179

198

Balance at beginning of year

162

164

179

Interest cost

19

16

16

Current service cost

4

2

3

Actuarial gain

(21)

–

–

Curtailment gain

–

(3)

–

Bonus

685

826

1,071

Balance at beginning of year

608

685

826

Charged to employee expenses

546

732

965

Payment

(469)

(591)

(720)

Non-employee related

97

116

105

Supplier dispute (Refer to note 36)

–

–

–

Balance at beginning of year

356

–

–

Released to selling, general and administrative expenses

(356)

–

–

Warranty provision

17

14

16

Balance at the beginning of year

5

17

14

Charged to selling, general and administrative expenses

14

6

20

Provision utilised

(2)

(9)

(18)

Other

80

102

89

Less: Short-term provisions

(1,329)

(1,428)

(1,660)

Annual leave

(401)

(337)

(356)

Post-retirement medical aid

(158)

(171)

(159)

Telephone rebate

(12)

(16)

(17)

Bonus

(685)

(826)

(1,071)

Warranty provision

(17)

(14)

(16)

Other

(56)

(64)

(41)

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-45

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

26. Provisions

(continued)

Annual leave

In terms of the Group‘s policy, employees are entitled to accumulate vested leave benefits not taken within a leave cycle, to a cap of 25 days (2005:
25 days; 2004: 28 days) which must be taken within an 18 month leave cycle for Telkom, and a cap of 45 days for Vodacom. The leave cycle is
reviewed annually and is in accordance with legislation.

Bonus

The Telkom bonus scheme consists of performance bonuses which are dependent on achievement of certain financial and non-financial targets. The
bonus is payable to all qualifying employees annually after the Company’s results have been made public.

Vodacom’s bonus provision consists of a performance bonus based on the achievement of the predetermined financial targets payable to all levels of staff.

Deferred bonus incentive

Vodacom’s deferred bonus incentive provision represents the present value of the expected future cash outflows of the entitlement value at the balance
sheet date less the value at which the entitlements were issued, multiplied by the number of entitlements allocated to a participant.

The value of the bonus entitlements are determined based upon the audited consolidated financial statements of the Vodacom Group. Periodically, a
number of entitlements are issued to employees, the value of which depends on the seniority of the employee. The participating rights of employees
vest at different stages and employees are entitled to cash in their entitlements within one year after the participating rights have vested. The provision
is utilised when eligible employees receive the value of vested entitlements.

Warranty provision

The warranty provision in Vodacom covers manufacturing defects in the second year of warranty on handsets sold to customers. The estimate is based
on claims notified and past experience.

Other

Included in other provisions is an amount provided for asset retirement obligations.

Other provisions also include provisions for losses as a result of onerous contracts, advertising co-operation and various other smaller provisions. The
provision for onerous contracts represents the Groups‘s liability in respect of onerous lease contracts related to certain buildings. The provision is
discounted for the respective periods of the lease contracts and is net of the the fair value of sublease rentals. The provision for advertising co-operation
represents the funds received from handset suppliers for expenditure not yet spent by the Group or external service providers.

2004

2005

2006

Rm

Rm

Rm

27. Trade and other payables

6,007

6,782

6,103

Trade payables

3,435

4,233

4,371

Finance cost accrued

463

385

141

Accruals

2,109

2,164

1,591

Accruals mainly represent amounts payable for goods received,
amounts raised for anticipated obligations on indirect taxes, net Value-
added Tax obligations and licence fees. Also included is an amount for
workforce reduction expenses of R2 million (2005: R606 million;
2004: R1,633 million) (Refer to note 5.1).

28. Employee benefits

The Group provides benefits for all its permanent employees through the Telkom Pension Fund and the Telkom Retirement Fund, and the Vodacom
Group Pension Fund. Membership of one of the funds is compulsory. In addition, certain retired employees receive medical aid benefits and a
telephone rebate. The liabilities for all of the benefits are actuarially determined in accordance with accounting requirements each year. In addition,
statutory funding valuations for the retirement funds are performed at intervals not exceeding three years.

At March 31, 2006, the Group employed 31,458 employees (2005: 31,790; 2004: 37,543). As at March 31, 2005, 2,745 (2004: 312) of
these employees were affected by the workforce reduction. In concluding the workforce reduction initiative, an additional 245 employees have left
Telkom during the current financial year.

F-46

28. Employee benefits

(continued)

The Telkom Pension Fund

The Telkom Pension Fund is a defined benefit fund that was created in terms of the Post Office Amendment Act 85 of 1991. All employees who were
members of the Government Service Pension Fund and Temporary Employees Pension Fund were transferred to a newly established Telkom Pension
fund, as were the deficits that existed in the aforementioned State Funds. Legislation also made provision that Telkom would guarantee the financial
obligations of the Telkom Pension Fund. The South African Government guaranteed the actuarially valued deficit of the Telkom Pension Fund as at
September 30, 1991, plus interest as determined by the State Actuary. The deficit related to the transferred members was fully repaid during 2004.

The latest actuarial valuation performed at March 31, 2006 indicates that the pension fund is in a surplus funding position of R80 million after
unrecognised losses. The recognition of the surplus is limited due to the application of the asset limitation criteria in IAS19 (revised).

The last statutory valuation of the Telkom Pension Fund performed in March 2005, indicated a statutory deficit. The current contributions are based
on that valuation. Management expects to complete the next statutory valuation in July 2006.

With effect from July 1, 1995, the Telkom Pension Fund was closed to new members. The funded status of the Telkom Pension Fund is disclosed

below.

2004

2005

2006

Rm

Rm

Rm

Telkom Pension Fund

The net periodic pension costs include the following components:
Interest and service cost on projected benefit obligations

22

22

22

Expected return on plan asset

(32)

(22)

(24)

Amortisation of unrecognised net actuarial loss

2

5

78

Net periodic pension (benefit)/expense recognised

(8)

5

76

Pension contributions

22

12

22

The status of the pension plan is as follows

Benefit obligation:
At beginning of year

162

190

186

Interest and service cost

22

22

22

Employee contributions

3

3

4

Benefits paid and net cash flow

(7)

–

(20)

Actuarial loss/(gain)

10

(29)

89

Benefit obligation at end of year

190

186

281

Plan assets at fair value:
At beginning of year

211

219

231

Expected return on plan assets

32

22

24

Net cash flows

17

14

6

Actuarial loss

(41)

(24)

(18)

Plan assets at end of year

219

231

243

Present value of funded obligation

190

186

281

Fair value of plan assets

(219)

(231)

(243)

Funded status

(29)

(45)

38

Unrecognised net actuarial loss

(100)

(89)

(118)

Unrecognised/recognised net asset

(129)

(134)

(80)

Expected return on plan assets

31

22

24

Actuarial loss on plan assets

(41)

(24)

(18)

Actual (loss)/return on plan assets

(10)

(2)

6

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-47

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

28. Employee benefits

(continued)

The Telkom Pension Fund

(continued)

Principal actuarial assumptions were as follows:
Discount rate (%)

10.0

9.0

7.5

Yield on government bonds (%)

9.0

9.0

7.5

Long-term return on equities (%)

12.0

12.0

10.5

Long-term return on cash (%)

7.0

7.0

5.5

Administration fee allowance (%)

1.0

1.0

1.0

Expected return on plan assets (%)

10.0

10.0

9.5

Salary inflation rate (%)

7.0

6.0

6.0

Pension increase allowance (%)

3.8

3.6

2.9

The assumed rates of mortality are determined by reference to the
SA85/90 Ultimate mortality table, as published by the Actuarial
Society of South Africa, for all categories of members.

Funding level per statutory actuarial valuation (%)

94.0

98.5

99.8

The number of employees registered under the Telkom Pension Fund

339

295

255

Actuarial calculations/valuations were performed by qualified actuaries
to determine the benefit obligation, plan asset and service costs for the
pension and retirement funds for each of the financial periods
presented.

The fund portfolio consists of the following:
Equities (%)

60

62

84

Bonds (%)

30

21

9

Cash (%)

10

17

7

The total expected contributions payable to the pension fund for the
next financial year is R10 million.

Expected future benefit payments are as follows:

Rm

2007

10

2008

10

2009

11

2010

13

2011

14

>5 years

226

Total

284

The Telkom Retirement Fund

The Telkom Retirement Fund was established on July 1, 1995 as a hybrid defined benefit and defined contribution plan. Existing employees were
given the option to either remain in the Telkom Pension Fund or to be transferred to the Telkom Retirement Fund. All pensioners of the Telkom Pension
Fund and employees who retired after July 1, 1995 were transferred to the Telkom Retirement Fund. At the same time the proportionate share of
the deficit relating to the transferring employees and pensioners was transferred to the Telkom Retirement Fund. Upon transfer the Government ceased
to guarantee the deficit in the Telkom Retirement Fund. Subsequent to July 1, 1995 further transfers of existing employees occurred.

The Telkom Retirement Fund is a defined contribution fund with regards to in-service members. On retirement, an employee is transferred from the
defined contribution plan to a defined benefit plan. Telkom, as a guarantor is contingently liable for any deficit in the Telkom Retirement Fund.
Moreover, all of the assets in the Fund, including any potential excess belong to the participants of the scheme. The Company is unable to benefit
from the excess.

Telkom guarantees any actuarial shortfall of the pensioner pool in the retirement fund. This liability is initially funded through assets of the retirement
fund. The latest actuarial calculation performed at March 31, 2006 indicates that the retirement fund is in a surplus funding position of R854 million
after unrecognised losses.

F-48

28. Employee benefits

(continued)

The Telkom Retirement Fund

(continued)

The Telkom Retirement Fund is governed by the Pension Funds Act, Act No. 24 of 1956. In terms of section 37A of this Act, the pension benefits
payable to the pensioners cannot be reduced. If therefore the present value of the funded obligation were to exceed the fair value of the plan assets,
Telkom would be required to fund the deficit.

The information presented below is intended only to comply with the disclosure requirements of IAS19 (revised) and not to suggest that the Company
has a potential asset with regards to this Fund.

The funded status of the Telkom Retirement Fund is disclosed below:

2004

2005

2006

Rm

Rm

Rm

Telkom Retirement Fund

The net periodic retirement costs include the following components:
Interest and service cost on projected benefit obligations

279

301

346

Expected return on plan assets

(421)

(338)

(430)

Amortisation of unrecognised net actuarial loss

–

29

–

Net periodic pension benefit recognised

(142)

(8)

(84)

Retirement fund contributions

423

429

383

Benefit obligation:
At beginning of year

2,679

3,162

4,020

Interest and service cost

279

301

346

Benefits paid

(307)

(329)

(377)

Actuarial loss

511

886

388

Benefit obligation at end of year

3,162

4,020

4,377

Plan assets at fair value:
At beginning of year

3,106

3,540

4,477

Expected return on plan assets

421

338

431

Benefits paid

(305)

(329)

(377)

Actuarial gain

318

928

1,442

Plan assets at end of year

3,540

4,477

5,973

Present value of funded obligation

3,162

4,020

4,377

Fair value of plan assets

(3,540)

(4,477)

(5,973)

Funded status

(378)

(457)

(1,596)

Unrecognised net actuarial (loss)/gain

(382)

(312)

742

Unrecognised net asset

(760)

(769)

(854)

Expected return on plan assets

421

338

430

Actuarial gain on plan assets

318

928

1,442

Actual return on plan assets

739

1,266

1,872

Included in fair value of plan assets is:
Office buildings occupied by Telkom

127

221

274

Telkom bonds

46

39

56

Telkom shares

121

187

287

The Telkom Retirement Fund invests its funds in South Africa and internationally. Ten fund managers invest in South Africa and four of these managers
specialise in trades with bonds on behalf of the Retirement Fund. The international investment portfolio consists of global equity and hedged funds.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-49

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

28. Employee benefits

(continued)

The Telkom Retirement Fund

(continued)

Principal actuarial assumptions were as follows:
Discount rate (%)

10.0

9.0

7.5

Yield on government bonds (%)

9.0

9.0

7.5

Long-term return on equities (%)

12.0

12.0

10.5

Long-term return on cash (%)

7.0

7.0

5.5

Administration fee allowance (%)

1.0

1.0

1.0

Expected return on plan assets (%)

10.0

10.0

8.5

Salary inflation rate (%)

7.0

6.0

6.0

Pension increase allowance (%)

3.8

3.6

2.9

The assumed rates of mortality are determined by reference to the
PA(90) table, as published by the Institute and Faculty of Actuaries in
London and Scotland, rated down one year (75% male and 25%
female) together with improvements of 0.75% per annum based on an
average fund pension.

Funding level per statutory actuarial valuation (%)

84

100

100

The number of pensioners registered under the Telkom Retirement Fund

14,268

14,087

14,323

The number of in-service employees registered under the Telkom Retirement Fund

32,017

28,677

25,320

The fund portfolio consists of the following:
Equities (%)

56

57

72

Property (%)

4

5

4

Bonds (%)

30

21

21

Cash (%)

10

17

3

The total expected contributions payable to the retirement fund for the
next financial year is R670 million.

Expected future benefit payments are as follows:

Rm

2007

646

2008

687

2009

730

2010

776

2011

826

>5 years

15,899

Total

19,564

Vodacom Group Pension Fund

All eligible employees of the Vodacom Group are members of the Vodacom Group Pension Fund, a defined contribution pension scheme. Certain
executive employees of Vodacom are also members of the Vodacom Executive Provident Fund, a defined contribution provident scheme. Both schemes
are administered by ABSA Consultants and Actuaries (Proprietary) Limited. The Group’s share of the current contributions to the Pension Fund
amounted to R38 million (2005: R35 million; 2004: R33 million). The Group’s share of the current contributions to the Provident Fund amounted
to R6 million (2005: R2 million; 2004: R3 million). The Vodacom employees at March 31, 2006 were 5,271 (2005: 4,991; 2004: 4,609). The
South African funds are governed by the Pension Funds Act No. 24 of 1956.

F-50

28. Employee benefits

(continued)

Medical benefits

Telkom makes certain contributions to medical funds in respect of current and retired employees. The scheme is a defined benefit plan. The expense
in respect of current employees’ medical aid is disclosed in note 5.1. The amounts due in respect of post-retirement medical benefits to current and
retired employees have been actuarially determined and provided for as set out in note 26. The Company has terminated future post-retirement
medical benefits in respect of employees joining after July 1, 2000.

There are three major categories of members entitled to the post-retirement medical aid: pensioners who retired before 1994 (‘Pre-94’); those who
retired after 1994 (‘Post-94’); and the in-service members. The Post-94 and the in-service members’ liability is subject to a Rand cap, which increases
annually with the average salary increase.

Eligible employees must be employed by Telkom until retirement age to qualify for the post-retirement medical aid. The most recent actuarial valuation
of the benefit was performed as at March 31, 2006.

Telkom has allocated certain investments to fund this liability as set out in note 12. During the current year, Telkom realised a portion of the
investment in the sinking fund and invested it in an annuity policy within the cell captive. These investments do not qualify as plan assets.

The status of the medical aid liability is disclosed below:

2004

2005

2006

Rm

Rm

Rm

Medical aid

Present value of unfunded obligation

2,378

3,079

3,904

Unrecognised net actuarial gain/(loss)*

42

(649)

(1,297)

Liability as disclosed in the balance sheet (Refer to note 26)

2,420

2,430

2,607

* The prior year net actuarial loss has been corrected by R492 million as a result of an actuarial

calculation error that occurred in 2005. This has not had an effect on previously reported results.

Principal actuarial assumptions were as follows:
Discount rate (%)

10.0

9.0

7.5

Salary inflation rate (%)

7.0

6.0

6.0

Medical inflation rate (%)

8.0

7.0

6.5

Withdrawal rate (%)

15.0

30.0

30.0

The assumed rates of mortality are determined by reference to the
SA85-90 (Light) ultimate table, as published by the Actuarial Society
of South Africa, for pre-retirement purposes and the PA(90) ultimate
table, as published by the Institute and Faculty of Actuaries in London
and Scotland, for retirement purposes.

Actual retirement age

65

65

65

Average retirement age

63

60

60

Number of members

23,522

18,890

17,872

Number of pensioners

8,233

8,845

8,665

The liability is extremely sensitive to changes in the underlying
assumptions. The impact of a one percentage point movement in the
medical cost and salary inflation rate is as follows:

Impact on total service and interest cost components for one percent increase

59

Impact on post-retirement benefit obligation for one percent increase

563

Impact on total service and interest cost components for one percent decrease

(54)

Impact on post-retirement benefit obligation for one percent decrease

(497)

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-51

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

28. Employee benefits

(continued)

Telephone rebates

Telkom provides telephone rebates to its pensioners. The most recent
actuarial valuation was performed in March 2006. Eligible employees
must be employed by Telkom until retirement age to qualify for the
telephone rebates. The scheme is a defined benefit plan.
The status of the telephone rebate liability is disclosed below:

Present value of unfunded obligation

164

177

251

Unrecognised net actuarial gain/(loss)

–

2

(53)

Liability as disclosed in balance sheet (Refer to note 26)

164

179

198

Principal actuarial assumptions were as follows:
Discount rate (%)

10.0

9.0

7.5

Rebate inflation rate (%)

5.0

0.0

0.0

The assumed rates of mortality are determined by reference to the
standard published mortality table PA(90), as published by the Institute
and Faculty of Actuaries in London and Scotland, rated down one year to
value the pensioners.

Actual retirement age

65

65

65

Average retirement age

63

60

60

Number of members

21,867

18,834

19,164

Number of pensioners

11,686

10,571

11,148

The liability is extremely sensitive to changes in the underlying
assumptions. The impact of a 0.5% increase in the rebate inflation rate
is an increase of R14 million in the liability.

Telkom Conditional Share Plan

Telkom’s shareholders approved the Telkom Conditional Share Plan at the January 2004 Annual General Meeting. The scheme covers both operational
and management employees and is aimed at giving shares to Telkom employees, at a RNil exercise price, at the end of the vesting period. The vesting
period for the operational employees share award is 0% in year one, 33% in each of the 3 years thereafter, while the management share award
vests fully after 3 years. Although the number of shares awarded to employees will be communicated at the grant date, the ultimate number of shares
that vest may differ based on certain performance conditions being met.

The Telkom Board approved the award of 3.2 million shares in 2004, the grant of which occurred in August 2004. The Telkom Board approved the
second allocation of shares to employees as at June 23, 2005. A total of 2,024,555 shares were granted. No consideration is payable on the shares
issued to employees, but performance criteria will need to be met in order for the shares to be granted and to vest. The ultimate number of shares
that will vest may differ based on certain individual and Telkom performance conditions being met. The related compensation expense is recognised
over the vesting period of the shares granted, commencing on the grant date.

The weighted average remaining vesting period for the shares outstanding as at March 31, 2006 is 1.75 years (2005: 2.25 years).

The following table illustrates the movement of the maximum number of shares that will vest to employees for the August 2004 grant:

2004

2005

2006

Outstanding at beginning of year

–

–

2,943,124

Granted during the year

–

3,046,242

90

Forfeited during the year

–

(103,118)

(67,573)

Settled during the year

–

–

(444,093)

Vested during the year

–

–

(17,341)

Outstanding at end of the year

–

2,943,124

2,414,207

F-52

2004

2005

2006

28. Employee benefits

(continued)

Telkom Conditional Share Plan

(continued)

The following table illustrates the movement of the maximum number
of shares that will vest to employees for the June 2005 grant:

Outstanding at beginning of year

–

–

–

Granted during the year

–

–

2,024,465

Forfeited during the year

–

–

(62,354)

Settled during the year

–

–

(19,096)

Vested during the year

–

–

(12,328)

Outstanding at end of year

–

–

1,930,687

In the terms of the settlement agreement between Telkom and
Mr Sizwe Nxasana, the former CEO, the Telkom Board approved the
acceleration of the vesting of 29,669 shares that had been granted to
Mr Nxasana, with the result that the shares vested on August 31,
2005. On September 15, 2005 Mr Nxasana exercised his right to the
shares and the shares were transferred from the treasury share reserve
to Mr Nxasana.

The fair value of the shares granted on August 8, 2004, has been
calculated by an actuary using a market share price of R77.50 at grant
date, and adjusted for a 2,6% dividend yield. The fair value of the
shares granted on June 23, 2005, has been calculated by an actuary
using a market share price of R111.00 at grant date, and adjusted for
a 3.6% dividend yield.

The principal assumptions used in calculating the expected number of
shares that will vest are as follows:

Employee turnover (%)

–

5

5

Meeting specified performance criteria (%)

–

100

100

At March 31, 2006 the estimated total compensation expense to
be recognised over the vesting period was R381 million
(2005: R192 million), of which R127 million (2005: R68 million)
was recognised in employee expenses for the year.

Long-term incentive provision

The long-term incentive provision represents the present value of the
expected future cash outflows to eligible employees that qualify. The
amount of the liability is based on an actuarial valuation. The provision
is utilised when eligible employees receive the value of vested benefits.

The Group exposure is 50% of the following items:

Rm

Net liability at beginning of year

–

–

–

Interest cost

–

–

7

Current service cost

–

–

9

Past service and interest costs

–

–

76

Actuarial loss

–

–

47

Net cost

–

–

139

Total benefit payments

–

–

(17)

Net liability at end of year

–

–

122

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-53

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2002

2003

2004

2005

2006

Rm

Rm

Rm

Rm

Rm

28. Employee benefits

(continued)

The amounts for the current and previous
four years are as follows:

Telkom Pension Fund

Defined benefit obligation

(167)

(162)

(190)

(186)

(281)

Plan assets

150

211

219

231

243

(Deficit)/surplus

(17)

49

29

45

(38)

Unrecognised actuarial loss

86

50

100

89

118

Unrecognised/recognised net asset

69

99

129

134

80

Telkom Retirement Fund

Defined benefit obligation

(3,055)

(2,679)

(3,162)

(4,020)

(4,377)

Plan assets

3,805

3,106

3,540

4,477

5,973

Surplus

750

427

378

457

1,596

Unrecognised actuarial (gain)/loss

(460)

190

382

312

(742)

Unrecognised net asset

290

617

760

769

854

Medical benefits

Defined benefit obligation

(1,893)

(2,162)

(2,378)

(3,079)

(3,904)

Unrecognised actuarial (gain)/loss

(267)

(127)

(42)

649

1,297

Liability

(2,160)

(2,289)

(2,420)

(2,430)

(2,607)

Telephone rebates

Defined benefit obligation

(146)

(162)

(164)

(177)

(251)

Unrecognised actuarial (gain)/loss

–

–

–

(2)

53

Liability

(146)

(162)

(164)

(179)

(198)

2004

2005

2006

Rm

Rm

Rm

29. Reconciliation of profit for the

year to cash generated
from operations

16,302

18,622

19,724

Profit for the year

4,658

6,834

9,321

Finance charges

3,264

1,695

1,233

Taxation

1,738

3,082

4,520

Investment income

(322)

(350)

(397)

Interest received from debtors

(156)

(127)

(136)

Non-cash items

6,517

6,329

6,206

Depreciation, amortisation, impairment and write-offs

7,248

6,288

5,876

(Decrease)/increase in provisions

(687)

135

554

Profit on disposal of property, plant and equipment

(19)

(30)

(79)

Profit on disposal of investment

(25)

(64)

(163)

Loss on disposal of property, plant and equipment

–

–

18

Decrease/(increase) in working capital

603

1,159

(1,023)

Inventories

115

(127)

(198)

Accounts receivable

(275)

441

(667)

Accounts payable

763

845

(158)

F-54

2004

2005

2006

Rm

Rm

Rm

30. Finance charges paid

(1,787)

(1,272)

(1,316)

Finance charges per income statement

(3,264)

(1,695)

(1,233)

Non-cash items

1,477

423

(83)

Movements in interest accruals

111

(84)

(276)

Net discount amortised

581

482

423

Fair value adjustment

1,130

(83)

(302)

Unrealised foreign exchange (loss)/gains

(345)

108

72

31. Taxation paid

(562)

(1,487)

(4,550)

Net asset/(liability) at beginning of year

99

(460)

(1,711)

Taxation

(1,258)

(2,976)

(4,965)

Secondary Tax on Companies

151

238

585

Business combination

(14)

–

(8)

Tax liability at end of year

460

1,711

1,549

32. Dividend paid

(548)

(629)

(4,884)

Dividends payable at beginning of year

–

(7)

(7)

Dividends declared

(501)

(606)

(4,801)

Dividends paid to minority shareholders

(54)

(23)

(80)

Dividends payable at end of year

7

7

4

33. Purchase of subsidiaries, joint ventures and minority shareholders’ interests

Acquisitions

The following acquisitions were made:

By Telkom

During the 2004 financial year, a 100% shareholding in Rossal No 65
(Proprietary) Limited for R100. This company will be utilised to
administer, on behalf of Telkom, the Telkom Conditional Share Plan.

–

During the 2005 financial year, a 100% shareholding in Acajou
Investments (Proprietary) Limited for R100. This company will be
utilised to hold treasury shares acquired in Telkom up to the maximum
as allowed by the JSE Securities Exchange rules.

–

By the Group’s 50% joint venture, Vodacom

On March 1, 2004, a 51% interest in the equity of Smartphone SP
(Proprietary) Limited, which has a 100% shareholding in Stand 13
Eastwood Road Dunkeld (Proprietary) Limited and 53% in Ithuba
Smartcall (Proprietary) Limited.

The aggregate fair value of assets acquired and liabilities assumed on
the purchase of subsidiaries and joint ventures were as follows:

Aggregate fair value of net assets acquired

(5)

Goodwill

(112)

Purchase price

(117)

Cash and cash equivalents

75

Cash consideration

(42)

Less:

Amount payable

117

75

The purchase price of R234 million (Group share: R117 million) was paid on April 7, 2004. The outstanding amount accrued interest at prime less
2% per annum from March 1, 2004 up to the date of payment.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-55

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

33. Purchase of subsidiaries, joint ventures and minority

shareholders’ interests

(continued)

By the Group’s 50% joint venture, Vodacom

(continued)

Smartphone SP (Proprietary) Limited had a contingent asset of R71 million at the date of acquisition. The Group valued the asset at RNil. The contingent
asset realised during the current financial year. The Group had an obligation under the shareholders agreement to pay the company an additional amount
should the asset realise. The additional amount paid by the Group qualified as a contingent purchase consideration and resulted in an adjustment of
R36 million to goodwill. The recognition of the contingent asset therefore resulted in a profit of R71 million (Group share: R35 million) in the
consolidated income statement for the year ended March 31, 2006 with R35 million (Group share: R17 million) being allocated to minority interest.

On April 16, 2004, a 85.75% interest in the equity of Smartcom (Proprietary) Limited through its 51% owned subsidiary, Smartphone SP
(Proprietary) Limited.

2004

2005

2006

Rm

Rm

Rm

Aggregate fair value of net assets acquired

(36)

Purchase price

(35)

Cash and cash equivalents

31

Cash consideration

(4)

Plus: Smartphone SP (Proprietary) Limited’s share of the dividend paid
by Smartcom (Proprietary) Limited

(4)

(8)

The purchase price of R78 million (Group share: R39 million) including
capitalised costs excluding dividend from Smartcom (Proprietary)
Limited, was paid during April 2004. The company declared a dividend
to its shareholders from pre-acquisition reserves on August 18, 2004.
The dividend was paid on August 31, 2004. The goodwill relating to
the acquisition represents future synergies and the ability to directly
control the Group’s customers.

On February 1, 2005, the cellular business of Tiscali (Proprietary) Limited.

The fair value of the assets and liabilities acquired were preliminary
determined as follows:

Aggregate fair value of net assets acquired

(15)

Trademarks, copyrights and other

(22)

Deferred taxation liability

7

Goodwill

(5)

Purchase price

(20)

The customer base was not previously recorded in the accounting records of Tiscali (Proprietary) Limited as it was an internally generated intangible
asset. The goodwill related to the acquisition represents future synergies and the ability to directly control customers. It is impracticable to disclose
the revenue and profit of the business that is included in the prior year’s results as the customer base was integrated into Vodacom Service Provider
Company (Proprietary) Limited. The profit and revenue related to these customers were not separately recorded. For the same reason stated above,
it would not be practicable to determine the impact on revenue and profits of the Vodacom Group for a full year.

F-56

2004

2005

2006

Rm

Rm

Rm

33. Purchase of subsidiaries, joint ventures and minority

shareholders’ interests

(continued)

By the Group’s 50% joint venture, Vodacom

(continued)

On August 1, 2005, the Vodacom Group acquired a 51% interest in the
equity of Cointel VAS (Proprietary) Limited. The fair value of the assets
and liabilities acquired were determined by the Group and are as
follows:

Fair value of net assets acquired

(47)

Property, plant and equipment

(1)

Intangible assets

(90)

Trade and other receivables

(4)

Cash and cash equivalents

(42)

Deferred taxation liability

18

Trade and other payables

57

Taxation payable

8

Provision

1

Dividends payable

6

Minority interest

23

Goodwill

(18)

Purchase price (including capitalised costs)

(42)

Cash and cash equivalents

42

Cash consideration

–

The purchase price of R84 million (Group share: R42 million), excluding capitalised costs, was paid on August 23, 2005. Capitalised costs were paid
throughout the period.

Revenue amounting to R45 million and net profit of R9 million is included in the current period results. Revenue would have amounted to
R47,630 million and net profit of R9,146 million if the entity had been consolidated for the full year ended March 31, 2006.

The goodwill related to the acquisition represents future synergies and are allocated to the Mobile South African cash generating unit.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-57

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

34. Undrawn borrowing facilities and guarantees
34.1 Rand denominated facilities and guarantees

Telkom has general banking facilities of R6,529 million with no amounts utilised at March 31, 2006. The facilities are unsecured, bear interest at a
rate linked to prime, have no specific maturity date and are subject to annual review.

The Group exposure is 50% of the following items:

Vodacom has a rand denominated credit facility totalling R7,083 million with R1,114 million unutilised at March 31, 2006. The facilities are
uncommitted and can also be utilised for foreign loans and are subject to review at various dates (usually on an annual basis). Certain of
the facilities are still subject to the Group’s final acceptance.

Guarantor

Details

Beneficiary

2004

2005

2006

Rm

Rm

Rm

Vodacom (Proprietary) Limited

All guarantees individually less than R2 million

Various

3

3

3

Vodacom Service Provider
Company (Proprietary) Limited

All guarantees individually less than R2 million

Various

3

3

3

Vodacom Service Provider

Guarantee in respect of receipt of independent

Company (Proprietary) Limited

intermediaries of premiums on behalf of short-
term insurers and Lloyd’s underwriters, and

SA Insurance

relating to short-term insurance business carried

Association for

on in RSA. Terminates on May 31, 2006

benefit of insurers

14

18

21

Smartcom (Proprietary) Limited

Guarantees for salary bank
account and debit orders

Various

–

3

3

20

27

30

F-58

34. Undrawn borrowing facilities and guarantees

(continued)

34.2 Foreign denominated facilities and guarantees

The Group exposure is 50% of the following items:

Vodacom Tanzania Limited has project funding facilities of USD30 million, which were fully utilised at March 31, 2006. Vodacom Congo (RDC) s.p.r.l.
has a revolving credit facility of USD5 million which was fully utilised at March 31, 2006. Vodacom International Limited has a revolving term loan
of USD180 million which was fully utilised at March 31, 2006. Vodacom Lesotho (Proprietary) Limited has overdraft facilities with various banks of
M47 million and of which MNil million was utilised at March 31, 2006. Foreign currency term facilities are predominantly US Dollar based, at various
maturities and are utilised for bridging and short-term working capital needs.

Guarantor

Details

Beneficiary

Currency

2004

2005

2006

Rm

Rm

Rm

€

11million

Nedbank on behalf of

(2005:

€

41 million;

Vodacom (Proprietary) Limited Unsecured standby letters of credit

Alcatel CIT

2004:

€

25 million)

195

330

86

Vodacom Group (Proprietary)

Guarantees issued for the

ABSA

€

Nil

Limited

obligation of Vodacom Congo

(2005:

€

Nil;

(RDC) s.p.r.l.**

2004: S54 million)

416

–

–

Vodacom Group (Proprietary)

Guarantees issued for the

ABSA

USDNil

Limited

obligation of Vodacom Congo

(2005: USDNil;

(RDC) s.p.r.l.’s revolving

2004: USD32 million)

credit facility**

202

–

–

Vodacom Group (Proprietary)

Guarantees issued for the

Standard

€

Nil

Limited

obligation of Vodacom Congo

Finance

(2005:

€

Nil;

(RDC) s.p.r.l.**

(Isle of Man)

2004:

€

23 million)

Limited

174

–

–

Vodacom Group (Proprietary)

Guarantees issued for the

Standard

USDNil

Limited

obligation of Vodacom Congo

Finance

(2005; USDNil;

(RDC) s.p.r.l.**

(Isle of Man)

2004; USD38 million)

Limited

237

–

–

Vodacom Group (Proprietary)

Guarantees issued for the

Standard Bank

USD180 million

Limited

obligation of Vodacom International

London

(2005: USD180 million;

Limited’s term loan facility**#

Limited and RMB

2004: USDNil)

International
(Dublin) Limited

–

1,129

1,114

Vodacom International

Guarantees issued for the

Alcatel CIT

€

5 million

Limited

obligation of Vodacom Congo

(2005:

€

15 million;

(RDC) s.p.r.l.**

2004:

€

25 million)

193

122

38

1,417

1,581

1,238

** Foreign denominated guarantees amounting to R1,152 million (2005: R1,190 million; 2004: R623 million) issued in support of Vodacom Congo (RDC) s.p.r.l. are

included as liabilities in the balance sheet.

# The Vodacom Group is in compliance with the covenants attached to the term loan facility.

Companies within the Group have provided the following guarantees:

Vodacom (Proprietary) Limited provides an unlimited guarantee for borrowings entered into by Vodacom Group (Proprietary) Limited.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-59

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

35. Commitments

Capital commitments authorised

7,151

7,970

10,265

Fixed-line

4,566

5,029

6,519

Mobile

2,585

2,941

3,746

Commitments against authorised capital expenditure

439

825

842

Fixed-line

88

91

200

Mobile

351

734

642

Authorised capital expenditure not yet contracted

6,712

7,145

9,423

Fixed-line

4,478

4,938

6,319

Mobile

2,234

2,207

3,104

Capital commitments comprise of commitments for Property, plant and equipment and software included in Intangible assets.

Management expects these commitments to be financed from internally generated cash and other borrowings.

Total

<1 year

1 – 5 years

>5 years

Rm

Rm

Rm

Rm

Operating lease commitments
2006

Buildings

890

240

640

10

Rental receivable on buildings

(180)

(56)

(122)

(2)

Transmission and data lines

131

28

102

1

Vehicles

996

498

498

–

Equipment

35

20

15

–

Sport and marketing contracts

567

149

418

–

Total

2,439

879

1,551

9

2005

Buildings

1,174

206

788

180

Rental receivable on buildings

(149)

(35)

(94)

(20)

Transmission and data lines

163

32

129

2

Vehicles

347

347

–

–

Equipment

37

6

31

–

Sport and marketing contracts

313

146

167

–

Total

1,885

702

1,021

162

2004

Buildings

809

141

365

303

Rental receivable on buildings

(227)

(57)

(125)

(45)

Transmission and data lines

64

17

46

1

Vehicles

540

540

–

–

Equipment

37

23

14

–

Sport and marketing contracts

364

149

215

–

Total

1,587

813

515

259

Operating leases

The Group leases certain buildings, vehicles and equipment. The majority of the lease terms negotiated for equipment-related premises are ten years with
other leases signed for five years and three years. The bulk of non-equipment-related premises are for leases of three years to ten years. The majority of
the leases normally contain an option clause entitling Telkom to renew the lease agreements for a period usually equal to the main lease term.

The minimum lease payments under these agreements are subject to annual escalations, which range from 8% to 12%.

F-60

35. Commitments

(continued)

Operating leases

(continued)

Penalties in terms of the lease agreements are only payable should Telkom vacate the premises and negotiate to terminate the lease agreement prior
to the expiry date, in which case the settlement payment will be negotiated in accordance with the market conditions of the premises. Future
minimum lease payments under operating leases are included in the above note. Onerous leases for buildings, of which Telkom has no further use,
no possibility of sub-lease and no option to cancel, are provided for in full and included in other provisions.

The master lease agreement for vehicles was for a period of five years, and expired on March 31, 2005. A new agreement has been negotiated for
a period of three years on similar terms and conditions as the previous agreement and is effective April 1, 2005. In accordance with the new
agreement Telkom is not allowed to lease any similar vehicle as specified in the contract from any other service provider during the three year period,
except for the rentals at airports which are utilised in cases of subsistence and travel, as well as vehicles which are not part of the agreement. The
agreement is structured to have no lease increases on vehicles that are continually leased from the lessor. If a vehicle is, however, replaced by a new
similar vehicle, the lease costs of the newest vehicle, will increase by the Consumer Price Index. All leased vehicles are, however, subject to any
variance in the interest rate fluctuations and are adjusted as and when the adjustments are announced by the South African Reserve Bank. The leases
of individual vehicles are renewed annually. The Group is considered to be compelled to renew such leases based upon its historical requirements and
contractual obligations. In accordance with the agreement Telkom is not allowed to lease any similar vehicles as those specified in the contract from
any other service provider during the contract period.

The master lease agreement for office equipment expired on March 31, 2006. New agreements have been entered into with two suppliers with an
initial period of 36 months effective from November 25, 2005. In terms of the new agreements the leases of individual equipment shall be valid for
36 months at a fixed fee for the entire period, whereafter the Group has the option to renew the leases for a further two years at reduced rentals of
between 25% and 40% of the initial rentals. Annual increases for newly rented equipment in year two and three of the agreement shall be fixed at

between 7.5% and 8%.

Total

<1 year

1 – 5 years

>5 years

Rm

Rm

Rm

Rm

Finance lease commitments
2006

Lease payments

2,644

217

908

1,519

Finance charges

(1,372)

(172)

(587)

(613)

Minimum lease payments

1,272

45

321

906

The liability is made up as follows:
Present value of the initial liability

1,040

Finance charges capitalised

232

Liability as disclosed in note 24

1,272

2005

Lease payments

2,730

172

1,021

1,537

Finance charges

(1,521)

(168)

(642)

(711)

Minimum lease payments

1,209

4

379

826

The liability is made up as follows:
Present value of the initial liability

1,059

Finance charges capitalised

150

Liability as disclosed in note 24

1,209

2004

Lease payments

2,884

155

818

1,911

Finance charges

(1,687)

(167)

(642)

(878)

Minimum lease payments

1,197

(12)

176

1,033

The liability is made up as follows:
Present value of the initial liability

1,086

Finance charges capitalised

111

Liability as disclosed in note 24

1,197

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-61

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

35. Commitments

(continued)

Finance leases

A major portion of the finance lease relates to the sale and lease-back of certain of the Group’s buildings. The lease term negotiated for the buildings
is for a period of 25 years ending 2019. The minimum lease payments are subject to an annual escalation of 10% p.a. Telkom has the right to sublet
part of the buildings. In case of breach of contract, the lessor is entitled to cancel the lease agreement and claim damages.
Finance charges accruing on one of the Group’s building leases exceed the lease payments for the next four years. Minimum lease payments for the
next five years do not result in any income accruing to the Group.

Other

The Group exposure is 50% of the following items:

Interception of Communications and Provisions of Communication-related Information Act (‘the Act’)

The Act was proclaimed in the Government Gazette and has been made effective September 30, 2005 with the exception of the provisions dealing
with customer registration which comes into effect on June 30, 2006. The cellular operators have succeeded in obtaining in principle support by the
Department of Justice for an electronic registration process. The legislative amendments necessary to allow for such an electronic registration process
have not yet been effected, but are anticipated prior to the effective date of June 30, 2006. The Group has acquired and implemented the monitoring
and interception facilities as per the technical specifications of the facilities agreed upon between the Group and the Department of Justice and
promulgated on November 28, 2005. A reliable estimate of capital and operating costs that will potentially be incurred in order to comply with the
provisions of the Act cannot be determined at this stage.

Global Alliance fees

The Vodacom Group pays annual fees from February 18, 2005 for the services provided. The fee is calculated as a percentage of revenue.

Retention incentives

The Vodacom Group has committed a maximum of R456 million (March 31, 2005: R373 million) in respect of customers already beyond their
normal 24 month contract period, but who have not yet upgraded to new contracts, and therefore have not utilised the incentive available for such
upgrades. The Group has not provided for this liability, as no legal obligation exists, since the customers have not yet entered into new contracts.

Other
Africell Cellular Services (Proprietary) Limited

An offer to acquire the cellular business of Africell Cellular Services (Proprietary) Limited was made and accepted. The suspensive conditions as well
as Competition Commission approval, is currently being attended to.

2004

2005

2006

Rm

Rm

Rm

36. Contingencies

Third parties

38

33

30

Fixed-line

33

30

27

Mobile

5

3

3

Guarantee of employee housing loans – fixed-line

144

122

55

Third parties

These amounts represent sundry disputes with third parties that are not individually significant and that the Group does not intend to settle.

Guarantee of employee housing loans

Telkom guarantees a certain portion of employees’ housing loans. The amount guaranteed differs depending on facts such as employment period and
salary rates. When an employee leaves the employment of Telkom, any housing debt guaranteed by Telkom is settled before any pension payout
can be made to the employee. Telkom recognises a provision when it becomes probable that a guarantee will be called. There is no provision
outstanding in respect of these contingencies. The maximum amount of the guarantee in the event of the default is as disclosed above.

The guarantees as at March 31, 2006 have reduced significantly due to negotiations with financial institutions to release certain guarantees older
than 5 years.

F-62

36. Contingencies

(continued)

Supplier dispute

Expenditure of R594 million was incurred up to March 31, 2002 for the development and installation of an integrated end-to-end customer assurance
and activation system to be supplied by Telcordia. In the 2001 financial year, the agreement with Telcordia was terminated and in that year, Telkom
wrote off R119 million of this investment. Following an assessment of the viability of the project, the balance of the Telcordia investment was written
off in the 2002 financial year. During March 2001, the dispute was taken to arbitration where Telcordia was seeking approximately USD130 million
plus interest at a rate of 15.50% per year for money outstanding and damages. In September 2002, a partial ruling was issued by the arbitrator in
favour of Telcordia. Telkom brought an application in the High Court in South Africa to review and set aside the partial award. Judgement in Telkom’s
favour was handed down on November 27, 2003.

On July 29, 2004, Telcordia filed a further petition to enforce the arbitrator’s partial award in the District Court of New Jersey, USA. On December 8,
2004 the court dismissed Telcordia’s petition. Telcordia has since filed its appeal. Telkom has been advised that the appeal court will only finalise the
appeal after the Supreme Court of Appeals in South Africa hands down its judgment.

On November 29, 2004, the Supreme Court of Appeals, Bloemfontein granted Telcordia leave to appeal. The appeal is set down for hearing from
October 30, 2006 to November 3, 2006.

During the year, Telkom was approached by Telcordia’s representatives to consider certain settlement proposals. The dispute between Telkom and
Telcordia and the amount of Telkom’s liability are not expected to be finalised until the end of 2006. As Telkom does not believe it has a present
obligation, it has provided USDNil (March 31, 2005: USDNil) for its estimate of probable liabilities.

Competition commission
The South African Value Added Network Services (‘SAVA’)

The South African Value Added Network Services (‘SAVA’), an association of Value Added Network Services (‘VANS’) providers, filed complaints
against Telkom at the Competition Commission regarding alleged anti-competitive practices on the part of Telkom. Certain of the complaints have
been referred to the Competition Tribunal by the Competition Commission for adjudication. A maximum administrative penalty of up to 10%, calculated
with reference to Telkom’s annual turnover, excluding the turnover of subsidiaries and joint ventures, for the financial year prior to the complaint date,
may be imposed if it is found that Telkom has committed a prohibited practice as set out in the Competition Act, 1998 (as amended). The Competition
Commission has to date not imposed the maximum penalty.

Telkom has brought an application in the High Court in respect of the Competition Tribunal’s jurisdiction to adjudicate this matter. Only the Competition
Commission has opposed the application. Telkom is currently waiting for certain confidential documents contained in the Competition Commission’s
record of proceedings, after which Telkom may supplement their papers if necessary and after which the Competition Commission must file their
answering affidavit. Our attorneys are corresponding with the Competition Commission in this regard. Telkom is currently waiting for the Competition
Commission to file its record of proceedings. The Competition Commission has now approached the High Court on application for an order directing
which of the confidential documents can be included in the record of proceedings.

Telkom does not expect the Competition Tribunal to adjudicate on this matter within the next financial year.

The Internet Service Providers Association (‘ISPA’)

The Internet Service Providers Association (‘ISPA’), an association of internet service providers (‘ISPs’), filed complaints against Telkom at the
Competition Commission regarding alleged anti-competitive practices on the part of Telkom. A maximum administrative penalty of up to 10%,
calculated with reference to Telkom’s annual turnover, excluding the turnover of subsidiaries and joint ventures, for the financial year prior to the
complaint date, may be imposed if it is found that Telkom has committed a prohibited practice as set out in the Competition Act, 1998 (as amended).
The complaints deal with the cost of access to the South African Internet Exchange (‘SAIX’), the prices offered by Telkom

Internet

, the alleged delay

in provision of facilities to ISPs and the alleged favourable installation timelines offered to Telkom

Internet

customers. The Competition Commission

has formally requested Telkom to provide it with certain records of orders placed for certain services, in an attempt to first investigate the latter aspects
of the complaint.

Contingent asset

Telkom has a contingent asset of R58 million relating to sundry disputes with third parties. No asset has been recognised for these as the realisation
of income is not virtually certain.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-63

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

37. Financial instruments and risk management

Exposure to continuously changing market conditions has highlighted the importance of financial risk management as an element of control for the
Group. Treasury policies, risk limits and control procedures are continuously monitored by the Board of Directors.

The Group holds or issues financial instruments to finance its operations, for the temporary investment of short-term funds and to manage currency
and interest rate risks. In addition, financial instruments like trade receivables and payables, arise directly from the Group’s operations.

The Group finances its operations primarily by a mixture of issued share capital, retained earnings, long-term and short-term loans. The Group uses
derivative financial instruments to manage its exposure to market risks from changes in interest and foreign exchange rates. The derivatives used for
this purpose are principally interest rate swaps, currency swaps and forward exchange contracts. The Group does not speculate in derivative instruments.

Interest rate risk management

Interest rate risk arises from the repricing of the Group’s forward cover and floating rate debt as well as incremental funding or new borrowings and
the refinancing of existing borrowings.

The Group’s policy is to manage interest cost through the utilisation of a mix of fixed and variable rate debt. In order to manage this mix in a cost
efficient manner, the Group makes use of interest rate derivatives as approved in terms of the Group policy. Fixed rate debt represents approximately
92.04% (2005: 91.55%; 2004: 86.89%) of the total consolidated debt, after taking the instruments listed below into consideration. The debt profile
of mainly fixed rate debt has been maintained to limit the Group’s exposure to interest rate increases given the size of the Group’s debt portfolio.

Floating rate

Fixed rate

Fixed rate

Fixed rate

< 1 year

< 1 year

1-5 years

>5 years

Total

Rm

Rm

Rm

Rm

Rm

Interest rate repricing profile for
interest-bearing debt:

2006

Borrowings

885

2,608

5,511

2,119

11,123

Percentage of borrowings

7.96%

23.44%

49.55%

19.05%

100.00%

2005

Borrowings

1,184

4,084

5,778

2,957

14,003

Percentage of borrowings

8.45%

29.17%

41.26%

21.12%

100.00%

2004

Borrowings

2,196

2,316

9,403

2,839

16,754

Percentage of borrowings

13.11%

13.82%

56.13%

16.94%

100.00%

Borrowings do not include credit facilities utilised of R693 million (2005: R909 million; 2004: R422 million), which are floating rate debt.

The effective interest rate for the year was 13.91% (2005: 15.23%; 2004: 15.14%). At March 31, 2006 the Group did not have a significant
interest rate risk exposure on financial assets.

In order to hedge specific exposure in the interest rate repricing profile of existing borrowings and anticipated peak additional borrowings, the Group
makes use of interest rate derivatives as approved in terms of Group policy limits.

The table below summarises the interest rate swops outstanding as at March, 31:

Notional

Weighted

Average

amount

average

maturity

Currency

m

coupon rate %

2006

Interest rate swaps
Pay fixed

1-5 years

ZAR

1,000

14.67

Receive fixed

1-5 years

ZAR

47

9.15

>5 years

ZAR

62

9.43

2005

Interest rate swaps
Pay fixed

1-5 years

ZAR

1,000

14.67

Receive fixed

1-5 years

ZAR

52

9.73

> 5 years

ZAR

63

9.53

F-64

Notional Weighted

Average

amount

average

maturity

Currency

m

coupon rate %

37. Financial instruments and risk management

(continued)

Interest rate risk management

(continued)

2004

Interest rate swaps
Pay fixed

< 1 year

ZAR

150

12.92

1-5 years

ZAR

1,000

14.67

Receive fixed

1-5 years

ZAR

56

9.99

> 5 years

ZAR

62

9.82

Pay fixed

The floating rate is based on the three months JIBAR, and is settled quarterly in arrears. The interest rate swaps are used to manage interest rate risk
on debt instruments.

Pay floating and receive fixed

The Group swapped its fixed rate for a floating rate linked to the BA (Banker’s Acceptance) rate plus a margin of between 2% and 2.25%.

Credit risk management
Other financial assets and liabilities

The risk arises from derivative contracts entered into with international financial institutions with a rating of A1 or better. The maximum exposure to
the Group from counterparties is a net favourable position of R158 million (2005: R1,083 million; 2004: R853 million). No collateral is required
when entering into derivative contracts. Credit limits are reviewed on an annual basis or when information becomes available in the market. The
Group limits its exposure to any counterparty and exposures are monitored daily. The Group expects that all counterparties will meet their obligations.

Trade receivables

Credit limits are set on an individual and entity basis. Management reduces the risk of irrecoverable debt by improving credit management through
credit checks and levels. Trade receivables comprise a large widespread customer base, covering residential, business and corporate customer profiles.
Credit checks are performed on all customers on application for new services, and on an ongoing basis where appropriate.

Liquidity risk management

The Group is exposed to liquidity risk as a result of uncertain trade receivable related cash flows as well as capital commitments of the Group. Liquidity
risk is primarily managed by the Corporate Finance division in accordance with policies and guidelines formulated by the Executive Committee. In
terms of its borrowing requirements, the Group ensures that sufficient facilities exist to meet its immediate obligations. In terms of its long-term
liquidity risk, the Group maintains a reasonable balance between the period assets generate funds and the period the respective assets are funded.
Short-term liquidity gaps may be funded through repurchase agreements.

Available credit facilities not utilised at March 31, 2006 amounted to R9,519 million (Refer to note 34).

Negative working capital ratio

For each of the financial years ended 2006, 2005 and 2004 the Group had a negative working capital ratio. A negative working capital ratio arises
when current liabilities are greater than the current assets. Current liabilities are intended to be financed from operating cash flows, new borrowings
and borrowings available under existing credit facilities.

VM S.A.R.L call option

In terms of the shareholders’ agreement, the Group’s minority shareholder in VM S.A.R.L, Empresa Mocabicana De Telecommunicaçòes S.A.R.L
(Emotel) has a call option for a period of four years following the commencement date, August 23, 2003. In terms of the option, Emotel shall be
entitled to call on Vodacom International Limited such number of shares in and claims on loan account against VM S.A.R.L as constitute 25% of the
entire issued share capital of that company. Emotel can exercise this option in full increments of 1%. The option can only be exercised on April 1 or
October 1 of each calendar year for the duration of the option. The option price is specified in the shareholders’ agreement. The call option has no
value at March 31, 2006 (2005: RNil; 2004: RNil).

Smartphone SP (Proprietary) Limited put option

In term of the shareholder’s agreement, the minority shareholders of Smartphone SP (Proprietary) Limited have a put option against Vodacom Group
(Proprietary) Limited, should the Group or the company terminate or fail to renew the Service Provider Agreement for any reason other than the
expiry or cancellation of the Group’s South African license. The put option has no value at March 31, 2006, 2005 and 2004 as the conditions set
out in the agreement have not been met.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-65

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

37. Financial instruments and risk management

(continued)

Liquidity risk management

(continued)

Smartcom (Proprietary) Limited put option

In terms of the agreement between Vodacom Group (Proprietary) Limited (‘the Group’), Smartphone SP (Proprietary) Limited (‘Smartphone’) and
the minority shareholders of Smartcom (Proprietary) Limited (‘Smartcom’), the minority shareholders of Smartcom have a put option against the
group, should the Group reduce the standard service provider discount below certain percentages as stipulated in the put option agreement. The put
option has no value at March 31, 2006 (2005: RNil) as the conditions set out in the agreement have not been met.

Skyprops 134 (Proprietary) Limited call option

In terms of the call option agreement between Vodacom Group (Proprietary) Limited (‘Vodacom Group’) FirstRand Bank Limited (‘FirstRand’),
Vodacom (Proprietary) Limited (‘Vodacom’) and Skyprops 134 (Proprietary) Limited (‘company’), FirstRand grants to Vodacom Group an irrevocable
call option to require FirstRand at any time to sell the shares in and claims against the company to Vodacom Group. Vodacom Group gave notice to
exercise the option during the financial year ended March 31, 2006, and will take over the property in the new financial year.

Congolese Wireless Network s.p.r.l. (‘CWN’) put option

In terms of a shareholders’ agreement, the Group’s joint venture partner in Vodacom Congo (RDC) s.p.r.l., Congolese Wireless Network s.p.r.l. (‘CWN’)
has a put option which comes into effect three years after the commencement date, December 1, 2001, and for a maximum of five years thereafter.
In terms of the option, CWN shall be entitled to put to Vodacom International Limited such number of shares in and claims on loan account against
Vodacom Congo (RDC) s.p.r.l. as constitute 19% of the entire issued share capital of that company. CWN can exercise this option in a maximum of
three tranches and each tranche must consist of at least 5% of the entire issued share capital of Vodacom Congo (RDC) s.p.r.l. The option price will be
the fair market value of the related shares at the date the put option is exercised. The option has no value at March 31, 2006, 2005 and 2004.

Cointel VAS (Proprietary) Limited call option

In terms of the sale of shares agreement between Vodacom Group (Proprietary) Limited (‘Vodacom Group’) and the sellers of shares in Cointel VAS
(Proprietary) Limited (‘Cointel’), the sellers have been granted a put option that requires Vodacom Group to purchase all (and not part only) of the
sellers’ shares in Cointel. The sellers will only be capable to exercise the put option if the recharge agreement with Vodacom (Proprietary) Limited is
not continued after August 31, 2008 on terms and conditions reasonably acceptable to the sellers. The put option has no value at March 31, 2006
as the conditions set out in the agreement have not been met.

Foreign currency exchange rate risk management

In respect of South African operations, the Group manages its foreign currency exchange rate risk by hedging on a portfolio basis, all identifiable
exposures via various financial instruments suitable to the Group’s risk exposure.

Cross currency swaps and forward exchange contracts have been entered into to reduce the foreign currency exposure on the Group’s operations and
liabilities. The Group also enters into forward exchange contracts to hedge interest expense and purchase and sale commitments denominated in
foreign currencies (primarily USD and Euro). The purpose of the Group’s foreign currency hedging activities is to protect the Group from the risk that
the eventual net flows will be adversely affected by changes in exchange rates.

The table below reflects the currency and interest rate exposure of liabilities. Foreign currency debt is translated at the year-end exchange rates:

Fixed

Floating

Interest-

rate

rate

free

Total

Rm

Rm

Rm

Rm

Liabilities
2006

Currency
ZAR

10,209

693

15,843

26,745

USD

29

757

300

1,086

Euro

–

114

88

202

Other

–

14

31

45

10,238

1,578

16,262

28,078

2005

Currency
ZAR

8,737

1,171

15,891

25,799

USD

41

754

236

1,031

Euro

4,041

137

173

4,351

Other

–

31

24

55

12,819

2,093

16,324

31,236

F-66

Fixed

Floating

Interest -

rate

rate

free

Total

Rm

Rm

Rm

Rm

37. Financial instruments and risk management

(continued)

Foreign currency exchange rate risk management

(continued)

Liabilities

(continued)

2004

Currency
ZAR

10,611

1,991

13,662

26,264

USD

52

246

341

639

Euro

3,895

337

148

4,380

Other

–

44

19

63

14,558

2,618

14,170

31,346

Assets

There is no material foreign currency exposure for assets.

Forward exchange contracts

The following contracts relate to specific items on the balance sheet or foreign commitments not yet due. Foreign commitments not yet due consist
of capital expenditure ordered but not yet received and future interest payments on loans denominated in foreign currency.

Average maturity

<1 year

1 – 5 years

> 5 years

Foreign

Foreign

Foreign

currency

Local

currency

Local

currency

Local

notional

currency

notional

currency

notional

currency

amount

amount

amount

amount

amount

amount

m

Rm

m

Rm

m

Rm

2006

Buy foreign currency and sell ZAR
United States Dollar

178

1,157

–

–

–

–

Pound Sterling

28

321

–

–

–

–

Euro

156

1,235

–

–

–

–

Swedish Krona

56

46

–

–

–

–

Japanese Yen

33

2

–

–

–

–

2,761

–

–

Buy ZAR and sell foreign currency
United States Dollar

103

679

25

275

–

–

Pound Sterling

5

56

–

–

–

–

Euro

41

309

–

–

–

–

Swedish Krona

28

22

–

–

–

–

Japanese Yen

26

1

–

–

–

–

1,067

275

–

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-67

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

Average maturity

<1 year

1 – 5 years

> 5 years

Foreign

Foreign

Foreign

currency

Local

currency

Local

currency

Local

notional

currency

notional

currency

notional

currency

amount

amount

amount

amount

amount

amount

m

Rm

m

Rm

m

Rm

37. Financial instruments and risk management

(continued)

Forward exchange contracts

(continued)

2005

Buy foreign currency and sell ZAR
United States Dollar

182

1,244

–

–

–

–

Pound Sterling

28

337

–

–

–

–

Euro

243

1,891

–

–

–

–

Swedish Krona

23

21

–

–

–

–

Japanese Yen

45

3

–

–

–

–

3,496

–

–

Buy ZAR and sell foreign currency
United States Dollar

118

800

34

364

–

–

Pound Sterling

5

57

–

–

–

–

Euro

77

604

–

–

–

–

Swedish Krona

20

19

–

–

–

–

Japanese Yen

21

1

–

–

–

–

1,481

364

–

Buy Euro and sell USD currency
United States Dollar

2

19

–

–

–

–

2004

Buy foreign currency and sell ZAR
United States Dollar

231

1,706

22

226

–

–

Pound Sterling

17

215

–

–

–

–

Euro

119

1,024

54

369

–

–

Swedish Krona

20

19

–

–

–

–

Japanese Yen

30

2

–

–

–

–

2,966

595

–

Buy ZAR and sell foreign currency
United States Dollar

81

613

43

446

–

–

Pound Sterling

7

84

–

–

–

–

Euro

45

383

–

–

–

–

Swedish Krona

17

16

–

–

–

–

Japanese Yen

25

2

–

–

–

–

1,098

446

–

Buy Euro and sell USD currency
United States Dollar

11

95

–

–

–

–

F-68

Average Average

Average

maturity

Receive

coupon

Pay

coupon

37. Financial instruments and risk

management

(continued)

Foreign currency exchange rate risk management

(continued)

Currency swaps

There are no currency swaps in place
at March 31, 2006.

2005

Receive fixed/pay fixed

<1 year

350m EUR

7.13%

2,177m ZAR

15.89%

Receive fixed/pay floating

<1 year

100m EUR

7.13%

630m ZAR

JIBAR+2.30%

2004

Receive fixed/pay fixed

1 – 5 years

350m EUR

7.13%

2,177m ZAR

15.89%

Receive fixed/pay floating

1 – 5 years

100m EUR

7.13%

630m ZAR

JIBAR+2.30%

Fair value of financial instruments

Fair value of all financial instruments noted in the balance sheet approximates carrying value except as disclosed below.

The estimated net fair values as at March 31, 2006, have been determined using available market information and appropriate valuation
methodologies as outlined below. The value is not necessarily indicative of the amounts that the Group could realise in the normal course of business.

2004

2005

2006

Carrying

Fair

Carrying

Fair

Carrying

Fair

amount

value

amount

value

amount

value

Rm

Rm

Rm

Rm

Rm

Rm

Liabilities (Refer to note 24)
Total interest-bearing debt

16,754

18,896

14,003

16,054

11,123

13,149

The fair value of derivatives approximate their carrying amounts.
The fair value of receivables, bank balances, repurchase agreements and other liquid funds, payables and accruals, approximate their carrying amount
due to the short-term maturities of these instruments.

The fair values disclosed above of borrowings are based on quoted prices or, where such prices are not available, expected future payments discounted
at market interest rates.

The fair values of derivatives are determined using quoted prices or, where such prices are not available, discounted cash flow analysis is used. These
amounts reflect the approximate values of the net derivative position at the balance sheet date. The fair values of listed investments and the
underlying investments held by the cell captive are based on quoted market prices.

2004

2005

2006

R

R

R

Exchange rate table (closing rate)
United States Dollar

6.357

6.226

6.180

Euro

7.790

8.080

7.482

Pound Sterling

11.679

11.743

10.737

Swedish Krona

0.842

0.883

0.793

Japanese Yen

0.061

0.058

0.052

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-69

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

38. Directors’ interest

NE Mtshotshisa, DD Tabata, M Mostert, TCP Chikane and YR Tenza, five of Telkom’s board members, are the Government’s representatives on
Telkom’s Board of Directors. At March 31, 2006, the Government held 37.99% (2005: 37.17%) of Telkom’s shares.

T Mahloele is the Public Investment Corporation (“PIC”) representative on Telkom’s Board of Directors. As at March 31, 2006 PIC held 10.6% of
Telkom’s shares directly and a further 5.6% indirectly through the Elephant Consortium.

Beneficial

Non-beneficial

Direct

Indirect

Direct

Indirect

Directors’ shareholding
2006

Non-executive

455

–

–

88

NE Mtshotshisa

–

–

–

88

T Mosololi

455

–

–

–

Total

455

–

–

88

2005

Executive – SE Nxasana

367

802

–

267

Non-executive

455

–

–

88

NE Mtshotshisa

–

–

–

88

T Mosololi

455

–

–

–

Total

822

802

–

355

2004

Executive – SE Nxasana

273

669

–

223

Non-executive

–

–

–

16,700,276

NE Mtshotshisa

–

–

–

88

MP Moyo*

–

–

–

16,700,000

TG Vilakazi

–

–

–

188

Total

273

669

–

16,700,499

* The shares are beneficially owned by Old Mutual Plc.

The directors’ shareholding did not change between the balance sheet date and the date of issue of the financial statements.

2004

2005

2006

Rm

Rm

Rm

Directors’ emoluments

48

35

15

Executive

For other services

47

33

12

Non-executive

For services as directors

1

2

3

F-70

Performance

Fringe and

Management

Fees

Remuneration

bonus

other benefits

company

Total

R

R

R

R

R

R

38. Directors’ interest

(continued)

Directors’ emoluments

(continued)

2006

Emoluments per director:

Non-executive

2,969,158

–

–

–

–

2,969,158

NE Mtshotshisa

759,500

–

–

–

–

759,500

TCP Chikane

181,022

–

–

–

–

181,022

B du Plessis

254,391

–

–

–

–

254,391

PSC Luthuli

168,357

–

–

–

–

168,357

TD Mahloele

223,227

–

–

–

–

223,227

TF Mosololi

230,809

–

–

–

–

230,809

M Mostert

308,272

–

–

–

–

308,272

A Ngwezi

47,727

–

–

–

–

47,727

DD Tabata

323,022

–

–

–

–

323,022

YR Tenza

349,022

–

–

–

–

349,022

PL Zim

123,809

–

–

–

–

123,809

Executive

–

2,186,460

7,070,262

2,990,865

– 12,247,587

LRR Molotsane*

–

1,250,747

3,442,573

909,675

–

5,602,995

SE Nxasana*

–

935,713

3,627,689

2,081,190

–

6,644,592

Total emoluments – Paid by Telkom

2,969,158

2,186,460

7,070,262

2,990,865

– 15,216,745

2005

Emoluments per director:

Non-executive

1,528,037

–

–

–

–

1,528,037

NE Mtshotshisa

723,333

–

–

–

–

723,333

RP Menell

51,954

–

–

–

–

51,954

TA Sekano

51,954

–

–

–

–

51,954

TG Vilakazi

58,181

–

–

–

–

58,181

CL Valkin

90,500

–

–

–

–

90,500

MP Moyo+

62,454

–

–

–

–

62,454

Tan Sri Dato’ Ir. Md. Radzi Mansor

35,053

–

–

–

–

35,053

TCP Chikane

50,045

–

–

–

–

50,045

B du Plessis

37,782

–

–

–

–

37,782

TD Mahloele

32,454

–

–

–

–

32,454

TF Mosololi

47,619

–

–

–

–

47,619

M Mostert

65,045

–

–

–

–

65,045

A Ngwezi

45,454

–

–

–

–

45,454

DD Tabata

56,545

–

–

–

–

56,545

YR Tenza

80,045

–

–

–

–

80,045

PL Zim

39,619

–

–

–

–

39,619

Executive

–

2,138,772

12,116,113

1,166,412

18,079,286

33,500,583

SE Nxasana*

In respect of 2005 financial year

–

2,138,772

3,666,384

1,166,412

–

6,971,568

In respect of 2004 financial year

–

–

8,449,729

–

–

8,449,729

SM McKenzie++

–

–

–

–

6,751,560

6,751,560

JB Gibson++ (alternate)

–

–

–

–

4,008,347

4,008,347

B Manning++ (alternate)

–

–

–

–

3,753,646

3,753,646

CK Tan+++

–

–

–

–

3,565,733

3,565,733

Total emoluments – Paid by Telkom

1,528,037

2,138,772

12,116,113

1,166,412

18,079,286

35,028,620

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-71

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

Performance

Fringe and

Management

Fees

Remuneration

bonus

other benefits

company

Total

R

R

R

R

R

R

38. Directors’ interest

(continued)

Directors’ emoluments

(continued)

2004

Emoluments per director:

Non-executive

1,292,166

–

–

–

–

1,292,166

NE Mtshotshisa

666,666

–

–

–

–

666,666

RP Menell

108,000

–

–

–

–

108,000

TA Sekano

96,000

–

–

–

–

96,000

TG Vilakazi

108,000

–

–

–

–

108,000

C L Valkin

108,000

–

–

–

–

108,000

MP Moyo+

115,500

–

–

–

–

115,500

Tan Sri Dato’ Ir. Md. Radzi Mansor

90,000

–

–

–

–

90,000

Executive

–

1,864,845

8,200,991

1,074,730

35,600,612

46,741,178

SE Nxasana*

–

1,864,845

8,200,991

1,074,730

–

11,140,566

SM McKenzie++

–

–

–

–

11,224,756

11,224,756

AJ Lewis++

–

–

–

–

5,517,295

5,517,295

JB Gibson++

–

–

–

–

6,867,629

6,867,629

B Manning++

–

–

–

–

6,241,497

6,241,497

CK Tan+++

–

–

–

–

5,749,435

5,749,435

Total emoluments – Paid by Telkom

1,292,166

1,864,845

8,200,991

1,074,730

35,600,612

48,033,344

* Included in fringe and other benefits is a pension contribution for SE Nxasana and LRR Molotsane of R121,643 (2005: R278,040; 2004: R242,430) and R162,597 (2005: RNil 2006: RNil) respectively paid to the Telkom Retirement Fund. Also included in fringe and other benefits is a termination settlement of R1,574,514 paid to SE Nxasana. In addition to the emoluments disclosed above, Mr Nxasana received a gain of R3,742,744 being the value of shares which vested on his resignation. (Refer to note 28).

+ Paid to Old Mutual Life Assurance Company.

++ Paid to SBC Communications for services rendered by directors included in consultancy services – managerial fees.

+++ Paid to Telkom Malaysia for services rendered by directors included in consultancy services – managerial fees.

F-72

2004

2005

2006

Rm

Rm

Rm

39. Segment information

Eliminations represent the inter-segmental transactions that have been
eliminated against segment results. The mobile segment represents the
Group’s joint venture Vodacom (Refer to note 41).

Business Segment

Consolidated revenue

40,582

43,160

47,625

Fixed-line

31,004

31,457

32,749

To external customers

30,541

30,888

32,039

Inter-company

463

569

710

Mobile

11,428

13,657

17,021

To external customers

10,041

12,272

15,586

Inter-company

1,387

1,385

1,435

Elimination

(1,850)

(1,954)

(2,145)

Other income

255

280

480

Fixed-line

230

255

430

Elimination

–

(9)

–

Mobile

25

34

50

Operating expenses

31,499

32,179

33,428

Fixed-line

24,510

23,691

22,937

Elimination

(1,387)

(1,385)

(1,435)

Mobile

8,839

10,451

12,636

Elimination

(463)

(578)

(710)

Consolidated operating profit

9,338

11,261

14,677

Fixed-line

6,724

8,021

10,242

Elimination

924

807

725

Mobile

2,614

3,240

4,435

Elimination

(924)

(807)

(725)

Consolidated investment income

322

350

397

Fixed-line

1,324

1,992

2,583

Elimination

(1,061)

(1,700)

(2,250)

Mobile

59

58

64

Consolidated finance charges

3,264

1,695

1,233

Fixed-line

2,991

1,647

839

Mobile

284

48

394

Elimination

(11)

–

–

Consolidated taxation

1,738

3,082

4,520

Fixed-line

876

1,775

2,981

Mobile

862

1,307

1,539

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-73

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

39. Segment information

(continued)

Minority interests

69

83

139

Fixed-line

56

68

81

Mobile

13

15

58

Profit attributable to equity holders of Telkom

4,589

6,751

9,182

Fixed-line

4,125

6,523

8,924

Elimination

(137)

(893)

(1,525)

Mobile

1,514

1,928

2,508

Elimination

(913)

(807)

(725)

Consolidated assets

50,198

50,177

54,306

Fixed-line

41,441

40,206

43,748

Mobile

9,799

11,157

12,262

Elimination

(1,042)

(1,186)

(1,704)

Investments

1,735

2,346

2,963

Fixed-line

1,466

2,240

2,861

Mobile

269

106

102

Other financial assets

1,241

5,074

275

Fixed-line

1,222

5,039

256

Mobile

19

35

19

Total assets

53,174

57,597

57,544

Consolidated liabilities

13,487

15,209

15,171

Fixed-line

9,733

10,658

10,409

Mobile

4,796

5,737

6,466

Elimination

(1,042)

(1,186)

(1,704)

Interest-bearing debt

16,754

14,003

11,123

Fixed-line

15,724

12,703

9,889

Mobile

1,030

1,300

1,234

Other financial liabilities

645

313

235

Fixed-line

613

313

205

Mobile

32

–

30

Tax liabilities

460

1,711

1,549

Fixed-line

34

1,395

1,234

Mobile

426

316

315

Total liabilities

31,346

31,236

28,078

Other segment information

Capital expenditure for property, plant and equipment

4,936

4,464

6,310

Fixed-line

3,491

2,820

3,960

Mobile

1,445

1,644

2,350

Capital expenditure for intangible assets

432

1,387

1,196

Fixed-line

371

1,284

975

Mobile

61

103

221

F-74

2004

2005

2006

Rm

Rm

Rm

39. Segment information

(continued)

Other segment information

(continued)

Depreciation and amortisation

6,898

5,944

5,714

Fixed-line

5,633

4,522

4,216

Mobile

1,265

1,422

1,498

Impairment and asset write-offs

350

295

162

Fixed-line

350

210

188

Mobile

–

85

(26)

Intangible assets impairment – Mobile

–

49

–

Workforce reduction expense – Fixed-line

302

961

88

Geographical Segments

Consolidated revenue

40,582

43,160

47,625

South Africa

39,840

42,027

46,154

Other African countries

748

1,135

1,487

Elimination

(6)

(2)

(16)

Consolidated operating profit

9,338

11,261

14,677

South Africa

9,374

10,768

14,665

Other African countries

(33)

(88)

131

Elimination

(3)

581

(119)

Consolidated assets

53,174

57,597

57,544

South Africa

52,706

56,544

56,479

Other African countries

1,675

1,926

2,015

Elimination

(1,207)

(873)

(950)

Other segment information
Capital expenditure for property, plant and equipment

4,936

4,464

6,310

South Africa

4,263

4,117

5,939

Other African countries

673

347

371

Elimination

–

–

–

‘South Africa’, which is also the country of domicile for Telkom, comprises the segment information relating to Telkom and its subsidiaries as well as
Vodacom’s South African-based mobile communications network, the segment information of its service providers and its other business segments.

‘Other African countries’ comprises only Vodacom’s mobile communications networks in Tanzania, Lesotho, the Democratic Republic of Congo and
Mozambique.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-75

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

40. Related parties

Details of material transactions and balances with related parties not
disclosed elsewhere in the consolidated annual financial statements
were as follows:

With joint venture:
Vodacom Group (Proprietary) Limited
Related party balances

Trade receivables

42

42

48

Trade payables

(250)

(250)

(256)

Related party transactions

Income

(463)

(569)

(710)

Expenses

1,387

1,385

1,435

Audit fees

3

3

3

Interest received

(11)

–

–

With shareholders:
Thintana Communications LLC

Management fees

154

57

–

On November 22, 2004, Thintana Communications LLC sold their total interest in Telkom.

Government
Related party balances

Trade receivables

189

185

194

Related party transactions

Income

(1,866)

(1,987)

(2,106)

With entities under common control:
Major public entities
Related party balances

Trade receivables

24

36

30

Trade payables

(3)

(8)

(2)

The outstanding balances are unsecured and will be settled in cash in
the ordinary course of business.

Related party transactions

Income

(370)

(448)

(346)

Expenses

169

201

172

Rent received

(9)

(15)

(17)

Rent paid

54

52

56

F-76

2004

2005

2006

Rm

Rm

Rm

40. Related parties

(continued)

With key management personnel:

Including directors’ emoluments (Refer to note 38)

Related party transactions

Short-term employee benefits

96

84

117

Post-employment benefits

2

3

4

Termination benefits

3

–

12

Equity compensation benefits

–

3

6

Terms and conditions of transactions with related parties

The sales to and purchases from related parties of telecommunication services are made at normal market prices. Except as indicated above,
outstanding balances at the year-end are unsecured, interest free and settlement occurs in cash. There have been no guarantees provided or received
for any related party receivables or payables. Except as indicated above, for the year ended March 31, 2006, the Group has not made any impairment
of amounts owed by related parties (2005: Nil; 2004: Nil). This assessment is undertaken each financial year through examining the financial
position of the related party and the market in which the related party operates.

41. Investments in joint ventures

Vodacom Group (Proprietary) Limited

Telkom owns 5,000 shares of 1c each at cost. This amounts to a 50% shareholding in Vodacom Group (Proprietary) Limited. Vodacom is an entity
that is jointly controlled by its venturers through a contractual agreement. Telkom applies joint venture accounting in recognising its investment in
Vodacom since it shares control of Vodacom with Vodafone, as set out in the joint venture agreement between the two parties, and has chosen to
proportionately consolidate Vodacom on a line by line basis. Some of the provisions in the joint venture agreement that indicate how the venturers
jointly control the activities of Vodacom are as follows:

• The venturers have the right to appoint the 8 non-executive directors of Vodacom. A further 4 executive directors are appointed to the Board;

• A directing committee has been established that holds all powers, functions and authority of the directors to act for and on behalf of the Company.

This directing committee constitutes only the directors as appointed by the venturers;

• All decisions made by the directing committee are mandatorily ratified by the Board of Directors as the ultimate decision lies with the Directing

committee; and

• The directing committee, which is composed entirely of venturer appointed directors, is the ultimate oversight committee of, and controls the

activities of, Vodacom.

During the 2006 financial year, shareholding changed. Vodafone Holdings (Proprietary) Limited increased its effective shareholding in the Vodacom
Group from 35% to 50%. This was achieved by acquiring a 100% shareholding in VenFin Limited, who ultimately owned 15% in the Vodacom Group.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-77

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

Rm

Rm

Rm

41. Investments in joint ventures

(continued)

Vodacom Group (Proprietary) Limited

(continued)

Vodacom Group (Proprietary) Limited restated its comparatives for the
years ended March 31, 2005 and 2004. The Group’s proportionate
share of Vodacom’s assets and liabilities after the restatement is as
follows:

Total assets

10,087

11,297

12,384

Non-current assets

6,426

6,944

8,040

Current assets

3,661

4,353

4,344

Total liabilities and reserves

(10,087)

(11,297)

(12,384)

Reserves

(3,756)

(3,880)

(4,196)

Minority interests

(46)

(64)

(142)

Non-current liabilities

(1,070)

(1,524)

(932)

Current liabilities

(5,215)

(5,829)

(7,114)

The Group’s proportionate share of revenue and expense is as follows:
Revenue

11,428

13,658

17,021

Net operating expenses

(8,815)

(10,417)

(12,585)

Profit before net financing charges

2,613

3,241

4,436

Net finance charges

(226)

9

(331)

Net income before taxation

2,387

3,250

4,105

Taxation

(861)

(1,307)

(1,539)

Profit after taxation

1,526

1,943

2,566

Minority interest

(13)

(15)

(58)

Net profit for the year

1,513

1,928

2,508

The Group’s proportionate share of cash flow is as follows:
Cash flow from operating activities

2,395

2,075

2,251

Cash flow from investing activities

(1,500)

(1,687)

(2,395)

Cash flow from financing activities

(399)

(98)

(53)

Net (decrease)/increase in cash and cash equivalents

496

290

(197)

Effect of exchange rate on cash and cash equivalents

(21)

(3)

(8)

Cash and cash equivalents at beginning of year

323

798

1,085

Cash and cash equivalents at end of year

798

1,085

880

F-78

42. Interest in significant subsidiaries

Country of incorporation: RSA – Republic of South Africa; TZN – Tanzania; LES – Lesotho; MAU – Mauritius; MZ – Mozambique

Nature of business: C – Cellular; S – Satellite; MSC – Management services company; TV – Television and related rental services; INV – Investment
holding company; PROP – Property company; OTH – Other.

*Dormant at March 31, 2006.

Interest in issued

Issued share capital

ordinary share capital

Country of

2004

2005

2006

2004

2005

2006

incorporation

%

%

%

Directory advertising
Telkom Directory
Services (Proprietary) Limited

RSA

R100,000

R100,000

R100,000

64.9

64.9

64.9

Data application services
Swiftnet (Proprietary) Limited

RSA

R50,000,000

R50,000,000

R25,000,000

100

100

100

Other
Rossal No 65 (Proprietary) Limited

RSA

R100

R100

R100

100

100

100

Acajou Investments
(Proprietary) Limited

RSA

–

R100

R100

–

100

100

The aggregate net profit of the four
subsidiaries is R471 million
(2005: R500 million; 2004: R180 million)

Vodacom has an interest in the
following companies (Group Share:
50% of the interest in ordinary share
capital as indicated):

Cellular network operators
Vodacom (Proprietary) Limited (C)

RSA

R100

R100

R100

100

100

100

Vodacom Lesotho
(Proprietary) Limited (C)

LES

M4,180

M4,180

M4,180

88.3

88.3

88.3

Vodacom Tanzania Limited (C)

TZN

USD100

TZS10,000

TZS10,000

65

65

65

Vodacom Mozambique
S.A.R.L. (C)

MZ

USD60,000,000

USD60,000,000

USD60,000,000

98

98

98

Vodacom Congo (RDC)
s.p.r.l. (C)

DRC

–

USD1,000,000

USD1,000,000

–

51

51

Service providers
Vodacom Service Provider
Holdings Company
(Proprietary) Limited (INV))

RSA

R1,020

R1,020

R1,020

100

100

100

Vodacom Service Provider
Company (Proprietary)
Limited (C)

RSA

R20

R20

R20

100

100

100

Vodacom Satellite Services
(Proprietary) Limited
previously known as
Globalstar Southern Africa
(Proprietary) Limited* (S)

RSA

R100

R100

R100

100

100

100

GSM Cellular
(Proprietary) Limited* (C)

RSA

R1,200

R1,200

R1,200

100

100

100

Smartphone SP (Proprietary)
Limited (C)

RSA

R20,000

R20,000

R20,000

51

51

51

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-79

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

Interest in issued

Issued share capital

ordinary share capital

Country of

2004

2005

2006

2004

2005

2006

incorporation

%

%

%

42. Interest in significant

subsidiaries

(continued)

Service providers (continued)
Smartcom (Proprietary)
Limited (C)

RSA

–

R1,000

R1,000

–

85.75

85.75

Cointel VAS (Proprietary)
Limited (C)

RSA

–

–

R10,204

–

–

51

Other significant subsidiaries of
the Group’s Joint Venture
Vodacom Venture No.1 (INV)

RSA

R158,999

R810

R810

100

100

100

Vodacom Equipment Company
(Proprietary) Limited* (C)

RSA

R100

R100

R100

100

100

100

Vodacare (Proprietary)
Limited* (C)

RSA

R100

R100

R100

100

100

100

Vodacom International
Holdings (Proprietary) Limited
(MSC)

RSA

R100

R100

R100

100

100

100

Vodacom International
Limited (MSC)

MAU

USD100

USD100

USD100

100

100

100

Vodacom Properties No.1
(Proprietary) Limited (PROP)

RSA

R100

R100

R100

100

100

100

Vodacom Properties No.2
(Proprietary) Limited (PROP)

RSA

–

R1,000

R1,000

–

100

100

Stand 13 Eastwood Road

Dunkeld West (Proprietary)
Limited (PROP)

RSA

R100

R100

R100

51

51

51

Ithuba Smartcall (Proprietary)
Limited* (OTH)

RSA

R100

R100

R100

26.5

26.5

26.5

Vodacom Tanzania Limited (Zanzibar)

TZN

TZS10,000

TZS10,000

TZS10,000

99

99

99

Joycell Shops (Proprietary) Limited

RSA

R100

R100

R100

100

100

100

Vodacom Ventures (Proprietary) Limited (OTH)

RSA

–

–

R100

–

–

100

Indebtedness of Telkom subsidiary companies

2004

2005

2006

Rm

Rm

Rm

Swiftnet (Proprietary) Limited

RSA

18

4

2

Intekom (Proprietary) Limited

RSA

17

10

3

Q-Trunk (Proprietary) Limited

RSA

40

37

34

Rossal No 65 (Proprietary) Limited

RSA

249

21

–

Acajou Investments (Proprietary) Limited

RSA

–

3

–

F-80

43. Subsequent events

Dividends

The Telkom Board declared an annual dividend of R2,725 million or 500 cents per share and a special dividend of R2,180 million or 400 cents per
share on June 2, 2006, payable on July 14, 2006 for shareholders registered on July 7, 2006 which will fully utilise the available deferred tax asset
in STC credits and result in an additional STC taxation liability of R314 million.

Business Connexion Group Limited (‘BCX’)

On April 4, 2006, Telkom announced its firm intention to make an offer to acquire the entire issued share capital of Business Connexion Group Limited,
other than the BCX shares held as treasury shares and, if the trustees of the BCX share incentive trust so agree, the BCX shares held by the BCX
share incentive trust. Telkom has offered to acquire the outstanding options in BCX on the same terms and conditions as the offer for the shares. The
offer will be implemented by way of a scheme of arrangement in terms of section 311 of the South African Companies Act, to be proposed by Telkom
between BCX and its shareholders.

Telkom’s offer is for the entire issued share capital of BCX at a cash consideration of R9.00 per share for an aggregate of R2.4 billion, including
outstanding options. In addition, Telkom has agreed to BCX paying a dividend of R0.25 per share following the scheme meeting, but prior to the
implementation of the scheme. Furthermore, Telkom has agreed to BCX continuing to pay dividends in the ordinary course of business in line with
its current policy to maintain a three times dividend cover ratio, excluding exceptional items, provided that such dividends do not materially alter the
net cash position of BCX as of November 30, 2005, unless such diminution in cash occurred due to an increase in assets of BCX.

Telkom’s offer is subject to the fulfilment, by no later than December 15, 2006, of conditions precedent.

On June 12, 2006, BCX’s shareholders voted in favour of the scheme and on June 20, 2006, the South African courts sanctioned the scheme, subject
to the approval of the offer by the South African competition authorities, either unconditionally or subject to such conditions as may be acceptable to
Telkom by no later than December 15, 2006, or such later date as agreed between Telkom and BCX.

Furthermore, Telkom has entered into an agreement with Gadlex (Proprietary) Limited (‘Gadlex’) to acquire a certain percentage of Gadlex’s
investment in Business Connexion (Proprietary) Limited, BCX’s major operating subsidiary, at the implied value of the offer for BCX.

Cell captive annuity policy

Subsequent to year-end, an addendum to the annuity policy contract, which transferred a part of the post-retirement medical liability to an annuity
fund was signed. This will effectively change the presentation of the liability and the asset as the annuity policy will meet the definition of a plan
asset in terms of IAS19 which requires the liability to be reduced by the fair value of the plan asset. The effect of this on the annual financial
statements will be a reduction in investments and liabilities to the value of R1,731 million.

Swiftnet (Proprietary) Limited

Telkom is in the process of selling a 30% shareholding in its subsidiary Swiftnet (Proprietary) Limited in order to comply with existing licence
requirements from the Independent Communications Authority of South Africa. This process is expected to be finalised by the end of August 2006.

Share buy-back

As part of the Group’s commitment to the optimal use of capital, the Telkom Board approved on June 2, 2006 a share buy back programme to the
value of R2 billion.

Other matters

The directors are not aware of any other matter or circumstance since the financial year end and the date of this report, not otherwise dealt with in
the financial statements, which significantly affects the financial position of the Group and the results of its operations.

44. US GAAP information

Differences between International Financial Reporting Standards and US Generally Accepted Accounting Principles

The consolidated financial statements of Telkom have been prepared in accordance with International Financial Reporting Standards (‘IFRS’), which
differ in certain respects from generally accepted accounting principles in the United States (‘US GAAP’). Application of US GAAP would have affected
the balance sheets as of March 31, 2006, 2005 and 2004 and net income for each of the three years in the periods ended March 31, 2006, 2005
and 2004 to the extent described below. A description of the differences between IFRS and US GAAP as they relate to the Group, as well as its equity
accounted investment in Vodacom, are discussed in further detail below.

*The United States Dollar (‘US$’) amounts disclosed in the footnotes have been translated at March 31, 2006 and for the year then ended from
South African Rand (‘ZAR’) only as a matter of convenience at the exchange rate of ZAR6.15 = US$1, the noon buying rate on March 31, 2006.
These amounts are included for the convenience of the reader only. Such translation should not be construed as a representation that the South African
Rand amounts have been or could be converted into US Dollars at this or any other rate.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-81

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

Restated

Restated

2004

2005

2006

2006*

Rm

Rm

Rm

US$m

44. US GAAP information

(continued)

Net income and equity in accordance with US GAAP

The following details the adjustments to reconcile net income
in accordance with IFRS to the amounts determined in accordance
with US GAAP for each of the three years in the period ended
March 31, 2006, 2005 and 2004.

Net income according to IFRS

4,658

6,834

9,321

1,516

US GAAP adjustments – Telkom:

a)

Sale and lease-back transaction

94

94

–

–

b)

Derivative financial instruments

82

86

89

14

c)

Goodwill

25

–

–

–

d)

Pension fund surplus

–

–

34

6

e)

Tax effect of reconciling differences

(66)

(68)

(45)

(7)

e)

Additional distribution tax on retained earnings

(500)

(624)

(380)

(62)

e)

Capital gains tax on Vodacom investment

(63)

(19)

(36)

(6)

f)

Tax rate change

–

(33)

33

5

g)

Income attributable to minority shareholders

(69)

(83)

(139)

(22)

US GAAP adjustments – Vodacom:

b)

Derivative financial instruments

4

4

4

1

c)

Goodwill

47

–

–

–

h)

Deferred bonus incentive scheme

4

8

3

–

i)

Business combinations

2

(2)

–

–

e)

Tax effect of reconciling differences

(3)

(3)

8

1

f)

Tax rate change

–

(4)

4

1

j)

Foreign operations

–

1

1

–

k)

Impairment reversal

–

–

(30)

(5)

Net income as per US GAAP

4,215

6,191

8,867

1,442

Earnings per share

(Per share amounts in cents)
Basic

756.7

1,143.3

1,684.9

273.9

Diluted

756.7

1,141.1

1,675.7

272.5

Weighted average number of shares

2004

2005

2006

(Number of shares)

Basic 556,994,962

541,498,547

526,271,093

Diluted

556,994,962

542,537,579

529,152,318

F-82

44. US GAAP information

(continued)

The following is a reconciliation of the material adjustments necessary to reconcile shareholders‘ equity in accordance with IFRS to the amounts in
accordance with US GAAP as at March 31, 2006, 2005 and 2004.

Restated

Restated

2004

2005

2006

2006*

Rm

Rm

Rm

US$m

Shareholders‘ equity according to IFRS

21,828

26,361

29,466

4,791

US GAAP adjustments – Telkom:

a)

Sale and lease-back transaction

(94)

–

–

–

b)

Derivative financial instruments

(12)

(1)

–

–

c)

Goodwill

66

66

66

11

d)

Pension fund surplus

–

–

34

6

e)

Tax effect of reconciling differences

40

–

(12)

(2)

e)

Additional distribution tax on retained earnings

(913)

(1,537)

(1,917)

(312)

e)

Capital gains tax on Vodacom investment

(214)

(233)

(269)

(44)

f)

Tax rate change

–

(33)

–

–

g)

Equity attributable to minority shareholders

(200)

(220)

(301)

(49)

US GAAP adjustments – Vodacom:

c)

Goodwill

94

92

92

15

h)

Deferred bonus incentive scheme

18

26

29

5

i)

Business combinations

2

–

–

–

e)

Tax effect of reconciling differences

(7)

(10)

(2)

–

f)

Tax rate change

–

(4)

–

–

k)

Impairment reversal

–

–

(30)

(5)

Shareholders‘ equity according to US GAAP

20,608

24,507

27,156

4,416

Comprehensive income

Under US GAAP, SFAS130 ‘Reporting Comprehensive Income’ requires that certain items be recognised as a separate component of equity under the
caption ‘Accumulated Other Comprehensive income’ (‘OCI’). Additionally the standard requires that companies present comprehensive income, which
is a combination of net income and changes in a company’s other accumulated comprehensive income accounts. Changes in the Group’s accumulated
other comprehensive income is reflected under non-distributable reserves in the balance sheet under IFRS. The following is the roll forward of other
comprehensive income for each of the three years in the period ended March 31, 2006:

Other

Retained

Comprehensive

earnings

Income

Balance

Rm

Rm

Rm

Total April 1, 2003

8,761

261

9,022

Restatement and change in accounting policy

(50)

–

(50)

Restated balance, April 1, 2003

8,711

261

8,972

Movement in retained earnings

3,714

12,425

Net income per US GAAP

4,215

–

Dividends paid

(501)

–

Foreign currency translation adjustment

–

(95)

(172)

Increase in fair value of listed investment

–

9

22

Release of transitional adjustment on application of SFAS 133 to net income for
12 month period (net of tax of R28 million)

–

(47)

278

Total March 31, 2004

12,425

128

12,553

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-83

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

Other

Retained

Comprehensive

earnings

Income

Balance

Rm

Rm

Rm

44. US GAAP information

(continued)

Comprehensive income

(continued)

Total April 1, 2004

12,425

128

12,553

Movement in retained earnings

5,585

18,010

Net income per US GAAP

6,191

–

Dividends paid

(606)

–

Consolidation of Vodacom Congo

(117)

41

(76)

Foreign currency translation adjustment

–

(30)

(202)

Net decrease in fair value of listed investment

–

(22)

–

Increase in fair value of listed investment

9

Realisation of fair value adjustment on investment

(31)

Release of transitional adjustment on application of SFAS 133 to net income for
12 month period (net of tax of R29 million)

–

(52)

226

Total March 31, 2005

17,893

65

17,958

Movement in retained earnings

4,066

21,959

Net income per US GAAP

8,867

–

Dividends paid

(4,801)

–

Foreign currency translation adjustment

–

58

(103)

Release of transitional adjustment on application of SFAS 133 to net income for
12 month period (net of tax of R33 million)

–

(59)

167

Total March 31, 2006

21,959

64

22,023

Movement in shareholders’ equity in accordance with US GAAP is as follows:

Restated

Restated

2004

2005

2006

2006*

Shareholders’ equity according to US GAAP

Rm

Rm

Rm

US$m

Balance April 1

17,315

20,608

24,507

3,985

Restatement and change in accounting policy

(50)

–

–

–

Restated balance, April 1

17,265

20,608

24,507

3,985

Net income for the year

4,215

6,191

8,867

1,442

Foreign currency translation reserve

(95)

(30)

58

9

Fair value adjustments – derivatives

(47)

(52)

(59)

(9)

Fair value adjustments – investments

9

(22)

–

–

Dividend declared

(501)

(606)

(4,801)

(780)

Purchase of treasury shares

(238)

(1,574)

3

–

Shares bought back and cancelled

–

–

(1,502)

(244)

Compensation reserve

–

68

83

13

Business combination

–

(76)

–

–

Balance March 31

20,608

24,507

27,156

4,416

F-84

Restated

Restated

2004

2005

2006

2006*

Rm

Rm

Rm

US$m

44. US GAAP information

(continued)

US GAAP income statement, balance sheet and
cash flow statement without proportional
consolidation of Vodacom:
Income statements as per US GAAP

Operating revenue

30,541

30,887

32,035

5,209

Other income

319

338

429

70

Operating expenses and depreciation

(24,007)

(23,102)

(22,186)

(3,608)

Operating income

6,853

8,123

10,278

1,671

Investment income

277

292

333

54

Net finance costs

(2,920)

(1,569)

(752)

(122)

Income after financial items

4,210

6,846

9,859

1,603

Equity accounted earnings

1,567

1,931

2,497

406

Taxation (1,506)

(2,518)

(3,409)

(554)

Minority interests

(56)

(68)

(80)

(13)

Net income

4,215

6,191

8,867

1,442

Balance sheets as per US GAAP

Non-current assets

39,180

38,757

39,784

6,469

Current assets

8,760

11,835

10,044

1,633

Total assets

47,940

50,592

49,828

8,102

Equity 20,608

24,507

27,156

4,416

Minority interests

153

155

159

26

Non-current liabilities

15,674

12,330

11,455

1,862

Current liabilities

11,505

13,600

11,058

1,798

Total equity and liabilities

47,940

50,592

49,828

8,102

Cash flow as per US GAAP

Cash flow from operating activities

11,489

13,636

7,255

1,179

Cash generated from operations

12,504

13,615

14,179

2,305

Income from investments

285

340

313

51

Dividend received

610

1,567

1,800

293

Dividend paid

(548)

(629)

(4,884)

(794)

Net financing charges paid

(1,531)

(1,142)

(1,093)

(178)

Taxation paid

(108)

(115)

(3,060)

(498)

Taxation received

277

–

–

–

Cash flow from investing activities

(3,923)

(4,620)

(4,891)

(795)

Cash flow from financing activities

(6,082)

(9,799)

(204)

(33)

Net increase/(decrease) in cash and cash equivalents

1,484

(783)

2,160

351

Net cash and cash equivalents at beginning of year

514

1,998

1,215

198

Net cash and cash equivalents at end of year

1,998

1,215

3,375

549

Restatements

Revenue recognition – Connection revenues

For IFRS, prior to April 1, 2005, the fixed line business recognised installation fees when the installation service was provided. For US GAAP, the Group
recognised the installation fees over the estimated life of the customer relationship. In the current year, the Group changed its accounting policy under
IFRS to ensure comparability with other telecommunications entities reporting under IFRS and to better reflect Telkom’s current customer retention focus.
As a result, IFRS is in line with US GAAP. The reconciliation of net income therefore no longer reflects a reconciling item related to revenue recognition.
This has also resulted in a change in the tax effects of reconciling differences in both the income statement and equity reconciliation.

Cash flow

The cash flow statement has been restated to correctly reflect the equity accounted investment in Vodacom.

Operating leases

The Group restated lease payments and receipts under operating leases in order to recognise the expenses and income on a straight-line basis over
the lease terms.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-85

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

44. US GAAP information

(continued)

Restatements

(continued)

Additional distribution tax on retained earnings

The comparatives for the additional distribution tax on retained earnings have been restated as a result of the effects of the restatements mentioned
in note 2.

Capital gains tax on Vodacom investment

The comparatives for the Capital gains tax on Vodacom investment have been restated as a result of the restatement related to the straight lining of
operating leases.

a) Sale and lease-back transaction

In the year ended March 31, 2000 the Group entered into a sale and lease-back of its vehicle fleet with a third party, part of which has been
accounted for under US GAAP as capital leases. Lease contracts were renewed every year. The Group was however deemed to be economically
compelled under US GAAP to renew such leases based upon their historical requirements and contractual obligations to source any such requirements
during the contract period from the lessor. In accordance with the agreement Telkom was not allowed to lease any similar vehicles as those specified
in the contract from any other service provider during the five-year period.

Under the provisions of IAS17, the Group recorded a gain from the sale since it had transferred substantially all of the risks and rewards incidental
to ownership of the vehicles to the lessor and the criteria for profit recognition had been satisfied. The Group recognised a gain amounting to
R463 million in 2000 and accounted for the lease-backs as operating leases.

Under US GAAP, SFAS13, as amended by SFAS28, the Group determined that while the terms of the agreement provide that the assets underlying
the lease-backs would be subject to annual lease contracts, renewable based upon the Group’s vehicle requirements and cancelable under certain
terms, the lessor’s right of first refusal to provide all of the Group’s requirements during the five year term represents an economic compulsion to
renew the leases. Accordingly, the Group concluded that since the lease-back covered substantially all the assets that were sold under the contract for
substantially all their remaining useful lives, deferral of the related gain and recognition over the five year lease term was appropriate.

Based on the requirements of SFAS13, a portion of the vehicle leases which met the recognition criteria of a finance lease was treated as a finance
lease due to the fact that when analysed on a vehicle by vehicle basis, the present value of the minimum lease payments of certain individual vehicles
exceed 90% of the fair value of these vehicles or the lease term represents more than 75% of the remaining economic life of the vehicles. Accordingly,
the full gain realised through the sale of the vehicles was reversed and the proceeds from the sale have been treated as an obligation. Rental payments
would be applied to interest expense on the obligation as well as to reduce the principal amount of the obligation. The resulting capital lease assets

were being depreciated over their remaining useful lives.

2004

2005

Rm

Rm

Retained earnings opening balance

(188)

(94)

Recognition of deferred profit

93

92

Depreciation

(45)

(40)

Finance costs

(9)

(8)

Add back: lease expense

55

50

Net impact on income statement per period

94

94

Retained earnings closing balance

(94)

–

Balance sheet
Capital lease asset

57

17

Opening balance

102

57

Additions

–

–

Depreciation

(45)

(40)

Capital lease liability

59

17

Opening balance

105

59

Additions

–

–

Lease payments

(55)

(50)

Finance charges

9

8

F-86

44. US GAAP information

(continued)

a) Sale and lease-back transaction

(continued)

The initial master lease agreement for vehicles was for a period of five years, and expired on March 31, 2005. A new agreement has been negotiated
for a period of three years on similar terms and conditions as the previous agreement and is effective April 1, 2005. In accordance with the new
agreement Telkom is not allowed to lease any similar vehicle as specified in the contract from any other service provider during the three year period
except for the rentals at airports which are utilised in cases of subsistence and travel as well as vehicles which are not part of the agreement. The
agreement is structured to have no lease increases on vehicles that are continually leased from the lessor. If a vehicle is, however, replaced by a new
similar vehicle, the lease costs of the newest vehicle will increase by the Consumer Price Index. All leased vehicles are, however, subject to any
variance in the interest rate fluctuations and are adjusted as and when the adjustments are announced by the South African Reserve Bank.

Telkom has accounted for the vehicles covered by the new lease under IFRS as operating leases. However for US GAAP purposes, a lessee is required
to compute the present value of the lease payments using its incremental borrowing rate unless it is practicable to determine the implicit rate
computed by the lessor and that implicit interest rate is less than the lessee’s incremental borrowing rate. For IFRS, the discount rate is the implicit
interest rate if it is practicable to determine, otherwise the lessee’s incremental borrowing rate is used. Telkom was in a position to determine the
implicit interest rate in the new lease which was higher than its incremental borrowing rate. The new leases do not qualify as finance leases as a
result of using a higher discount rate for IFRS. Some of the leases do however qualify as finance leases for US GAAP as the present value of future
minimum lease payments discounted at the incremental borrowing rate, exceeds 90% of the fair value of the leased vehicles.

A summary of the income statement and equity effects of the new lease are as follows:

2006

2006*

Rm

US$m

Retained earnings opening balance

–

–

Depreciation

(14)

(2)

Finance costs

(3)

–

Add back: lease expense

17

2

Net impact on income statement for the period

–

–

Retained earnings closing balance

–

–

Balance sheet

Capital lease asset

28

5

Opening balance

–

–

Additions

42

7

Depreciation

(14)

(2)

Capital lease liability

28

5

Opening balance

–

–

Additions

42

7

Lease payments

(17)

(2)

Finance charges

3

–

The operating lease commitments under US GAAP as at March 31, 2006 are as follows:

Buildings

Equipment

Vehicles

Total

Rm

Rm

Rm

Rm

2007

102

19

481

602

2008

82

14

481

577

2009

55

–

–

55

2010

40

–

–

40

2011

19

–

–

19

> 5 years

8

–

–

8

Total

306

33

962

1,301

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-87

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

44. US GAAP information

(continued)

a) Sale and lease-back transaction

(continued)

The finance lease commitments under US GAAP as at March 31, 2006 are as follows:

Buildings

Equipment

Vehicles

Total

Rm

Rm

Rm

Rm

2007

117

4

17

138

2008

124

5

17

146

2009

127

–

–

127

2010

112

–

–

112

2011

122

–

–

122

> 5 years

1,428

–

–

1,428

Total

2,030

9

34

2,073

Amount representing interest

(1,177)

Capital lease liability

896

b) Derivative financial instruments

SFAS133 – Fair value adjustments

The Group adopted IAS39 and SFAS133 on April 1, 2001. Upon adoption of IAS39, the difference between previous carrying amounts and the fair
value of derivatives, which prior to the adoption of IAS39 had been designated as cash flow hedges or fair value hedges but which do not qualify for
hedge accounting under IAS39, was recognised as an adjustment to the opening balance of retained earnings in the financial year April 1, 2001.
Changes in the fair value of derivatives subsequent to April 1, 2001 are recorded in the income statement as they do not qualify for hedge accounting.

Under US GAAP, in accordance with SFAS133, the Group is required to recognise all derivatives on the balance sheet at fair value. The SFAS133
transitional adjustments (at April 1, 2001) are recorded differently than those recorded under IAS39. For pre-existing hedge relationships that would
be considered cash flow type hedges, the transitional adjustment should be reported in OCI as a cumulative effect of the accounting change. Any
transitional adjustment reported as a cumulative effect adjustment in OCI will subsequently be reclassified into earnings in a manner consistent with
the earnings effect of the hedged transaction. For pre-existing hedge relationships that would be considered fair value type hedges, the Group adjusted
the carrying values of the hedged item to its fair value, but only to the extent of an offsetting transition adjustment from the previously designated
hedging instrument.

The hedged asset or liability is subsequently accounted for in a manner consistent with the appropriate accounting for such assets and liabilities. For
both cash flow and fair value hedges any portion of the derivative that is considered ineffective at transition is reported in income as a cumulative
effect of an accounting change.

Upon adoption on April 1, 2001, the Group recorded an adjustment to other comprehensive income of R440 million (net of tax of R262 million)
representing the fair value adjustment of derivatives for which the pre-existing hedge relationships would be considered cash flow type hedges. In the
2006 fiscal year, the Group reclassified from OCI into earnings R59 million (net of tax of R33 million) (2005: R52 million (net of tax of R29 million))
(2004: R47 million (net of tax of R28 million)) as the hedged transaction impacted earnings. Upon adoption, the Group also recorded an adjustment
of R45 million to increase the carrying value of a hedged debt instrument that was the hedged item in what would be considered a fair value type
hedge. The fair value adjustment to the hedged item is limited to the extent of an off-setting fair value adjustment to the hedging instrument. In the
2006 fiscal year, the Group amortised the remaining R1 million (2005: R11 million; 2004: R11 million) of the adjustment to the hedged debt
instrument into earnings.

c) Goodwill

Prior to April 1, 2004 under IFRS, goodwill arising on the acquisition of a foreign entity was treated as an asset of the Group and translated at the
foreign exchange rate in effect at transaction date. In accordance with IFRS the Group amortised goodwill and other intangibles on a straight-line
basis over the anticipated benefit period.

Under US GAAP, goodwill arising on the acquisition of a foreign entity was translated at the actual exchange rate at the end of the period. Furthermore,
under US GAAP with effect from July 1, 2001 goodwill and intangibles with infinite lives are not amortised for business combinations completed after
June 30, 2001. For previously recorded goodwill and intangibles with infinite lives, amortisation ceased on March 31, 2002. These adjustments
resulted in an increase in income of R72 million in 2004. The cumulative equity effect in 2004 amounted to R66m, which is the difference that will
remain the same as goodwill is also no longer depreciated for IFRS from April 1, 2004.

F-88

44. US GAAP information

(continued)

c) Goodwill

(continued)

The Group adopted the revised IAS21 ‘The Effects of Changes on Foreign Exchange Rates’, effective April 1, 2004. Since that date, under IFRS and
US GAAP, goodwill arising on the acquisition of a foreign entity is treated as an asset of the foreign entity and translated at the foreign exchange rate
ruling at the balance sheet date. The resulting foreign exchange transaction gain or loss is recorded in equity.

The Group adopted IFRS3 ‘Business Combinations’ from April 1, 2004, under which acquired goodwill is no longer amortised, but tested for
impairment at least annually (or more frequently if impairment indicators arise). Accordingly, goodwill arising from the Group’s investment is not
subject to amortisation as from April 1, 2004. Hence, from that date US GAAP and IFRS are similar in this regard.

d) Pension fund surplus

IFRS limits the amount of prepaid pension asset recognised for a defined benefit plan to the lower of the amount initially determined as the defined
benefit asset, and the total of unrecognised net actuarial losses and the present value of any economic benefits available in the form of refunds from
the plan or reductions in future contributions to the plan.

For US GAAP purposes, the prepaid pension cost is recognised in full. The amount determined for prepaid pension cost under US GAAP is also different
to the amount determined under IFRS due to the unrecognised transitional asset which is being amortised to the income statement over the remaining
working lives of the employees under US GAAP. The amount recognised under IFRS is R80m, as compared to the amount of R114 million that has
been recognised under US GAAP.

There is a difference in treatment of the transitional asset/liability at inception of the statements under IFRS and US GAAP. In terms of SFAS87, the
transitional asset/liability is amortised on a straight-line basis over the remaining working lives of the employees participating in the plan from April 1,
1989. For IFRS purposes, the effect was recognised immediately on transition.

2004

2005

2006

2006*

Rm

Rm

Rm

US$m

Pension fund

The net periodic pension costs includes the following components:

Service cost on benefits earned:

Interest and service cost on projected benefit obligations

22

22

22

3

Expected return on plan assets

(31)

(22)

(24)

(4)

Amortisation of transitional obligation

(3)

(3)

(3)

–

Amortisation of unrecognised net gain

2

5

6

1

Net periodic pension (benefit)/cost

(10)

2

1

–

The status of the pension plan is as follows:
Net funding position

29

45

(38)

(6)

Unrecognised net transitional asset

(41)

(38)

(35)

(6)

Unrecognised actuarial loss

100

89

187

30

Pension surplus

88

96

114

18

Retirement fund
Service cost on benefits earned:

The net periodic retirement costs include the following components:
Interest and service cost on projected benefit obligations

279

301

346

56

Expected return on plan assets

(421)

(338)

(431)

(70)

Amortisation of transitional obligation

1

1

1

–

Amortisation of unrecognised net gain

–

29

–

–

Net periodic pension benefit

(141)

(7)

(84)

(14)

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-89

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

2004

2005

2006

2006*

Rm

Rm

Rm

US$m

44. US GAAP information

(continued)

d) Pension fund surplus

(continued)

Retirement fund

(continued)

The status of the retirement plan is as follows:
Net funding position

378

457

1,596

260

Unrecognised net transitional obligation

7

6

5

1

Unrecognised actuarial loss/(gain)

383

312

(742)

(121)

Retirement plan surplus

768

775

859

140

e) Income taxes

Deferred tax benefits and liabilities are calculated, when applicable, for the differences between IFRS and US GAAP.

Telkom is taxed at a corporate tax rate of 29% (2005: 30%) on taxable income. Telkom incurs an additional Secondary Tax on Companies (‘STC’)
at a rate of 12.5% on any dividends distributed to shareholders. The dividend tax is payable if and only when dividends are distributed. Neither the
Group nor the shareholders receive any future tax benefits as a result of additional tax on dividends paid. As required under IFRS, Telkom will recognise
the tax effects of dividends when dividends are distributed in the future. Under US GAAP, consistent with the requirements of EITF95-9, the Group
measures its income tax expense, including the tax effect of temporary differences, using the tax rate that includes the dividend tax. STC is calculated
on retained income after the 1992 fiscal year after deducting the net gains from certain capital transactions as defined and after giving credit for
dividends received from Vodacom and other subsidiaries for which related STC tax has been paid.

The following is the reconciliation of the tax expense computed using the statutory tax rate of 29% (2005: 30%; 2004: 30%) to the effective rate
of 35% (2005: 37%; 2004: 36%)

Restated

Restated

2004

2005

2006

2006*

Rm

Rm

Rm

US$m

Income before tax per US GAAP

4,210

6,846

9,859

1,603

Expected income tax expense at statutory rate

1,263

2,054

2,859

465

Adjustments due to STC on retained income

532

509

743

120

Exempt income

(180)

(90)

(161)

(26)

Disallowable expenses

(149)

96

61

10

Tax rate change

–

–

(33)

(5)

Tax losses not utilised

–

8

–

–

Adjustment on possible CGT – Vodacom earnings

63

19

36

6

Under provision for prior year

(23)

(78)

(96)

(16)

Effective tax

1,506

2,518

3,409

554

With respect to the Group’s investment in Vodacom, SFAS109 requires that deferred taxes be recognised for the difference between the reported
amount and the tax base of such investment. According to South African tax law, the Group would be required to pay Capital gains tax at a rate of
29% (2005: 30%; 2004: 30%) on 50% of any increase in the taxable appreciation in the value of its investment since October 1, 2001. As such,
deferred taxes have been recognised on the Group’s share of the undistributed earnings of Vodacom since October 1, 2001.

In addition, SFAS109 prohibits recognition of deferred taxation assets or liabilities that under SFAS52 are re-measured from local currency into the
functional currency using historical exchange rates and that result from either changes in exchange rates or indexing for taxation purposes. The
functional currency of Vodacom Congo (RDC) s.p.r.l. is the US$ and it benefits from indexing for local Democratic Republic of Congo taxation purposes
which gives rise to a deferred taxation benefit for IFRS purposes of R101 million.

Under IFRS, no deferred taxation liability was recognised in respect of intangible assets acquired other than in a business combination where there
was a difference at the date of acquisition between the assigned values and the taxation bases of the assets.

Under US GAAP, a deferred taxation liability (and corresponding increase in assets acquired) is recognised for all temporary differences between the
assigned values and the taxation bases of intangible assets acquired. The recording of such deferred taxation liability has no net impact on net income
or shareholder’s equity as determined under US GAAP as the decrease in income taxation expense is offset by a corresponding increase in
amortisation.

F-90

Restated

Restated

2004

2005

2006

2006*

Rm

Rm

Rm

US$m

44. US GAAP information

(continued)

e) Income taxes

(continued)

Deferred tax

The tax effects of the US GAAP adjustments relating to Telkom’s
operations have been calculated based on a tax rate of 36.89%
(2005: 37.78%; 2004: 37.78%).

A reconciliation of the deferred tax balances under IFRS to the
amounts determined under US GAAP, is as follows:

Net deferred tax liability per IFRS

(118)

(435)

(587)

(95)

Vodacom deferred tax balance (equity accounted)

66

82

152

25

Additional distribution tax

(913)

(1,537)

(1,917)

(312)

CGT on Vodacom investment

(214)

(233)

(269)

(44)

Tax effect of US GAAP adjustments

40

–

(12)

(2)

Change in tax rate

–

(33)

–

–

Net deferred tax liability per US GAAP

(1,139)

(2,156)

(2,633)

(428)

f) Tax rate change

Under IFRS, current and deferred taxation assets and liabilities are measured using taxation rates enacted unless announcements of taxation rates
by the government have the substantive effect of actual enactment. The Group’s deferred taxation assets and liabilities at March 31, 2006 were
recorded at the enacted taxation rate of 29%.

For the purpose of US GAAP, the Group believes that under SFAS109 ‘Accounting for Income Taxes’, measurement of current and future taxation
liabilities and assets is based on the provision of the enacted tax law; the effects of future changes in taxation laws or rates are not anticipated.
Therefore, the enacted rate of 30% was used for all taxation amounts at March 31, 2005. The Group therefore adjusted the deferred taxation in
terms of the difference in the taxation rate used for deferred tax for IFRS as compared to the rate used for US GAAP.

The company tax rate of 29% was promulgated in April 2005 and therefore tax charges under both IFRS and US GAAP for 2006 have been calculated
at the enacted rate of 29%. The US GAAP adjustment recorded in 2005 is no longer required and is therefore reversed in 2006.

g) Income and equity attributable to minority interests

The Group adopted IAS27 ‘Consolidated and Separate Financial Statements’, revised from April 1, 2004. In accordance with the guidance, the Group
has reclassified its minority interest in the balance sheet from a liability into equity. The Group applied this reclassification retrospectively.

Under US GAAP, minority interest is recorded outside of equity. Therefore, the minority interest under US GAAP is reclassified at the end of each fiscal
year from the shareholders’ equity reconciliation.

h) Deferred bonus incentive scheme

Under IFRS, the total value of deferred bonus entitlements as calculated at the end of each financial period are provided in full on the balance sheet
date, based on the net present value of expected future cash flows.

Under US GAAP, in accordance with FIN28 ‘Accounting for Stock Appreciation Rights and Other Variable Stock Option Awards Plans’ and Interpretation
of APB Opinion no’s 15 and 25, compensation cost is recognised over the service period or the vesting period if the service period is not defined,
based upon the undiscounted value of the entitlements.

i) Business combinations

Under IFRS, the Group fair values 100% of the assets acquired and liabilities assumed in business combinations, including minority interests. The
excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed should be recognised as an
asset referred to as goodwill.

Under US GAAP, the Group should only fair value the percentage of the assets acquired and liabilities assumed, excluding minority interests. Similar
to IFRS, the excess of the cost of an acquisition over the net of the amounts assigned to assets acquired and liabilities assumed should be recognised
as an asset referred to as goodwill. As a result, the carrying amount of the goodwill for US GAAP purposes is adjusted to reflect the different values
assigned to the minority portion of assets and liabilities.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-91

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

44. US GAAP information

(continued)

i) Business combinations(continued)

Under IFRS and US GAAP, losses are generally only allocated to the minority interest up to the amount of the minority’s equity in the subsidiary entity.
In 2004, for certain Vodacom subsidiaries, the minority interest allocation was a net profit under US GAAP, and a net loss under IFRS (due to the
additional amortisation expense). Therefore, there was no minority interest allocation under IFRS, and thus there was a GAAP difference effecting net
income. In 2005, the minority interest allocation under both IFRS and US GAAP was a net profit. Therefore, in accordance with IAS27, the income
allocation to minority interest was net of the loss not allocated to the minority in 2004. No difference in shareholders’ equity exists at the end of
2005 and 2006.

j) Foreign exchange translation on net investment in foreign operations

Upon the adoption of IAS21 ‘The Effects of Changes in Foreign Exchange Rates’, the Group has reclassified the foreign exchange gains or losses of
the monetary item that forms part of the net investment in foreign operations which is denominated in a currency other than the functional currency
of either the parent company or the foreign operation through earnings and not as a separate component of equity.

For US GAAP, in accordance with SFAS52 ‘Foreign Currency Translation’, foreign exchange gains or losses related to a monetary item that forms part
of the net investment in foreign operations are recognised upon consolidation as a component of equity in OCI. There is no impact on equity resulting
from the adjustment.

k) Impairment reversal

Under IFRS, in accordance with IAS36 ‘Impairment of assets’, an impairment loss recognised in prior periods for an asset other than goodwill is
reversed if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised.

For US GAAP, in accordance with SFAS144 ‘Accounting for Impairment or Disposal of long lived assets’, a restoration of previously recognised
impairment loss is prohibited. The adjustment restores the impairment loss net of depreciation recognised under IFRS.

l) Joint venture accounting

Under IFRS, investments qualifying as joint ventures are accounted for under the proportionate consolidation method of accounting. Under the
proportionate consolidation method, the venturer records its share of each of the assets, liabilities, income and expenses of the jointly controlled entity
on a line-by-line basis with similar items in the venturer’s financial statements. The venturer continues to record its total share of the losses in excess
of the net investment in the joint venture.

However for US GAAP purposes where the joint ventures are equity accounted, losses are only recognised up to the net investment in the joint venture,
unless the investor has committed to continue providing financial support to the investee.

Vodacom equity accounted earnings

Under IFRS, the Group’s interests in joint ventures are proportionally consolidated. Under US GAAP, interest in joint ventures not meeting the criteria
for accommodation under item 17 of Form 20-F should be reflected in the consolidated financial statements using the equity method. The following
table sets out the restated abbreviated US GAAP income statement and balance sheet of the Group joint venture company, Vodacom.

Restated

Restated

2004

2005

2006

2006*

Rm

Rm

Rm

US$m

Income statements as per US GAAP
Operating income

5,456

6,554

8,874

1,443

Income after financial items

4,994

6,575

8,217

1,336

Equity accounted earnings

1

–

–

–

Taxes

(1,984)

(2,733)

(3,296)

(536)

Minority interests

(26)

(77)

(161)

(26)

Change in accounting policy

5

5

5

1

Net income for the year

2,990

3,770

4,765

775

F-92

Restated

Restated

2004

2005

2006

2006*

Rm

Rm

Rm

US$m

44. US GAAP information

(continued)

l) Joint venture accounting

(continued)

Balance sheets as per US GAAP
Non-current assets

12,083

14,176

16,286

2,648

Current assets

7,128

8,706

8,689

1,413

Total assets

19,211

22,882

24,975

4,061

Equity

6,728

6,881

7,257

1,180

Minority interests

93

166

321

52

Non-current liabilities

3,317

4,361

3,538

575

Current liabilities

9,073

11,474

13,859

2,254

Total equity and liabilities

19,211

22,882

24,975

4,061

m) Guarantees

Under IFRS, fees received by the Group from issuing guarantees are recognised in income as earned. A liability in respect of the guarantee is not
recognised until such time as the contingent liability is thought likely to be realised.

Under US GAAP, the Group adopted the initial recognition and initial measurement provisions of FASB Interpretation No. 45, ‘Guarantor’s Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others (an interpretation of FASB Statements No. 5, 57
and 107 and Rescission of Interpretation No. 34)’ (‘FIN45’) in fiscal year 2004. This interpretation clarifies that for certain guarantees a guarantor
is required to recognise, at the inception of a guarantee entered into after December 15, 2002, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This interpretation does not prescribe a specific approach for subsequently measuring the guarantor’s recognised
liability over the term of the related guarantee.

The Vodacom Group has issued certain guarantees in connection with borrowings of Vodacom Congo (RDC) s.p.r.l., an equity method investee for US
GAAP purposes. On the adoption of FIN45, all guarantees issued during fiscal year 2004 related to Vodacom Congo (RDC) s.p.r.l. were initially
recorded at fair value at the balance sheet and subsequently amortised into income statements as the premiums are earned.

n) Onerous contracts

Under IFRS when the Group has a contract that is onerous, the excess obligation is measured and recognised as a provision in accordance with IAS37
Provisions, Contingent Liabilities and Contingent Assets. Under US GAAP, in accordance with SFAS146 ‘Accounting for Costs Associated with Exit or
Disposal Activities’, a liability for costs that will continue to be incurred under a contract for its remaining term without corresponding economic benefit
to the entity should be recognised and measured at its fair value when the entity ceased using the right conveyed by the contract. The provision raised
in respect of the Group’s onerous contracts are not significant and therefore no adjustment has been made.

o) Classification of hedging derivatives held for trading

Telkom manages its interest rate and foreign currency exchange rate risk by entering into interest rate swaps and forward exchange contracts. These
contracts do not qualify for hedge accounting. For IFRS, these financial instruments are classified as held for trading and are therefore all shown as
current assets and liabilities.

For US GAAP, the derivatives that have a maturity of more than one year from balance sheet date are classified as non-current.

The table below shows the maturities of the hedging derivatives (Rm):

Assets
Maturing within the next twelve months

154

Maturing beyond twelve months

102

Liabilities
Maturing within the next twelve months

172

Maturing beyond twelve months

33

p) Discounting of trade receivables and payables

Under US GAAP, receivables and payables arising from transactions with customers or suppliers in the normal course of business which are due in
customary trade terms not exceeding approximately one year, are not discounted. Under IFRS, Telkom discounts receivables and payables where the
discount effect is considered to be material. Receivables that are due in less than one year are therefore discounted for IFRS. The difference is not
significant and no adjustment has been made.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-93

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

44. US GAAP information

(continued)

Additional US GAAP disclosures
Intangible assets

Aggregate amortisation expense for other identifiable intangible assets under US GAAP for the year ended March 31, 2006 is R560 million. The
estimated amortisation expense for the years ending March 31 is as follows:

Rm

2007

418

2008

395

2009

356

2010

279

2011

223

Share-based compensation

Telkom conditional share plan
The Group adopted IFRS2 ‘Share-based Payments’ with prospective effect from April 1, 2004. This has resulted in the Group complying with SFAS123
using the prospective method allowed by SFAS148 and as such there is no reconciling differences on the Telkom Conditional Share Plan.

Diabo Share Scheme
Due to the prospective method of adoption of SFAS123 the Group continues to account for stock options granted before April 1, 2004 in accordance
with APB Opinion No. 25 ‘Accounting for Stock Issued to Employees’ (APB25) and related interpretations.

Under APB25, Telkom must account for options granted by a principal shareholder to its employees as a result of their employment with Telkom.
Accordingly, the excess of the market price of the underlying stock at the date of grant over the exercise price of the employee options, is recognised
as a shareholder capital contribution and compensation expense over the vesting period in the financial statements of the Group. The Group recognises
this compensation expense for its graded vesting stock options on a straight-line basis over the vesting period of the shares.

Options granted under the Diabo stock option plan established by the principal shareholder, the Government of South Africa, are exercisable at the
price of R33.81, expire three years from the date of grant, are not transferable other than on death, and are exercisable in four equal annual
installments commencing on the date of grant, the first payments having been made six months from Initial Public Offering (‘IPO’) date and on the
first anniversary date of the scheme.

The compensation expense, applicable to current and qualifying former employees, is calculated as the difference between the option price and the
share price on IPO date since it all relates to compensation for past service. Since the option price exceeded the share price on that date, no
compensation expense is recorded.

Pro forma information regarding net income and earnings per share is required by SFAS123, as amended by SFAS148, and has been determined as
if the Group had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was
estimated at the date of grant using a binomial option pricing model with the following weighted-average assumptions:

• risk-free interest rates based on government zero coupon curve of 13.2% (first option), 12.7% (second option), 11.6% (third option) and 11.3%

(last option date);

• dividend yields of 3,33% p.a. (no dividend yield for the first year);

• volatility factors of the expected market price of the company’s common stock of 34% p.a.

An actuarially adjusted binomial valuation method has been used that builds up a full binomial tree of possible share prices whenever the option is
exercised, and discounts these to establish the fair value of the option granted.

For purposes of pro forma disclosures, the estimated fair value of the options was recognised as a once-off charge of R46 million in 2003 to operating
expenses as allowed by the SEC for options granted in connection with privatising governmental entities.

A summary of the Group’s stock option activity under the Diabo Share Scheme and related information for the year ended March 31, 2006 follows:

2004

2005

2006

Outstanding number at the beginning of the year

11,140,636

5,570,318

2,785,159

Granted during the year

–

–

–

Exercised during the year

5,570,318

2,785,159

2,785,159

Outstanding at the end of the year

5,570,318

2,785,159

–

Exercisable at the end of the year

–

–

–

The last options have been exercised as at March 31, 2006 when the Diabo Share Scheme expired.

F-94

44. US GAAP information

(continued)

Additional US GAAP disclosures

(continued)

Restrictions on dividend payouts

All distributable earnings are available for distribution based on the Group’s dividend policy. The Board of directors of Telkom decides on an annual
basis the amount of earnings to be reinvested in the operations and the amount of any remaining funds that are available for distribution to
shareholders.

Retained earnings of our investee, Vodacom, are restricted, since we require the consent of other shareholders in order to require Vodacom to declare
dividends. Restricted retained earnings included in the March 31, 2006 balance amount to R4,284 million (2005: R4,029 million; 2004: R3,918 million).

Telkom has invested funds in a Cell Captive, which will be used to fund future post-retirement medical aid costs. These funds will be used for that
purpose only and are therefore not distributable.

The following is a reconciliation of retained earnings per US GAAP to the amount of unrestricted retained earnings:

Restated

Restated

2004

2005

2006

2006*

Rm

Rm

Rm

US$m

Retained earnings per US GAAP

12,425

17,893

21,959

3,570

Share of non-distributable retained earnings in significant investee

(3,918)

(4,029)

(4,284)

(697)

Cell Captive investment

(237)

(517)

(1,233)

(200)

Unrestricted retained earnings under US GAAP

8,270

13,347

16,442

2,673

Statement of income classification items

US GAAP requires the disclosure of certain income statement items
Revenues from other services

(22,746)

(24,384)

(23,579)

(3,834)

Income from rentals

(629)

(662)

(756)

(123)

Net sales of tangible products

(208)

(194)

(210)

(34)

Revenue from SA Government

(1,866)

(1,987)

(2,106)

(342)

Revenue from other related parties

(5,092)

(3,660)

(5,384)

(876)

Total operating revenue

(30,541)

(30,887)

(32,035)

(5,209)

Total revenue from services

(30,333)

(30,693)

(31,824)

(5,175)

– Subscription and connection

(4,915)

(5,168)

(5,595)

(910)

– Domestic (local and long distance)

(9,680)

(9,323)

(8,915)

(1,450)

– Fixed to mobile

(7,321)

(7,302)

(7,647)

(1,243)

– International outgoing

(1,312)

(1,135)

(1,001)

(163)

– Interconnection

(1,643)

(1,546)

(1,654)

(269)

– Data

(5,032)

(5,810)

(6,674)

(1,085)

– Directories and other

(430)

(409)

(338)

(55)

Revenue from product sales

(208)

(194)

(211)

(34)

Total operating revenue

(30,541)

(30,887)

(32,035)

(5,209)

Costs of services

14,928

13,941

12,888

2,096

Cost of sales related to services

93

75

83

14

Cost of tangible products sold

201

167

257

42

Operating expenses of other income and SG&A

7,907

8,162

8,175

1,329

Operating lease expenses

878

757

783

127

Total operating expense

24,007

23,102

22,186

3,608

Net interest and amortisation of debt expense#

(3,170)

(1,862)

(1,087)

(177)

# Net interest and amortisation of debt expense include interest received from debtors of R134 million (2005: R127 million; 2004: R157 million) which for IFRS was

classified as Other Income.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-95

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

Restated

Restated

2004

2005

2006

2006*

Rm

Rm

Rm

US$m

44. US GAAP information

(continued)

Balance Sheet Classification Items

US GAAP requires the disclosure of certain balance sheet items

Amounts payable to controlled companies

(115)

(277)

(120)

(20)

Amounts payable to affiliates

(510)

(491)

(520)

(85)

Trade creditors

(1,468)

(1,479)

(1,482)

(241)

Restructuring liability

(97)

(606)

(3)

–

Other amounts payable

(2,148)

(1,791)

(1,716)

(279)

Total payable

(4,338)

(4,644)

(3,841)

(625)

Other payables include the following broad categories of payables: Financial instrument payables, sundry provisions, accruals and VAT payable.

Provisions

The following restructuring provision has been included in other liabilities in the balance sheet items as disclosed in the IFRS financial statements for
the Group:

2004

2005

2006

2006*

Rm

Rm

Rm

US$m

Restructuring provision
Opening balance

–

97

606

98

Movement in provision

302

961

85

14

Workforce reduction payments

(205)

(452)

(688)

(112)

Closing balance restructuring liability

97

606

3

–

New US GAAP standards adopted in 2006

On April 1, 2005, the Group adopted EITF Issue 03-6 ‘Participating Securities and the Two-Class Method under FASB Statement No. 128 Earnings
per Share.’ (‘EITF03-6’) The consensus addresses how to determine whether a security should be considered a participating security for purposes of
computing earnings per share and how earnings should be allocated to a participating security when using the two-class method for computing basic
earnings per share. The adoption of this consensus did not have any impact on the calculation of earnings per share.

In June 2005, the Emerging Issues Task Force reached a consensus in EITF Issue 05-6 ‘Determining the Amortisation Period for Leasehold
Improvements Purchased after Lease Inception or Acquired in a Business Combination’ (‘EITF05-6’) that leasehold improvements acquired in a
business combination or purchased subsequent to the inception of the lease should be amortised over the shorter of the useful life of the asset or the
lease term (that includes reasonably assured lease renewals as determined on the date the leasehold improvements are acquired). The consensus is
effective for leasehold improvements acquired in periods beginning after July 1, 2005. The adoption of EITF05-6 did not have a material impact on
the Group’s consolidated financial position or results of operations.

In March 2005, the FASB issued FASB Interpretation No. 47 ‘Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB
Statement No. 143’ (‘FIN47’). FIN47 clarifies that conditional asset retirement obligations meet the definition of liabilities and should be recognised
when incurred if their fair values can be reasonably estimated. The Interpretation is effective no later than December 31, 2005. The adoption of
FIN47 did not have a material impact on the Groups’ consolidated financial position or results of operations.

F-96

44. US GAAP information

(continued)

Recently issued accounting standards

In December 2004, the FASB issued SFAS123 (revised 2004) ‘Share-Based Payments’ (‘SFAS123R’). This statement eliminates the option to apply
the intrinsic value measurement provisions of APB25 ‘Accounting for Stock Issued to Employees’ to stock compensation awards issued to employees.
Rather, SFAS123R requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on
the grant date fair value of the award. That cost will be recognised over the period during which an employee is required to provide services in
exchange for the award. SFAS123R provides a choice of adoption between the modified retrospective method and the modified prospective method.
Telkom expects to choose the modified prospective method where the standard will be applied to all awards granted after the effective date of all
unvested awards from prior period grants and to awards modified, repurchased, or cancelled after that date. For public entities that do not file as
small business issuers, the standard is effective for the first annual reporting period that begins after June 15, 2005. The Group is currently evaluating
the impact of SFAS123R on its results of operations, financial position and cash flows.
In March, 2005 the Securities and Exchange Commission (‘SEC’) issued Staff Accounting Bulletin No 107: ‘Share-based Payments’ (‘SAB 107’).
SAB107 summarises the views of the SEC staff regarding the interaction between SFAS123R and certain SEC rules and regulations, and provides the
staff’s views regarding the valuation of share-based payment arrangements for public companies. The Group does not expect the adoption of SAB107
to have a material effect on the consolidated financial position or the results of operations.

On November 24, 2004, the FASB issued SFAS151 ‘Inventory Costs, an amendment of ARB No. 43, Chapter 4’ (‘SFAS151’). The amendments
made by SFAS151 clarify that ‘abnormal’ amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be
recognised as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the
production facilities. SFAS151 is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working
with the International Accounting Standards Board (‘IASB’) toward development of a single set of high-quality accounting standards. The FASB and
the IASB noted that ARB43, Chapter 4 and IAS2, Inventories, are both based on the principle that the primary basis of accounting for inventory is
cost. Both of these accounting standards also require that ‘abnormal’ amounts of idle freight, handling costs, and wasted materials be recognised as
period costs; however, the Boards noted that differences in the wording of the two standards could have led to the inconsistent application of those
similar requirements. The FASB concluded that clarifying the existing requirements in ARB43 by adopting language similar to that used in IAS2 is
consistent with its goals of improving financial reporting in the United States and promoting convergence of accounting standards internationally. The
guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Group does not expect the adoption of
SFAS151 to have a material impact on its operations, financial position or cash flows.

In December 2004, the FASB issued Statement 153 ‘Exchanges of Non-monetary Assets – an amendment of APB Opinion No. 29’ (‘SFAS153’).
The guidance in Accounting Principles Board Opinion 29 (‘APB29’), ‘Accounting for Non-monetary Transactions,’ is based on the general principle that
exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB29 included certain
exceptions to that principle. SFAS153 amends APB29 to eliminate the narrow exception for non-monetary exchanges of similar productive assets and
replaces it with a broader exception for exchanges of non-monetary assets that do not have commercial substance (that is, transactions where future
cash flows are not expected to significantly change as a result of the exchange). The Group will adopt the provisions of SFAS153 for non-monetary
asset exchange transactions entered into after April 1, 2006. The Group does not expect the adoption of SFAS153 to have a material impact on its
consolidated financial position or results of operations.

In May 2005, the FASB issued Statement 154 ‘Accounting Changes and Error Corrections’ (‘SFAS154’). Statement 154 replaces APB Opinion No. 20
‘Accounting Changes’ and FASB Statement No. 3 ‘Reporting Accounting Changes in Interim Financial Statements.’ SFAS154 applies to all voluntary
changes in accounting principle and changes the accounting for and reporting of a change in accounting principle, and requires the retrospective
application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS154 is effective for
accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS154 will only have an
effect when the Group implements changes in accounting principle that are addressed by the standard or corrects accounting errors in future periods.

In February 2006, the FASB issued SFAS155 ‘Accounting for certain hybrid financial instruments’ (‘SFAS155’). SFAS155 amends SFAS133
‘Accounting for derivative instruments and hedging activities’, and SFAS140 ‘Accounting for transfers and servicing of financial assets and
extinguishment of liabilities’. It further resolves issues addressed in SFAS133 implementation issue No. D1 ‘Application of statement 133 to beneficial
interest in securitised financial assets’. SFAS155 provides a fair value measurement option for certain hybrid financial instruments that contain an
embedded derivative that would otherwise require bifurcation and requires that beneficial interest in securitised financial asset be analysed to
determine whether there are free standing derivatives or whether there are hybrid instruments that contain embedded derivatives requiring bifurcation.
SFAS155 also provides clarification relating to some aspects of accounting for derivatives. SFAS155 is effective for all financial instruments acquired
or issued after the first fiscal year beginning after September 15, 2006. The Group is currently evaluating the impact of SFAS155 on its financial
position, results of operations and cash flows.

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

F-97

Notes to the consolidated annual financial statements

(continued)

for the three years ended March 31, 2006

44. US GAAP information

(continued)

Recently issued accounting standards

(continued)

In March 2006, the FASB issued SFAS156 ‘Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140’ (‘SFAS156’).
SFAS156 amends SFAS140 ‘Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities’, with respect to the
accounting for separately recognised servicing assets and servicing liabilities. SFAS156 requires a company to recognise a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract principally in a transfer of the servicer’s
financial assets that either meets the requirements for sale accounting, or is to a qualifying special-purpose entity in a guaranteed mortgage
securitisation in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities
in accordance with SFAS115 ‘Accounting for Certain Investments in Debt and Equity Securities’. SFAS156 requires all separately recognised servicing
assets and servicing liabilities to be initially measured at fair value, if practicable, and permits a company to choose to subsequently measure each
class of separately recognised servicing assets and servicing liabilities using either a specified amortisation method or a specified fair value
measurement method. SFAS156 is applicable to all transactions entered into in fiscal years that begin after September 15, 2006. The Group is
currently evaluating the impact of SFAS156 on its results of operations, financial position and cash flows.

In October 2005, the FASB issued FSP FAS123R 2 ‘Practical Accommodation to the Application of Grant Date as Defined in FASB Statement
No. 123R’. The FSP provides an exception to the application of the concept of ‘mutual understanding’ in the determination of whether a grant date
has occurred. The exception permits companies to measure compensation cost for equity awards to employees on the Board approval date if certain
conditions are met, provided that the communication to the employee occurs within a ‘relatively short period of time’ from the approval date. The
Group will adopt the provisions of this FSP to new plans as from April 1, 2006. The Group does not expect the adoption of this FSP to have a material
impact on its consolidated financial position or results of operations.

In October 2005, the FASB issued FSP FAS123R 3 ‘Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards’
which provides a simplified alternative method when a company transitions to SFAS123(R). The alternative method significantly simplifies the
calculation of the beginning pool. The FSP provides guidance for the presentation of excess tax benefits in the statement of cash flows for companies
that elect to adopt the simplified alternative method of calculating the pool. The guidance in the FSP is effective on November 10, 2005. The FSP
allows up to one year from the Group’s initial adoption of SFAS123(R) on April 1, 2006 to evaluate the available transition alternatives. The Group
is in the process of assessing the impact of the allowed alternatives.

In July 2005, the FASB issued FSP APB18-1 ‘Accounting by an Investor for its Proportionate Share of Other Comprehensive Income of an Investee
Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence’. The FSP requires that if an
investor loses significant influence over an investee, the investor’s proportionate share of the investee’s equity adjustments for Other Comprehensive
Income should be offset against the carrying value of the investment at the time significant influence is lost by the investor. The Group will adopt the
provisions of FSP APB18-1 in the reporting period beginning on April 1, 2006. The Group does not expect the adoption of FSP APB18-1 to have a
material impact on its consolidated financial position or results of operations.

In October 2005, the FASB issued FSP FAS13-1 ‘Accounting for Rental Costs Incurred during a Construction Period’. The FSP concludes that rental
costs associated with ground or building operating leases that are incurred during a construction period should be recognised as rental expense. The
Group will apply the guidance in this FSP to the first reporting period beginning after December 15, 2005. The Group does not expect the adoption
of this FSP to have a material impact on its consolidated financial position or results of operations.

In November 2005, the FASB issued FSP No’s FAS115-1 and FAS124-1 ‘The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments’, which effectively nullifies the requirements of EITF Issue No. 03-1. This FSP provides guidance on determining when an
investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. Additionally, the
FSP provides accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about
unrealised losses that have not been recognised as other-than-temporary impairments. The Group will adopt the provisions of this FSP in the reporting
period beginning April 1, 2006. The Group does not expect the adoption of this FSP to have a material impact on its consolidated financial position
or results of operations.

F-98

CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

Report of the Independent Auditors and

Independent Registered Public Accounting Firm

F-100

Consolidated Income Statements

F-101

Consolidated Balance Sheets

F-102

Consolidated Statements of Changes in Equity

F-103

Consolidated Cash Flow Statements

F-104

Notes to the Consolidated Annual Financial Statements

F-105

F-99

REPORT OF THE INDEPENDENT AUDITORS AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM*

TO THE MEMBERS OF VODACOM GROUP (PROPRIETARY) LIMITED

We have audited the accompanying consolidated balance sheets of Vodacom Group (Proprietary) Limited and subsidiaries (“the
Group”) as of March 31, 2006 and the related consolidated income statements, statements of changes in equity and cash flows for
the three years in the period then ended, set out on pages F-101 to F-193. These consolidated annual financial statements are the
responsibility of the Group’s directors. Our responsibility is to express an opinion on these consolidated annual financial statements
based on our audit.

We conducted our audit in accordance with International Standards on Auditing and the standards of the Public Company
Accounting Oversight Board (“PCAOB”) (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. The Group is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly,
we express no such opinion. 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 audit provides a reasonable
basis for our opinion.

In our opinion, the consolidated annual financial statements present fairly, in all material respects, the financial position of the
Group as of March 31, 2006, 2005 and 2004, and the results of its operations and its cash flows for the three years then ended,
in conformity with International Financial Reporting Standards (“IFRS”) and in the manner required by the Companies Act in South
Africa, 1973.

Note 23 to the consolidated annual financial statements discloses certain restatements. These restatements relate to the recognition
of operating lease payments on a straight-line basis, an investment property which has been reclassified to property, plant and
equipment, the non-current portion of the interest rate swap asset which has been reclassified to current assets, and computer
software which was previously classified as part of property, plant and equipment. These restatements do not impact the Group’s
results, with the exception of the operating lease restatement, or cash flow information for these years.

IFRS vary in certain significant respects from accounting principles generally accepted in the United States of America (“US GAAP”).
Information relating to the nature and effect of such differences is presented in Note 45 to the consolidated annual financial statements.

Deloitte & Touche
Registered Accountants and Auditors

Per S Strydom
Partner

Pretoria,
South Africa
June 2, 2006

* As defined in Rule 1001 of the PCAOB rules included in PCAOB Release No. 2003-007

F-100

F-101

CONSOLIDATED INCOME STATEMENTS

for the three years ended March 31, 2006

Revenue

1

22,855.2

27,315.3

34,042.5

Other operating income

57.6

63.8

125.1

Direct network operating cost

(12,435.1)

(14,617.8)

(18,297.2)

Depreciation

4

(2,316.9)

(2,413.6)

(2,651.6)

Staff expenses

(1,331.6)

(1,652.9)

(2,042.1)

Marketing and advertising expenses

(702.0)

(767.3)

(976.9)

General administration expenses

(687.2)

(751.3)

(1,042.7)

Amortisation of intangible assets

2

(214.8)

(429.6)

(344.2)

Impairment of assets

3

–

(268.4)

52.8

Profit from operations

4

5,225.2

6,478.2

8,865.7

Interest, dividends and other financial income

5

656.6

662.8

659.3

Finance costs

6

(1,107.5)

(641.7)

(1,318.2)

Profit before taxation

4,774.3

6,499.3

8,206.8

Taxation

7

(1,722.0)

(2,613.0)

(3,077.8)

Net profit

3,052.3

3,886.3

5,129.0

Attributable to:
Equity shareholders

3,026.1

3,855.5

5,012.3

Minority interests

26.2

30.8

116.7

2004

2005

2006

R

R

R

Basic and diluted earnings per share

32

302,610

385,550

501,230

Dividend per share

32

210,000

340,000

450,000

2004

2005

2006

Restated

Restated

Notes

Rm

Rm

Rm

F-102

ASSETS
Non-current assets

12,851.3

13,888.4

16,079.2

Property, plant and equipment

8

10,912.5

11,576.9

13,386.6

Investment properties

9

9.9

–

–

Intangible assets

10

1,002.7

1,644.3

1,954.9

Financial assets

11

222.4

93.3

92.1

Deferred taxation

12

277.8

308.1

297.6

Deferred cost

403.8

236.9

311.2

Lease assets

22.2

28.9

36.8

Current assets

7,322.7

8,706.4

8,688.6

Deferred cost

859.8

428.3

451.8

Short-term financial assets

11

354.3

187.1

149.3

Inventory

13

288.5

479.5

454.3

Trade and other receivables

14

3,450.0

3,621.4

4,487.1

Cash and cash equivalents

31

2,370.1

3,990.1

3,146.1

Total assets

20,174.0

22,594.8

24,767.8

EQUITY AND LIABILITIES
Equity

7,604.2

7,887.9

8,672.3

Ordinary share capital

15

*

*

*

Retained earnings

7,836.1

8,057.2

8,567.3

Non-distributable reserves

16

(324.9)

(298.0)

(178.3)

Minority interests

17

93.0

128.7

283.3

Non-current liabilities

2,317.5

3,233.1

2,236.6

Interest-bearing debt

19

1,216.6

2,213.5

819.2

Deferred taxation

12

410.1

472.1

602.3

Deferred revenue

403.8

240.7

320.3

Provisions

22

178.4

184.4

372.3

Operating lease liabilities

108.6

122.4

122.5

Current liabilities

10,252.3

11,473.8

13,858.9

Trade and other payables

20

3,862.1

4,830.8

5,104.7

Deferred revenue

1,883.4

1,411.4

1,604.5

Taxation payable

852.0

632.6

630.2

Non interest-bearing debt

21

4.3

4.3

4.3

Short-term interest-bearing debt

19

839.9

381.6

1,645.5

Short-term provisions

22

473.7

595.0

623.0

Dividends payable

1,500.0

1,800.0

2,800.0

Derivative financial liabilities

39

64.5

1.0

60.9

Bank borrowings

31

772.4

1,817.1

1,385.8

Total equity and liabilities

20,174.0

22,594.8

24,767.8

* Amounts less than R50 000

2004

2005

2006

Restated

Restated

Notes

Rm

Rm

Rm

CONSOLIDATED BALANCE SHEETS

as at March 31, 2006

F-103

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

for the three years ended March 31, 2006

Balance at March 31, 2003

– previously reported

*

6,962.8

(141.0)

6,821.8

88.0

6,909.8

Changes in accounting policies,
reclassifications and restatements

23

–

(53.6)

–

(53.6)

–

(53.6)

Balance at March 31, 2003

– restated

*

6,909.2

(141.0)

6,768.2

88.0

6,856.2

Net profit for the year

–

3,026.1

–

3,026.1

26.2

3,052.3

Dividends declared

32

–

(2,100.0)

–

(2,100.0)

–

(2,100.0)

Contingency reserve

16

–

0.8

(0.8)

–

–

–

Net gains and losses not recognised
in the consolidated income statement

16,17

Foreign currency translation reserve

–

–

(194.0)

(194.0)

(21.2)

(215.2)

Foreign currency translation reserve
– deferred taxation

–

–

10.9

10.9

–

10.9

Balance at March 31, 2004

– restated

*

7,836.1

(324.9) 7, 511.2

93.0

7,604.2

Net profit for the year

–

3,855.5

–

3,855.5

30.8

3,886.3

Dividends declared

32

–

(3,400.0)

–

(3,400.0)

(3.8) (3,403.8)

Contingency reserve

16

–

(1.0)

1.0

–

–

–

Acquired reserves from the minorities
of Vodacom Congo (RDC) s.p.r.l.

30

–

(233.4)

82.1

(151.3)

–

(151.3)

Acquisition of subsidiary

29

–

–

–

–

10.1

10.1

Revaluation of available-for-sale investments

16

–

–

0.2

0.2

0.1

0.3

Net gains and losses not recognised in the
consolidated income statement

16,17

Foreign currency translation reserve

–

–

(56.4)

(56.4)

(1.5)

(57.9)

Balance at March 31, 2005

– restated

*

8,057.2

(298.0)

7,759.2

128.7

7,887.9

Net profit for the year

–

5,012.3

–

5,012.3

116.7

5,129.0

Dividends declared

32

–

(4,500.0)

–

(4,500.0)

(0.9) (4,500.9)

Contingency reserve

16

–

(2.2)

2.2

–

–

–

Acquisition of subsidiary

29

–

–

–

–

46.5

46.5

Minority shares of VM, S.A.R.L

–

–

–

–

8.0

8.0

Revaluation of available-for-sale investments

16

–

–

(0.2)

(0.2)

(0.1)

(0.3)

Net gains and losses not recognised in the
consolidated income statement

16,17

Foreign currency translation reserve

–

–

117.7

117.7

(15.6)

102.1

Balance at March 31, 2006

*

8,567.3

(178.3) 8,389.0

283.3

8,672.3

* Amounts less than R50 000

Attributable to equity shareholders

Share

Retained

Non-dis-

Total

Minority

Total

capital

earnings

tributable

interests

equity

reserves

Notes

Rm

Rm

Rm

Rm

Rm

Rm

CONSOLIDATED CASH FLOW STATEMENTS

for the three years ended March 31, 2006

F-104

CASH FLOW FROM OPERATING ACTIVITIES
Cash receipts from customers

22,175.5

27,078.8

33,132.7

Cash paid to suppliers and employees

(14,578.8)

(17,066.8)

(22,042.4)

Cash generated from operations

24

7,596.7

10,012.0

11,090.3

Finance costs paid

25

(512.3)

(259.2)

(446.4)

Interest, dividends and other financial income received

26

368.7

246.8

338.6

Taxation paid

27

(1,463.3)

(2,744.4)

(2,980.3)

Dividends paid – equity shareholders

(1,200.0)

(3,100.0)

(3,500.0)

Dividends paid – minority shareholders

–

(5.2)

(0.9)

Net cash flows from operating activities

4,789.8

4,150.0

4,501.3

CASH FLOW FROM INVESTING ACTIVITIES
Additions to property, plant and equipment

28

(2,813.8)

(3,048.0)

(4,346.3)

Proceeds on disposal of property, plant and equipment

5.0

20.1

29.6

Acquisition of intangible assets

10

(121.1)

(205.4)

(442.1)

Proceeds on disposal of intangible assets

–

–

1.6

Acquisition of subsidiaries

29

149.6

(289.8)

(0.4)

Change in business combinations

29

–

–

0.3

Acquired cash from Vodacom Congo (RDC) s.p.r.l.

30

–

12.9

–

Other investing activities

(219.5)

136.0

(33.5)

Net cash flows utilised in investing activities

(2,999.8)

(3,374.2)

(4,790.8)

CASH FLOW FROM FINANCING ACTIVITIES
Shareholder loans repaid

(920.0)

–

–

Interest-bearing debt incurred

186.9

1,165.3

32.3

Interest-bearing debt repaid

(55.6)

(1,332.3)

(89.7)

Finance lease capital repaid

(9.6)

(28.1)

(50.2)

Net cash flows utilised in financing activities

(798.3)

(195.1)

(107.6)

NET (DECREASE)/INCREASE IN CASH AND
CASH EQUIVALENTS

991.7

580.7

(397.1)

Cash and cash equivalents at the beginning of the year

647.5

1,597.7

2,173.0

Effect of foreign exchange rate changes

(41.5)

(5.4)

(15.6)

CASH AND CASH EQUIVALENTS
AT THE END OF THE YEAR

31

1,597.7

2,173.0

1,760.3

2004

2005

2006

Restated

Restated

Notes

Rm

Rm

Rm

F-105

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

March 31, 2006

BASIS OF PREPARATION
These consolidated annual financial statements of Vodacom Group (Proprietary) Limited (“the Group”) have been prepared in accordance
with International Financial Reporting Standards (“IFRS”) and have been prepared on the historical cost basis, except for financial assets
and financial liabilities (including derivative instruments) recorded at fair value. The consolidated annual financial statements have been
presented in South African Rands, as this is the currency in which the majority of the Group’s transactions are denominated.

The principal accounting policies are consistent in all material respects with those applied in the previous period, except where
disclosed elsewhere (Note 23).

The following are the principal accounting policies adopted by the Group in the preparation of these consolidated annual financial
statements:

ACCOUNTING POLICIES
A.

Consolidation

A.1

Basis of consolidation
The consolidated annual financial statements include the consolidated financial position, results of operations and cash flows
of Vodacom Group (Proprietary) Limited and its subsidiaries, both foreign and domestic, up to March 31, 2006.

Joint ventures are included using the proportionate consolidation method, except when the investment is classified as held
for sale, in which case it is accounted for under IFRS 5: Non-current Assets Held for Sale and Discontinued Operations
(“IFRS 5”). The Group’s share of the assets, liabilities, income, expenses and cash flows of joint ventures are combined on
a line-by-line basis with similar items in the consolidated annual financial statements.

Minority interests are separately presented in the consolidated balance sheets and consolidated income statements.

Goodwill on the acquisition of subsidiaries and joint ventures is accounted for in accordance with the Group’s accounting
policy for intangible assets set out below.

A.2 Businesscombinations

• Acquisition of a business

Business combination acquisitions are accounted for using the purchase method of accounting, whereby the acquisition
is accounted for at its cost plus any costs directly attributable to the acquisition. Cost represents the cash or cash
equivalents paid or the fair value or other consideration given, at the date of the acquisition. Business combinations
include the acquisition of subsidiaries and joint ventures.

On acquisition, the identifiable assets, liabilities and contingent liabilities of the relevant subsidiaries or joint ventures,
are measured based upon the Group’s interest in their fair value at the date of acquisition, except for non-current assets
(or disposal groups) that are classified as held-for-sale in accordance with IFRS 5, which are recognised and measured
at fair value less costs to sell. The interest of minority shareholders is recorded at the minority’s share of the fair value of
the identifiable assets, liabilities and contingent liabilities. Subsequently, any losses attributable to minority shareholders
in excess of their interest, is allocated against the interest of the Group.

• Disposals

On subsequent disposal, the profit or loss on disposal is the difference between the selling price and the fair value of net
assets and liabilities disposed of, adjusted for any related carrying amount of goodwill in accordance with the Group’s
accounting policies.

A.3Subsidiaries

Subsidiaries are those entities controlled by the Group. Control is presumed to exist where the Group has an interest of
more than one half of the voting rights and the power to control the financial and operating activities of the entities so
as to obtain benefits from its activities. All subsidiaries are consolidated.

A.         Consolidation(continued)

A.3       Subsidiaries (continued)

Intercompany balances and transactions, and resulting unrealised profits between Group companies, are eliminated in full
on consolidation.

Where necessary, accounting policies of subsidiaries are adjusted to ensure that the consolidated annual financial
statements are prepared using uniform accounting policies.

Investments in subsidiaries are consolidated from the date on which the Group has power to exercise control, up to the date
on which power to exercise control ceases.

A.4

Joint ventures
Joint ventures, for the purpose of these consolidated annual financial statements, are those entities in which the Group has
joint control through a contractual arrangement with one or more other venturers.

Investments in joint ventures are proportionately consolidated from the date on which the Group has power to exercise joint
control, up to the date on which power to exercise joint control ceases.

The Group’s proportionate share of intercompany balances and transactions, and resulting unrealised profit or losses,
between Group companies and jointly controlled entities are eliminated on consolidation.

B.

Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any.
Land is not depreciated and is recorded at cost less accumulated impairment losses, if any.

The cost of property, plant and equipment includes all directly attributable expenditure incurred in the acquisition,
establishment and installation of such assets so as to bring them to the location and condition necessary for it to be
capable of operating in the manner intended by management. Interest costs are not capitalised.

Depreciation is calculated so as to write off the cost of property, plant and equipment on a straight-line basis, over the
estimated useful lives to the estimated residual value. Useful lives and residual values are reviewed on an annual basis.
Residual values are measured as the estimated amount currently receivable for an asset if the asset were already of the
age and condition expected at the end of its useful life. Each significant component included in an item of property, plant
and equipment is separately recorded and depreciated.

Depreciation commences when the asset is ready for its intended use (in the case of infrastructure assets this is deemed to
be the date of acceptance). Depreciation of an asset ceases at the earlier of the date the asset is classified as held for sale
in accordance with IFRS 5 or the date the asset is derecognised. Depreciation is not ceased when assets are idle.

General purpose buildings and special purpose buildings are generally classified as owner-occupied. They are therefore
held at cost and depreciated as property, plant and equipment and not regarded as investment properties.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or,
where shorter, the term of the relevant lease if there is no reasonable certainty that the Group will obtain ownership by the
end of the lease term.

Maintenance and repairs, which neither materially add to the value of the assets nor appreciably prolong their useful lives,
are recognised as an expense in the period incurred. Minor plant and equipment items are also recognised as an expense
during the period incurred.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-106

F-107

B.

Property, plant and equipment (continued)
Profits or losses on the retirement or disposal of property, plant and equipment, determined as the difference between
the actual proceeds and the carrying amount of the assets, are recognised in the consolidated income statement in the
period in which they occur.

Where a network infrastructure site lease contains a restoration clause, or where historical experience indicates that
restoration costs will be incurred, a liability for the site restoration costs is recorded. The liability recorded is measured at
the present value of the estimated future restoration costs to be incurred. The present value of the liability is capitalised to
the underlying infrastructure asset to which the restoration costs relate at the inception of the restoration obligation. These
amounts are amortised over the estimated useful life of the related infrastructure asset. The restoration liability is accredited
to its future value over the lease period.

Changes in the measurement of an existing liability that result from changes in the estimated timing or amount of the outflow
of resources required to settle the liability, or a change in the discount rate, are accounted for as follows:

•    changes in the liability are added, or deducted from, the cost of the reflected asset. If the amount deducted exceeds the

carrying amount of the asset, the excess is recognised immediately in profit and loss.

C.         Investment properties

Investment properties, which are properties held to earn rentals and/or for capital appreciation, are stated at cost less
accumulated depreciation and accumulated impairment losses, if any.

Depreciation is calculated so as to write off the cost of the investment property on a straight-line basis, over its estimated
useful live to its estimated residual value. Depreciation commences when the property is ready for its intended use. The
estimated useful lives of depreciable properties are disclosed under property, plant and equipment and can be general
purpose buildings or special purpose buildings.

D.         Intangible assets

Intangible assets are stated at cost less accumulated amortisation and accumulated impairment losses, if any.

The following are the main categories of intangible assets:

D.1

Intangible assets with an indefinite useful life
Intangible assets with an indefinite useful life are not amortised but instead are tested for impairment on an annual basis.

•    Goodwill

Goodwill represents the excess of the cost of an acquisition of a subsidiary or joint venture, over the Group’s interest in
the fair value of the identifiable assets and liabilities at the date of acquisition. Goodwill on the acquisition of
subsidiaries and joint ventures is included in intangible assets. Goodwill is tested annually for impairment and carried at
cost less accumulated impairment losses, if any. Impairment losses previously recognised cannot be reversed. Gains and
losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

D.2

Intangible assets with a finite useful life
Intangible assets with a finite useful life are amortised to the consolidated income statement on a straight-line basis over
their estimated useful lives, which are reviewed on an annual basis. Amortisation commences when the intangible asset
is available for use. The residual values of intangible assets are assumed to be zero.

• Licences

Licences, which are acquired to yield an enduring benefit, are capitalised at cost and amortised from the date of
commencement of usage rights over the shorter of the economic life or the duration of the licence agreement.

• Customer bases

Cost of contract customer bases and prepaid customer bases represents the fair value at the acquisition date of mobile
customer bases. Customer bases are amortised on a straight-line basis over their estimated useful lives.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-108

D.

Intangible assets (continued)

D.2

Intangible assets with a finite useful life (continued)
•    Trademarks and brands

Purchased trademarks and brands are capitalised at cost and amortised over their estimated useful lives. Expenditure incurred
to develop, maintain and renew trademarks and brands internally is recognised as an expense in the period incurred.

• Computer software

Computer software that is not considered to form an integral part of any hardware equipment is recorded as intangible
assets. The software is capitalised at cost and amortised over its estimated useful life.

D.3

Intangible assets not available for use
Intangible assets not available for use are not amortised but tested for impairment on an annual basis.

E.

Inventory
Inventory is stated at the lower of cost and net realisable value. Cost is determined by the first-in-first-out method and
comprises all costs of purchase, costs of conversion and other costs incurred in bringing it to its present location and
condition. Net realisable value represents the estimated selling price in the ordinary course of business less all estimated
costs to completion and the estimated costs necessary to make the sale.

The amount of any write-down of inventory to net realisable value and all losses of inventory are recognised as an expense
in the period that the write-down or loss occurs.

F. Foreign currencies

F.1

Transactions and balances
Foreign currency transactions are translated, on initial recognition, at the foreign exchange rate ruling at the date of the
transaction.

Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rate ruling at
settlement date or balance sheet date, whichever occurs first. Exchange differences on the settlement or translation of
monetary assets or liabilities are included in finance costs and finance income in the period in which they arise.

Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing
on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in foreign
currency are not translated. Exchange differences arising on the translation of non-monetary items carried at fair value are
included in profit and loss for the period except for differences arising on the translation of non-monetary items in respect
of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that
gain or loss is also recognised directly in equity.

F.2 Foreignoperations

The annual financial statements of foreign operations are translated into South African Rands for incorporation into the
consolidated annual financial statements. Assets and liabilities are translated at the foreign exchange rates ruling at balance
sheet date. Income, expenditure and cash flow items are translated at the actual foreign exchange rate or average foreign
exchange rates for the period.

All resulting unrealised exchange differences are classified as equity. On disposal, the cumulative amounts of unrealised
exchange differences that have been deferred are recognised in the consolidated income statement as part of the gain or
loss on disposal.

Gains and losses on the translation of equity loans to foreign entities that are intended to be permanent are recognised
in equity if the loans are denominated in one of the entities’ functional currencies. If the loans are denominated in a third
currency, gains or losses are recognised in the consolidated income statement.

Goodwill and intangibles arising on the acquisition of a foreign operation are treated as assets of the foreign operation
and translated at the foreign exchange rates ruling at balance sheet date.

F-109

G.         Taxation
G.1       Current taxation

The charge for current taxation is based on the results for the period and is adjusted for items that are non-assessable or
disallowed. Current taxation is measured at the amount expected to be paid, using taxation rates and laws that have been
enacted or substantively enacted by the balance sheet date.

G.2 Deferredtaxation

Deferred taxation is provided using the balance sheet liability method for all temporary differences arising between the
carrying amounts of assets and liabilities, on the consolidated balance sheet, and their respective taxation bases. Deferred
taxation is not provided on differences relating to goodwill for which amortisation is not deductible for taxation purposes nor
on the initial recognition of assets or liabilities, which is not a business combination and, at the time of the transaction,
affects neither accounting nor taxable profit or loss.

Deferred taxation liabilities are recognised for taxable temporary differences associated with investments in subsidiaries
and joint ventures, except where the company is able to control the timing of the reversal of the temporary differences
and it is probable that it will not reverse in the foreseeable future.

Deferred taxation assets are recognised to the extent that it is probable that future taxable profit will be available against
which the associated unused taxation losses or credits and deductible temporary differences can be utilised.

Deferred taxation assets and liabilities are offset when there is a legally enforceable right to set off current tax assets
against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group
has the intention to settle its current tax assets and liabilities on a net basis.

Exchange differences arising from the translation of foreign taxation assets and liabilities of foreign entities where the
functional currency is different to the local currency are classified as a deferred taxation expense or income.

G.3

Secondary taxation on companies
Secondary taxation on companies (“STC”) is provided for at a rate of 12.5% on the amount of the net dividend declared by
Vodacom Group (Proprietary) Limited. It is recorded as a tax expense when dividends are declared.

STC credits on dividends received are recorded as assets in the period that they arise, limited to the reserves available
for distribution.

H.

Employee benefits

H.1 Post-employmentbenefits

The Group provides defined contribution funds for the benefit of employees, the assets of which are held in separate funds.
The funds are funded by payments from employees and the Group. Contributions to the funds are recognised as an expense
in the period in which the employee renders the related service.

The Group has no liability for contributions to the medical aid of retired employees.

H.2

Short-term and long-term benefits
The cost of all short-term employee benefits, such as salaries, employee entitlements to leave pay, bonuses, medical aid
and other contributions, are recognised during the period in which the employee renders the related service. The Group
recognises the expected cost of bonuses only when the Group has a present legal or constructive obligation to make such
payment and a reliable estimate can be made.

The Group provides long-term incentives to eligible employees payable on termination or retirement. The Group’s liability is
based on an actuarial valuation. Actuarial gains and losses on the long-term incentives are accounted for in the year in
which they arise through profit and loss.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-110

H.

Employee benefits (continued)

H.3

Accumulative termination benefits
Accumulative termination benefits are payable whenever:
•   an employee’s employment is terminated before the normal retirement date; or
•   an employee accepts voluntary redundancy.

The Group recognises termination benefits when it is constructively obliged to either terminate the employment of current
employees according to a detailed formal plan without possibility of withdrawal or to provide termination benefits as a
result of an offer made to encourage voluntary redundancy. If the benefits fall due more than 12 months after balance sheet
date, they are discounted to present value. If the amount can be reasonably estimated, the measurement of termination
benefits is based on the number of employees expected to accept the offer.

H.4 Compensationbenefits

Employees of wholly owned subsidiaries, including executive directors, are eligible for compensation benefits in the form
of a deferred bonus incentive scheme. The benefit is recorded at the present value of the expected future cash outflows.

I.

Revenue recognition
Revenue net of discounts, which excludes value added taxation and sales between Group companies, represents the
invoiced value of goods and services supplied by the Group. The Group measures revenue at the fair value of the
consideration received or receivable. Revenue is recognised only when it is probable that the economic benefits associated
with a transaction will flow to the Group and the amount of revenue, and associated costs incurred or to be incurred, can
be measured reliably. If necessary, revenue is split into separately identifiable components.

The Group invoices its independent service providers for the revenue billed by them on behalf of the Group. The Group,
within its contractual arrangements with its agents, pays them administrative fees. The Group receives in cash, the net
amount equal to the gross revenue earned less the administrative fees payable to the agents.

The recognition of revenue involves estimates and assumptions with regard to the useful life of the customer base. The
estimates and assumptions are based on past experience.

The main categories of revenue and bases of recognition for the Group are:

I.1

Contract products
Contract products that may include deliverables such as a handset and 24-month service are defined as arrangements
with multiple deliverables. The arrangement consideration is allocated to each deliverable, based on the fair value of
each deliverable on a standalone basis as a percentage of the aggregated fair value of the individual deliverables. Revenue
allocated to the identified deliverables in each revenue arrangement and the cost applicable to these identified deliverables
are recognised based on the same recognition criteria of the individual deliverable at the time the product or service is
delivered.

• Revenue from the handset is recognised when the product is delivered.
• Monthly service revenue received from the customer is recognised in the period in which the service is delivered.
• Airtime revenue is recognised on the usage basis. The terms and conditions of the bundled airtime products, where
applicable, allow the carry over of unused airtime. The unused airtime is deferred in full.

• Deferred revenue related to unused airtime is recognised when utilised by the customer. Upon termination of the customer
contract, all deferred revenue for unused airtime is recognised in revenue.

F-111

I.

Revenue recognition (continued)

I.2         Prepaid products

Prepaid products that may include deliverables such as a SIM-card and airtime are defined as arrangements with multiple
deliverables. The arrangement consideration is allocated to each deliverable, based on the fair value of each deliverable on
a standalone basis as a percentage of the aggregated fair value of the individual deliverables. Revenue allocated to the
identified deliverables in each revenue arrangement and the cost applicable to these identified deliverables are recognised
based on the same recognition criteria of the individual deliverable at the time the product or service is delivered.

• Revenue from the SIM-card, representing activation fees, is recognised over the average useful life of a prepaid customer.
• Airtime revenue is recognised on the usage basis. Unused airtime is deferred in full.
• Deferred revenue related to unused airtime is recognised when utilised by the customer. Upon termination of the customer

relationship, all deferred revenue for unused airtime is recognised in revenue.

Upon purchase of an airtime voucher the customer receives the right to make outgoing voice and data calls to the value of
the airtime voucher. Revenue is recognised as the customer utilises the voucher.

Deferred revenue and costs related to unactivated starter packs which do not contain any expiry date, is recognised in the
period when the probability of these starter packs being activated by a customer becomes remote. In this regard the Group
applies a period of 36 months before these revenue and costs are released to the consolidated income statement.

I.3 Datarevenue

Revenue net of discounts, from data services is recognised when the Group has performed the related service and
depending on the nature of the service, is recognised either at the gross amount billed to the customer or the amount
receivable by the Group as commission for facilitating the service.

I.4 Equipmentsales

All equipment sales are recognised only when delivery and acceptance has taken place.

Equipment sales to third party service providers are recognised when delivery is accepted. No rights of return exist on sale
to third party service providers.

I.5

Other revenue and income
• Interconnect and international revenue

Interconnect and international revenue is recognised on the usage basis.

• Dividends

Dividends from investments or subsidiaries are recognised when the right to receive payment has been established.

• Interest

Interest is recognised on a time proportion basis with reference to the principal amount receivable and the effective
interest rate applicable.

J. Leases
J.1 Lease classification

Leases involving property, plant and equipment whereby the lessor provides finance to the lessee with the asset as security,
and where the lessee assumes the significant risks and rewards of ownership of those leased assets, are classified as
finance leases.

Leases of property, plant and equipment to the lessee, under which the lessor effectively retains the significant risks and
rewards of ownership of those leased assets, are classified as operating leases.

A lease of land and buildings is classified by considering the land and buildings elements separately. Minimum lease
payments are allocated between the land and buildings elements in proportion to the relative fair values of the land and
leasehold buildings elements of the lease.

J.          Leases(continued)

J.2

Group as lessee
•    Finance leases

Lessee finance leases are capitalised as property, plant and equipment at their cash equivalent cost and a corresponding
finance lease liability is raised. The cash equivalent cost is the lower of fair value or the present value of the minimum
lease payments, at inception of the lease. Such assets are depreciated in accordance with the accounting policy on
property, plant and equipment stated above.

Lease payments are allocated between lease finance costs and a capital reduction of the finance lease liability. Lease
finance costs are allocated to the consolidated income statement over the term of the lease using the effective interest rate
method, so as to produce a constant periodic rate of return on the remaining balance of the liability for each period.

• Operating leases

Lessee operating lease rental payments are expensed in the consolidated income statement on a straight-line basis over
the lease term.

When an operating lease is terminated before the lease term has expired any payment to the lessor that is required, by
way of penalty, is recognised as an expense in the period in which termination takes place.

J.3

Group as lessor
• Finance leases

Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group’s net investment
in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return
on the Group’s net investment outstanding in respect of the leases.

• Operating leases

Lessor operating lease rental income is recognised in the consolidated income statement on a straight-line basis over
the lease term. Such leased assets are included under property, plant and equipment and depreciated in accordance
with the accounting policy stated above.

K. Derivative instruments

The Group recognises all derivative instruments on the consolidated balance sheet at fair value, including certain derivative
instruments embedded in other contracts. Changes in the fair value of derivative instruments are recorded in earnings as
they arise.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives unless the
risks and characteristics are closely related to those host contracts or the host contracts are carried at fair value.

Where the fair value of derivatives cannot be reliably estimated, the derivatives are recorded at cost.

The Group does not use derivatives for trading or speculative purposes. However, derivatives that are not accounted for as
hedges are classified as trading instruments in current assets.

L.

Financial instruments – other than derivatives

L.1

Initial recognition and measurement
All financial instruments, other than derivatives which are dealt with above, are recognised in the consolidated balance
sheet. Financial instruments are initially recognised when the Group becomes party to the contractual terms of the
instruments and are measured at cost, which is the fair value of the consideration given (financial asset) or received
(financial liability or equity instrument) for it.

Financial liabilities and equity instruments issued by the Group are classified at initial recognition as debt or equity or
compounded instruments in terms of IAS 32: Financial Instruments: Disclosure and Presentation (“IAS 32”) on the basis of
the contractual terms.

Purchases and sales of investments are recognised on trade-date, the date on which the Group commits to purchase or sell
the asset.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-112

F-113

L.

Financial instruments – other than derivatives (continued)

L.2        Financial assets

The Group’s principal financial assets other than derivatives are investments, trade and other receivables and bank and
cash balances:

• Investments

All financial assets not carried at fair value through profit or loss are initially recognised at fair value including directly
attributable transaction costs. Subsequent to initial recognition, these instruments are measured as set out below.

Investments in equity instruments, excluding those in subsidiaries and joint ventures, are classified as available-for-sale
investments and are stated at fair value. Gains and losses from changes in fair value of available-for-sale investments
are recognised directly in equity until the financial asset is disposed of or it is determined to be impaired, at which
time the cumulative gain or loss previously recognised in equity is included in the consolidated income statement.
These investments are classified as current.

Investments acquired principally for the purpose of generating a profit from the short-term fluctuations in price, are
classified as financial assets at fair value through profit and loss and are recorded and measured at fair value. Financial
assets at fair value through profit or loss consists of financial assets held-for-trading or those designated at fair value
through profit or loss at inception. Gains and losses on these investments are recorded in the consolidated income
statement. These investments are classified as current assets if they are either held-for-trading or are expected to be
realised within 12 months of the balance sheet date.

Held-to-maturity investments carried at amortised costs are non-derivative financial assets with fixed or determinable
payments and fixed maturities that the Group has the positive intention and ability to hold to maturity.

• Receivables

Receivables that include interest-bearing investments, investments in finance leases, trade and other receivables, and
other loans are stated at original investment less principal payments, amortisations, and less accumulated impairment
losses. Receivables originated by the Group by providing goods or services directly to the customer are carried at
original invoice amount less provision for doubtful receivables. A provision for doubtful receivables is established when
there is objective evidence that the Group has incurred a loss and will not be able to collect all amounts due according
to the original terms of the receivables. The amount of the provision is the difference between the carrying amount and
the recoverable amount.

The provision for doubtful receivables covers losses where there is objective evidence that the Group incurred a loss at
the balance sheet date. These incurred loss events have been estimated based upon historical patterns of losses in each
component, the credit ratings allocated to the customers and reflecting the current economic climate in which the
borrowers operate. When a receivable is uncollectible, it is written off to the consolidated income statement.
Subsequent recoveries are credited to the consolidated income statement.

• Bank and cash balances

The accounting policy for bank and cash balances is dealt with under cash and cash equivalents set out below.

L.3 Financialliabilities

The Group’s principal financial liabilities other than derivatives are interest-bearing debt, trade and other payables, non-
interest-bearing debt, dividends payable, provisions, bank borrowings and other short-term debt:

• Interest-bearing debt

Interest-bearing debt, including finance lease obligations, is originally recognised at fair value, net of transaction costs
incurred. Interest-bearing debt is subsequently stated at amortised cost, namely original debt less principal payments and
amortisations. Any differences between proceeds and the redemption value are recognised in the consolidated income
statement over the period of the debt using the effective interest rate method. The accounting policy for finance lease
obligations is dealt with under leases set out above.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-114

L.

Financial instruments – other than derivatives (continued)

L.3

Financial liabilities (continued)

Interest-bearing debt is classified as current liabilities unless the Group has an unconditional right to defer settlement of
the liability for at least twelve months after the balance sheet date.

Preference shares, which are mandatory redeemable on a specific date, are classified as liabilities. The dividends on
these preference shares are recognised in the consolidated income statement as interest expense.

•    Trade and other payables

Trade and other payables are stated at their amortised cost.

•    Dividends payable

Dividends payable are stated at amounts declared.

•     Provisions

Provisions are recognised, when the Group has a present legal or constructive obligation resulting from past events, for
which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
and a reliable estimate of the amount of the obligation can be made. A past event is deemed to give rise to a present
obligation if, taking into account all of the available evidence, it is more likely than not that a present obligation exists at
balance sheet date.

The amount recognised as a provision is the best estimate of the expenditure required to settle the present obligation at
balance sheet date, taking into account risks and uncertainties surrounding the provision. Long-term provisions are
discounted to net present value.

•    Bank borrowings and other short-term debt

The accounting policy for bank borrowings and other short-term debt is dealt with under cash and cash equivalents set
out below.

L.4        Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its
liabilities.

The Group’s principal equity instrument is ordinary share capital, which is recorded at the proceeds received, net of any
direct issue costs.

L.5 Derecognition

Financial assets (or a portion thereof) are derecognised when the Group’s rights to the cash flow expire or when the Group
transfers substantially all the risks and rewards related to the financial asset or when the entity loses control of the financial
asset. On derecognition, the difference between the carrying amount of the financial asset and proceeds receivable and
any prior adjustment to reflect fair value that had been reported in equity are included in the consolidated income statement.

Financial liabilities (or a portion thereof) are derecognised when the obligation specified in the contract is discharged,
cancelled or expired. On derecognition, the difference between the carrying amount of the financial liability, including
related unamortised costs, and settlement amounts paid are included in the consolidated income statement.

L.6

Fair value methods and assumptions
The fair value of financial instruments traded in an organised financial market is measured at the applicable quoted prices.

The fair value of financial instruments not traded in an organised financial market, is determined using a variety of methods
and assumptions that are based on market conditions and risks existing at balance sheet date, including independent
appraisals and discounted cash flow methods.

The carrying amounts of financial assets and liabilities with a maturity of less than six months are assumed to approximate
their fair value.

F-115

L.

Financial instruments – other than derivatives (continued)

L.7       Offset

Where a legally enforceable right of offset exists for recognised financial assets and financial liabilities, and there is an intention
to settle the liability and realise the asset simultaneously, or to settle on a net basis, all related financial effects are offset.

M.

Impairment of assets
Goodwill and other assets that have an indefinite useful life and intangible assets not available for use are tested annually
for impairment and when events or changes in circumstances indicate that the carrying amount may not be recoverable.

Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.

An impairment loss is recognised if the recoverable amount of an asset is less than its carrying amount. The impairment loss
is recognised as an expense in the consolidated income statement immediately. The recoverable amount of an asset is the
higher of the asset’s fair value less cost of disposal and its value in use.

The fair value represents the amount obtainable from the sale of an asset in an arm’s length transaction between
knowledgeable, willing parties.

The value in use of an asset represents the expected future cash flows, from continuing use and disposal that are discounted
to their present value using an appropriate pretax discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset.

For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is
determined for the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group of
assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. An
impairment loss is recognised whenever the recoverable amount of a cash-generating unit is less than its carrying amount.

The impairment loss is allocated to reduce the carrying amount of the assets of the cash-generating unit, first to goodwill in
respect of the cash-generating unit, if any, and then to the other assets on a pro-rata basis based on their carrying amounts.
The carrying amount of individual assets is not reduced below the higher of its value in use, zero or fair value less cost
of disposal.

A previously recognised impairment loss related to assets is reversed if there has been a change in the estimates used to
determine the recoverable amount, however not to an amount higher than the carrying amount that would have been
determined had no impairment loss been recognised in prior periods. No goodwill impairment losses are reversed.

After the recognition of an impairment loss, any depreciation or amortisation charge for the asset is adjusted for future
periods to allocate the asset’s revised carrying amount, less its estimated residual value, on a systematic basis over its
remaining useful life.

N. Insurance contracts

N.1 Premiums

Premiums written comprise the premiums on insurance contracts entered into during the year, irrespective of whether they
relate in whole or in part to a later accounting period. Premiums are disclosed gross of commission to intermediaries and
exclude value added tax. Premiums written include adjustments to premiums written in prior accounting periods.

Outward reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct
insurance business assumed.

The net earned portion of premiums received is recognised as revenue. Premiums are earned from the date of attachment of
risk, over the indemnity period, based on the pattern of risks underwritten. Outward reinsurance premiums are recognised
as an expense in accordance with the pattern of indemnity received.

N.

Insurance contracts (continued)

N.2

Unearned premium provision
The provision for unearned premiums comprises the proportion of premiums written which is estimated to be earned in
subsequent financial years, computed separately for each insurance contract using a time proportionate basis or another
suitable basis for uneven risk contracts.

N.3       Claims incurred

Claims incurred consist of claims and claims handling expenses paid during the financial year together with the movement
in the provision for outstanding claims. Claims outstanding comprise provisions for the Group’s estimate of the ultimate cost
of settling all claims incurred but unpaid at the balance sheet date whether reported or not, and an appropriate risk margin.

N.4 Contingencyreserve

A reserve in equity is made for the full amount of the contingency reserve as required by the regulatory authorities in
South Africa. Transfers to and from this reserve are treated as appropriations of retained income.

O.

Cash and cash equivalents
For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand, deposits held
on call, net of bank borrowings, all of which are available for use by the Group unless otherwise stated.

Cash on hand is initially recognised at fair value and subsequently measured at its face value.

Deposits held on call are classified as loans receivable by the Group and carried at amortised cost. Due to the short-term
nature of these, the amortised cost approximates its fair value.

Bank borrowings, consisting of interest-bearing short-term bank loans, repayable on demand and overdrafts are recorded at
the proceeds received, net of direct issue costs. Finance costs, including premiums payable on settlement or redemption, are
accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not
settled in the period in which they arise.

P. Borrowing costs

Borrowing costs are expensed as they are incurred.

Q.

Expenses
Marketing and advertising costs are expensed as they are incurred. Prepaid costs related to annual events sponsorships are
expensed over the duration of the event.

R. Incentives

Incentives paid to service providers and dealers for products delivered to the customer are expensed as incurred. Incentives
paid to service providers and dealers for services delivered are expensed in the period that the related revenue is
recognised.

Distribution incentives paid to service providers and dealers for exclusivity are deferred and expensed over the contractual
relationship period.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-116

F-117

S.

Non-current assets held for sale
Non-current assets and disposal groups are classified as held-for-sale if their carrying amount will be recovered through a
sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable
and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed
to the sale, which should be expected to qualify for recognition as a complete sale within one year from the date of
classification.

Non-current assets (and disposal groups) classified as held-for-sale are measured at the lower of the assets’ previous
carrying amount and fair value less cost to sell.

T.

Use of estimates
The preparation of financial statements in conformity with IFRS requires the use of certain accounting estimates. It also
requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas
involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the
financial statements, are disclosed in the relevant sections of the financial statements. Although these estimates are based on
management’s best knowledge of current events and actions they may undertake in the future, actual results ultimately may
differ from those estimates.

U. Comparatives

Certain comparative figures have been reclassified, where required or necessary, in accordance with current period
classifications and presentation.

1.

REVENUE
Airtime and access

12,738.0

16,190.8

20,085.8

Data revenue

1,039.2

1,340.5

2,037.6

Interconnect revenue

5,784.8

5,923.6

6,696.8

Equipment sales

2,274.6

2,687.3

3,985.6

International airtime

659.2

886.8

971.2

Other

359.4

286.3

265.5

22,855.2

27,315.3

34,042.5

2.

AMORTISATION OF INTANGIBLE ASSETS
Goodwill

(93.6)

–

–

Licences

(14.8)

(17.1)

(8.5)

Trademarks

(7.3)

(42.6)

(52.3)

Customer bases

(99.1)

(172.4)

(106.9)

Computer software

*

(197.5)

(176.5)

(214.8)

(429.6)

(344.2)

* Refer Note 10 regarding information on the software reclassification.

3.

IMPAIRMENT OF ASSETS
Intangible assets

–

(97.5)

(0.1)

Licences

–

(97.5)

–

Software

–

–

(0.1)

Property, plant and equipment

–

(170.9)

52.9

Infrastructure

–

(142.3)

59.9

Information services

–

(23.3)

(5.6)

Motor vehicles

–

(2.4)

(0.3)

Furniture

–

(1.3)

(0.4)

Office equipment

–

(0.3)

(0.1)

Leasehold improvements

–

(0.6)

(0.3)

Other assets

–

(0.7)

(0.3)

Impairment reversal/(loss recognised)

–

(268.4)

52.8

Due to the competitive and economic environment in which VM, S.A.R.L. operates in Mozambique, the Group assessed the
assets for impairment in accordance with the requirements of IAS 36: Impairment of Assets. The recoverable amount of these
assets was based on the fair value less cost of disposal at March 31, 2006 and 2005. The fair value of the assets was
obtained from a knowledgeable, willing party on an arm’s length basis, based on the assumption that the assets would be
disposed of on an item by item basis. The amount with which the carrying amount exceeded the recoverable amount is
recognised as an impairment loss. The reversal of the impairment loss related to an increase in the fair value of
infrastructure assets.

2004

2005

2006

Rm

Rm

Rm

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-118

4.

PROFIT FROM OPERATIONS
The profit from operations is arrived at after taking
the following income/(expenditure) into account:

Net (loss)/profit on disposal of property, plant and equipment

(6.8)

1.8

(26.8)

Loss on disposal of property, plant and equipment

(7.9)

(6.7)

(27.5)

Profit on disposal of property, plant and equipment

1.1

8.5

0.7

Depreciation of property, plant and equipment (Note 8)

(2,316.9)

(2,413.6)

(2,651.6)

Buildings

(17.6)

(18.7)

(17.6)

Infrastructure

(1,840.1)

(1,952.5)

(2,530.0)

Information services

(350.5)

(326.7)

(41.9)

Community services

(12.8)

(10.8)

6.9

Motor vehicles

(20.2)

(21.8)

(13.6)

Furniture

(17.7)

(15.6)

(14.6)

Office equipment

(11.3)

(11.2)

(10.3)

Leasehold improvements

(36.4)

(40.0)

(22.0)

Other assets

(10.3)

(16.3)

(8.5)

Auditors’ remuneration – audit fees

(5.6)

(8.3)

(14.9)

Current year audit fees

(5.7)

(7.8)

(14.0)

Prior year (under)/over provision of audit fees

0.3

(0.1)

(0.8)

Telkom SA Limited foreign issuer costs

(6.8)

(4.6)

(4.8)

Recovered from Telkom SA Limited

6.8

4.6

4.8

Expenses

(0.2)

(0.4)

(0.1)

Auditors’ remuneration – other services

(6.8)

(2.5)

(2.1)

For other services

(7.4)

(2.5)

(2.1)

Capitalised

0.6

–

–

Professional fees for consultancy services

(117.3)

(78.4)

(112.2)

Operating lease rentals

(532.8)

(613.1)

(870.7)

GSM transmission and data lines

(465.6)

(544.3)

(787.9)

Office accommodation

(35.6)

(43.4)

(47.6)

Other accommodation

(29.6)

(24.5)

(33.0)

Office equipment

(2.0)

(0.9)

(1.1)

Motor vehicles

–

–

(1.1)

Payment to other operators

(2,990.3)

(3,652.5)

(4,634.3)

Regulatory fees

(550.1)

(670.3)

(812.2)

2004

2005

2006

Rm

Rm

Rm

F-119

4.

PROFIT FROM OPERATIONS (continued)
Staff expenses – pension and provident fund contributions

(71.8)

(74.9)

(89.3)

Pension fund contributions

(65.9)

(70.7)

(76.4)

Provident fund contributions

(5.9)

(4.2)

(12.9)

(Increase)/Decrease in provision for obsolete inventory (Note 13)

(30.9)

17.5

(15.9)

Decrease/(Increase) in provision for doubtful receivables (Note 14)

0.8

(11.3)

6.0

Bad debts written off

(48.8)

(52.2)

(42.3)

Impairment of assets (Note 3)

–

(268.4)

52.8

Insurance activities
The Group offers a range of insurance contracts to its customers providing protection against specified risks associated with
the ownership of a cellphone. These products are offered through a cell captive facility maintained with Nova Risk Partners
Limited, a South African registered short-term insurance company. The cell facility is further used to issue insurance contracts
to Group companies to provide cover against a variety of insurable risks including assets own risk and the extended
warranty provided to customers. These intercompany transactions are eliminated on consolidation of the cell captive.

In terms of the shareholder agreement, the Group carries all the risks and rewards related to the business underwritten in the
cell captive facility. The risks are closely monitored by the Group through the ongoing review of the performance of the
underlying insurance products. Premium rate adjustments are used to mitigate the associated insurance risks.

Provided below is a summarised underwriting account giving details of the R52.5 million (2005: R19.5 million;
2004: R32.6 million) underwriting profit included in profit from operations:

2004

2005

2006

Rm

Rm

Rm

Gross earned premiums

94.4

89.7

112.7

Gross claims incurred

(32.9)

(45.6)

(51.7)

Net reinsurance income/(expense)

(16.2)

(11.6)

10.7

Net operating expenses

(12.7)

(13.0)

(19.2)

Underwriting profit

32.6

19.5

52.5

5.

INTEREST, DIVIDENDS AND OTHER FINANCIAL INCOME
Banks and loans

68.4

93.6

89.4

Dividends received – unlisted investments

5.4

–

–

Guarantee fees

26.4

–

–

Income from investments at fair value through profit and loss

11.2

8.0

7.8

Other interest income

6.2

15.8

19.7

Gain on foreign exchange contract revaluation

269.6

155.1

211.2

Gain on foreign liability and asset revaluation

238.0

358.3

314.0

Interest rate swap interest

5.1

11.6

13.0

Interest rate swap revaluation

26.3

20.4

4.2

656.6

662.8

659.3

2004

2005

2006

Rm

Rm

Rm

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-120

6.

FINANCE COSTS
Bank overdraft

(27.3)

(39.1)

(15.2)

Finance leases

(130.1)

(127.3)

(121.6)

Funding loans

(64.4)

(32.2)

(73.8)

Interest on minority shareholder loan*

(7.6)

(7.2)

(8.1)

Leasehold property

(5.2)

–

–

Other finance costs

(13.3)

(24.2)

(30.6)

Shareholder loans

(47.2)

–

–

Interest rate swap interest

(1.1)

(5.5)

–

Interest rate swap revaluation

(18.9)

(11.3)

(10.8)

Loss on foreign exchange contract revaluation

(479.1)

(143.4)

(471.8)

Loss on foreign liability and asset revaluation

(313.3)

(251.5)

(586.3)

(1,107.5)

(641.7)

(1,318.2)

* This amount of R8.1 million (2005: R7.2 million; 2004: R7.6 million) relates

to notional interest on the loan from Caspian Construction Company Limited
and Planetel Communications Limited, that was remeasured at amortised cost,
at an effective interest rate of LIBOR plus 5%, for which no consideration has
been recorded.

7.

TAXATION
South African normal taxation

(1,702.6)

(2,082.6)

(2,375.6)

Current year

(1,716.4)

(2,091.3)

(2,337.9)

Prior year (under)/over provision

13.8

8.7

(37.7)

Deferred taxation

146.9

35.9

(135.5)

Current year

159.4

35.1

(176.3)

Prior year over/(under) provision

(12.5)

(6.3)

40.8

Taxation rate change*

–

7.1

–

Secondary taxation on companies – current year

(262.5)

(429.4)

(562.5)

Foreign taxation

(5.4)

(13.0)

(24.6)

Current year

(4.3)

(12.9)

(24.2)

Prior year under provision

(1.1)

(0.1)

(0.4)

Foreign deferred taxation

101.6

(123.9)

20.4

Current year

109.8

(75.2)

43.5

Prior year under provision

(8.2)

(48.7)

(22.0)

Taxation rate change

#

–

–

(1.1)

(1,722.0)

(2,613.0)

(3,077.8)

2004

2005

2006

Rm

Rm

Rm

F-121

7.

TAXATION (continued)
Reconciliation of rate of taxation
Normal taxation on profit before taxation

1,432.3

30.0

1,949.8

30.0       2,380.0

29.0

Adjusted for:

Exempt income

(0.8)

–

(0.1)

–

(1.1)

–

Disallowed expenditure

33.9

0.8

131.3

2.0

135.6

1.7

Goodwill

27.2

0.6

–

–

–

–

Prior year under/(over) provision

(8.0)

(0.2)

46.4

0.7

19.3

0.2

Unrecognised taxation asset

24.8

0.5

40.5

0.6

162.8

2.0

Utilisation of taxation loss

(75.3)

(1.6)

(12.6)

(0.1)

(6.9)

(0.1)

Foreign taxation rate differences

78.2

1.6

(30.8)

(0.5)

(15.6)

(0.2)

Taxation rate change*

#

–

–

(7.1)

(0.1)

1.1

–

Foreign taxation

–

–

5.7

0.1

8.7

0.1

Unrealised foreign exchange differences

–

–

(153.2)

(2.4)

45.1

0.5

Capital expenditure adjustment

–

–

80.7

1.2

(181.6)

(2.2)

Translation to US$

–

–

61.8

1.0

(16.8)

(0.2)

Impairment of assets

–

–

78.3

1.2

(12.9)

(0.2)

Secondary taxation on companies

262.5

5.5

429.4

6.6

562.5

6.9

Secondary taxation on companies credits

–

–

(3.8)

–

–

–

Utilisation of investment deductions

(24.1)

(0.5)

(10.2)

(0.2)

0.2

–

Utilisation of cumulative taxation differences

(28.7)

(0.6)

–

–

–

–

Other adjustments

–

–

6.9

0.1

(2.6)

–

1,722.0

36.1

2,613.0

40.2       3,077.8

37.5

* Deferred taxation was calculated at 29% for all South African entities at March 31, 2005 following a change in the corporate taxation rate. The

revised taxation rate was applicable to normal taxation from the 2006 financial year.

#

Deferred taxation was calculated at 25% for Vodacom Lesotho (Proprietary) Limited at March 31, 2006 following a change in the corporate taxation

rate. The revised taxation rate is applicable to normal taxation from the 2007 financial year.

2004

2004

2005

2005

2006

2006

Rm

%

Rm

%

Rm

%

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-122

8.

PROPERTY, PLANT AND EQUIPMENT
2004
Land and buildings

899.8

(68.4)

831.4

Infrastructure

16,738.5

(7,678.4)

9,060.1

Information services

2,359.6

(1,599.2)

760.4

Community services

90.7

(62.3)

28.4

Motor vehicles

128.9

(77.7)

51.2

Furniture

122.6

(84.4)

38.2

Office equipment

89.0

(66.6)

22.4

Leasehold improvements

247.3

(150.1)

97.2

Other assets

55.0

(31.8)

23.2

20,731.4

(9,818.9)

10,912.5

2005
Land and buildings

936.2

(87.4)

848.8

Infrastructure

18,902.5

(9,012.8)

9,889.7

Information services

1,678.0

(1,106.0)

572.0

Community services

91.9

(73.0)

18.9

Motor vehicles

158.1

(93.7)

64.4

Furniture

138.2

(102.2)

36.0

Office equipment

96.3

(78.1)

18.2

Leasehold improvements

294.6

(192.6)

102.0

Other assets

64.2

(37.3)

26.9

22,360.0

(10,783.1)

11,576.9

2006
Land and buildings

1,033.9

(105.0)

928.9

Infrastructure

22,556.3

(10,925.7)

11,630.6

Information services

1,623.9

(1,100.4)

523.5

Community services

107.8

(65.9)

41.9

Motor vehicles

154.4

(90.8)

63.6

Furniture

142.5

(115.0)

27.5

Office equipment

108.8

(88.0)

20.8

Leasehold improvements

361.4

(214.9)

146.5

Other assets

33.2

(29.9)

3.3

26,122.2

(12,735.6)

13,386.6

Cost

Accumulated

Net book

depreciation

value

and impairment

Rm

Rm

Rm

F-123

8.

PROPERTY, PLANT AND
EQUIPMENT (continued)
Reconciliation 2004

Opening balance

828.6

8,895.9

680.7

28.5

41.5

47.2

20.5

97.0

35.1 10,675.0

Additions

16.8

2,345.0

421.1

12.7

31.3

9.3

10.4

34.2

9.9

2,890.7

Disposals

0.1

(7.4)

(2.5)

–

(1.2)

(0.2)

(0.1)

(0.2)

(0.3)

(11.8)

Foreign currency translation

(1.6)

(295.6)

(27.5)

–

(2.0)

(1.3)

(0.5)

(1.9)

(0.3)

(330.7)

Depreciation

(17.6) (1,840.1)

(350.5)

(12.8)

(20.2)

(17.7)

(11.3)

(36.4)

(10.3) (2,316.9)

Business combinations

5.1

–

0.7

–

–

0.3

0.1

–

–

6.2

Asset category transfer

–

(37.7)

38.4

–

1.8

0.6

3.3

4.5

(10.9)

–

Closing balance

831.4

9,060.1

760.4

28.4

51.2

38.2

22.4

97.2

23.2 10,912.5

Reconciliation 2005

Opening balance

831.4

9,060.1

760.4

28.4

51.2

38.2

22.4

97.2

23.2 10,912.5

Transfer to intangible assets (Note 10)

–

(371.0)

(324.6)

–

–

–

–

–

–

(695.6)

Acquired from the minorities of
Vodacom Congo (RDC) s.p.r.l.

4.5

457.9

115.4

–

4.0

2.9

1.9

7.7

2.0

596.3

Transfer from investment properties
(Note 9)

9.9

–

–

–

–

–

–

–

–

9.9

Additions

21.7

2,781.7

371.5

1.3

35.2

11.8

5.6

37.9

21.7

3,288.4

Disposals

–

(10.8)

(3.0)

–

(2.2)

(0.3)

(0.3)

(0.2)

(1.5)

(18.3)

Foreign currency translation

–

60.5

3.5

–

0.4

0.3

–

–

(1.5)

63.2

Depreciation

(18.7) (1,952.5)

(326.7)

(10.8)

(21.8)

(15.6)

(11.2)

(40.0)

(16.3) (2,413.6)

Business combinations

–

–

4.9

–

–

–

0.1

–

–

5.0

Impairments (Note 3)

–

(142.3)

(23.3)

–

(2.4)

(1.3)

(0.3)

(0.6)

(0.7)

(170.9)

Asset category transfer

–

6.1

(6.1)

–

–

–

–

–

–

–

Closing balance

848.8

9,889.7

572.0

18.9

64.4

36.0

18.2

102.0

26.9 11,576.9

Reconciliation 2006

Opening balance

848.8

9,889.7

572.0

18.9

64.4

36.0

18.2

102.0

26.9 11,576.9

Reclassified to finance lease receivables
(Note 14)

–

–

–

–

(12.0)

–

–

–

–

(12.0)

Additions

98.2

4,237.9

237.2

16.1

27.1

8.9

14.1

55.3

4.6

4,699.4

Disposals

–

(51.0)

(1.7)

–

(0.2)

–

(0.4)

(0.1)

(3.0)

(56.4)

Foreign currency translation

(0.5)

(246.0)

(3.8)

–

(1.8)

(0.9)

–

(0.9)

–

(253.9)

Depreciation

(17.6) (2,530.0)

(41.9)

6.9

(13.6)

(14.6)

(10.3)

(22.0)

(8.5) (2,651.6)

Business combinations

–

–

1.7

–

–

–

–

–

–

1.7

Impairments (Note 3)

–

59.9

(5.6)

–

(0.3)

(0.4)

(0.1)

(0.3)

(0.3)

52.9

Transfer from intangible assets/asset
category transfer (Note 10)

–

270.1

(234.4)

–

–

(1.5)

(0.7)

12.5

(16.4)

29.6

Closing balance

928.9 11,630.6

523.5

41.9

63.6

27.5

20.8

146.5

3.3 13,386.6

Land

Infra-

Infor-

Com-

Motor    Furniture

Office Leasehold

Other

Total

and

structure

mation

munity

vehicles

equip-    improve-

assets

buildings

services

services

ment

ments

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-124

F-125

2004

2005

2006

Net book

Net book

Net book

value

value

value

Rm

Rm

Rm

8.

PROPERTY, PLANT AND EQUIPMENT (continued)
Freehold land and buildings
Portions 859, 847, 839 and 828 of the farm Randjesfontein
No. 405, Gauteng Province, RSA

35.0

37.5

37.5

Holding 182, Erand Agricultural Holdings Ext 1, RSA

1.6

1.6

1.6

Erf 200, Chelmsfordville, Pietermaritzburg, RSA

0.1

0.1

0.1

Erf 1606, New Germany, Pietermaritzburg, RSA

0.5

0.5

0.5

1046 Mama Yemo Avenue, Lubumbashi, Province De Katanga,
Democratic Republic of Congo

0.5

0.9

1.0

Kinshasa Building (Justice), 292 Justice Avenue, Gombe, Kinshasa,
Democratic Republic of Congo

4.2

8.6

8.3

MSC Building, Maseru West, Lesotho

0.7

0.7

0.6

Stands 13, 14 and 15, Eastwood Road, Dunkeld West, RSA

5.0

14.4

14.1

6195 Boulevard du 30 Juin, Kinshasa, Democratic Republic of Congo

–

7.6

7.4

Portions 878 and 879 of the farm Randjesfontein No. 405,
Gauteng Province, RSA

–

10.7

52.5

Erf 2102, Silverton, Ext 54, RSA

–

–

33.9

Portion 751 of the farm Randjesfontein No. 405, Gauteng Province, RSA

–

–

14.6

Holding 191, Erand Agricultural Holdings Ext 1, RSA

–

–

7.6

47.6

82.6

179.7

Leasehold land and buildings
Portions 839, 828, 847 and 859 of the farm Randjesfontein
No. 405, Gauteng Province, RSA

268.0

262.4

256.8

Portion 769 of the farm Randjesfontein No. 405, RSA

159.5

156.8

154.3

Stand 34083, Bellville, City of Tygerberg, RSA

106.3

104.7

103.3

Erf 5259 and 5260, Montague Gardens, RSA

94.9

93.3

91.8

Portion 748 of the farm Randjesfontein No. 405, Gauteng Province, RSA

87.2

85.5

83.9

Portion 791 of the farm Randjesfontein No. 405, Gauteng Province, RSA

53.9

49.7

45.9

Erf 33153 Bellville, Cape Town, RSA

10.3

10.1

9.9

43 Kwale Road, Dar es Salaam, Tanzania

3.7

3.7

3.3

783.8

766.2

749.2

Total freehold and leasehold land and buildings

831.4

848.8

928.9

Debt is collateralised over leasehold land and buildings and the fair value of the lease liability is R911.5 million
(2005: R956.8 million; 2004: R955.4 million).

A register with details of the cost price and date of acquisition of all land and buildings is available for inspection at the
registered office.

Land and buildings in which the Group occupies more than 25% of the floor space or when the primary purpose is the
service and connection of Vodacom customers, are classified as property, plant and equipment.

The Group adopted the revised IAS 16: Property, Plant and Equipment on April 1, 2005. The total adjustment was
processed in the current year with the reversal in depreciation resulting in certain asset categories having negative
depreciation charges in the current year. Refer Note 23.

During the current financial year, the Group reclassified Portion 791 of the farm Randjesfontein, No. 405, Gauteng
Province, RSA, from investment property to property, plant and equipment. The property’s primary purpose was deemed to
have always been for the service and connection of Vodacom customers and not for capital appreciation or rental income.
The restatement was processed retrospectively. Refer to Note 9 for information on investment properties.

8.

PROPERTY, PLANT AND EQUIPMENT (continued)
In the 2006 financial year asset category transfers include transfers from software included in intangible assets to property,
plant and equipment in Note 10 of R29.6 million. Refer to Note 23 for more information about the restatements relating to
investment property and software.

The estimated useful lives of depreciable property, plant and equipment are as follows:

General purpose buildings

50 years

Special purpose buildings

15 years

Infrastructure
– Radio

1 – 10 years

– Intelligent Networks

5 – 8 years

– Switching

5 – 10 years

– Transmission

8 years

– Billing

5 – 6 years

– Value-added services equipment

3 – 8 years

Community services
– Containers

2 – 10 years

– Cellular equipment

2 years

Information services

3 – 5 years

SIM centre

3 – 8 years

Office automation

3 – 5 years

Other assets
– Motor vehicles

4 years

– Furniture and fittings

5 years

– Office equipment

4 years

2004

2005

2006

Rm

Rm

Rm

9.

INVESTMENT PROPERTIES
Reconciliation
Opening balance

–

9.9

–

Transfer to property, plant and equipment (Note 8)

–

(9.9)

–

Business combination

9.9

–

–

Closing balance

9.9

–

–

Cost

Accumulated

Net book

depreciation

value

Rm

Rm

Rm

2004
Stands 13 and 14 Dunkeld West, RSA (Note 9.1)

9.9

–

9.9

9.1

Stands 13 and 14 Dunkeld West, RSA
The Group acquired these properties recorded at R9.9 million on March 1, 2004 through its equity investment in
Smartphone SP (Proprietary) Limited.

During the March 31, 2005 financial year the properties were transferred to property, plant and equipment as the majority
of the premises were no longer being leased to third parties.

9.2

Other
Refer Note 8 for information regarding the investment property reclassification to property, plant and equipment during the
current financial year.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-126

10.

INTANGIBLE ASSETS
2004
Goodwill

855.7

(511.4)

344.3

Licences

262.0

(80.4)

181.6

Trademarks

209.7

(36.2)

173.5

Customer bases

724.3

(421.0)

303.3

Computer software

*

*

*

2,051.7

(1,049.0)

1,002.7

2005
Goodwill

932.1

(518.6)

413.5

Licences

338.0

(211.4)

126.6

Trademarks

209.7

(78.8)

130.9

Customer bases

863.2

(593.4)

269.8

Computer software

2,123.3

(1,419.8)

703.5

4,466.3

(2,822.0)

1,644.3

2006
Goodwill

1,002.0

(518.1)

483.9

Licences

306.3

(186.6)

119.7

Trademarks

390.4

(132.5)

257.9

Customer bases

863.2

(700.3)

162.9

Computer software

2,375.6

(1,445.1)

930.5

4,937.5

(2,982.6)

1,954.9

* Refer Note 10 regarding information on the software reclassification.

Cost

Accumulated

Net book

amortisation

value

and impairment

Rm

Rm

Rm

F-127

Goodwill

Licences

Trademarks

Customer

Computer

Total

bases

software

Rm

Rm

Rm

Rm

Rm

Rm

10.

INTANGIBLE ASSETS (continued)
Reconciliation 2004
Opening balance

230.9

117.0

22.6

165.0

–

535.5

Additions

–

114.1

–

7.0

–

121.1

Foreign currency translation

(17.0)

(34.7)

–

–

–

(51.7)

Amortisation

(93.6)

(14.8)

(7.3)

(99.1)

–

(214.8)

Business combinations

224.0

–

158.2

230.4

–

612.6

Closing balance

344.3

181.6

173.5

303.3

–

1,002.7

Reconciliation 2005
Opening balance

344.3

181.6

173.5

303.3

–

1,002.7

Transfer from property, plant
and equipment (Note 8)

–

–

–

–

695.6

695.6

Additions

–

–

–

–

205.4

205.4

Acquired from the minorities of
Vodacom Congo (RDC) s.p.r.l.
(Note 30)

51.3

50.6

–

–

–

101.9

Foreign currency translation

(0.8)

9.0

–

–

–

8.2

Amortisation

–

(17.1)

(42.6)

(172.4)

(197.5)

(429.6)

Business combinations

18.7

–

–

138.9

–

157.6

Impairments (Note 3)

–

(97.5)

–

–

–

(97.5)

Closing balance

413.5

126.6

130.9

269.8

703.5

1,644.3

Reconciliation 2006
Opening balance

413.5

126.6

130.9

269.8

703.5

1,644.3

Additions

–

3.3

–

–

438.8

442.1

Contingent purchase consideration
(Note 29.1)

36.2

–

–

–

–

36.2

Transfer to property, plant
and equipment (Note 8)

–

–

–

–

(29.6)

(29.6)

Disposals

–

–

–

–

(1.6)

(1.6)

Foreign currency translation

(1.4)

(1.7)

–

–

(4.0)

(7.1)

Amortisation

–

(8.5)

(52.3)

(106.9)

(176.5)

(344.2)

Business combinations

35.6

–

179.3

–

–

214.9

Impairments (Note 3)

–

–

–

–

(0.1)

(0.1)

Closing balance

483.9

119.7

257.9

162.9

930.5

1,954.9

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-128

10.

INTANGIBLE ASSETS (continued)
Software that does not form an integral part of hardware was previously included in property, plant and equipment. The Group
reclassified this software to intangible assets under the requirements of IAS 38: Intangible Assets during the 2006 financial year
when the Group adopted the revised IAS 16: Property, Plant and Equipment. The reclassification was done retrospectively from
April 1, 2004. The composition of the 2004 amounts has not been restated by the Group, after making every reasonable effort
to determine these amounts. Also refer Note 23 regarding change in accounting policies, reclassifications and restatements.

The estimated useful lives of intangible assets are currently as follows:
– Mobile licences

5 – 30 years

– Contract mobile customers

5 years

– Prepaid mobile customers

36 – 43 months

– Trademarks

5 – 15 years

– Computer software

2 – 8 years

2004

2004

2004

2005

2005

2005

Short-term

Long-term

Total

Short-term

Long-term

Total

portion

portion

portion

portion

Rm

Rm

Rm

Rm

Rm

Rm

11.

FINANCIAL ASSETS
Loans and receivables (Note 11.1)

229.2

94.0

323.2

–

93.3

93.3

Investments at fair value through
profit and loss (Note 11.2)

70.8

9.3

80.1

101.1

–

101.1

Available-for-sale investments
(Note 11.3)

16.5

119.1

135.6

16.8

–

16.8

Derivative financial assets
(Note 11.4)

37.8

–

37.8

69.2

–

69.2

354.3

222.4

576.7

187.1

93.3

280.4

2006

2006

2006

Short-term

Long-term

Total

portion

portion

Rm

Rm

Rm

Loans and receivables (Note 11.1)

–

92.1

92.1

Investments at fair value through profit and loss (Note 11.2)

111.7

–

111.7

Derivative financial assets (Note 11.4)

37.6

–

37.6

149.3

92.1

241.4

F-129

2004

2005

2006

Rm

Rm

Rm

11.

FINANCIAL ASSETS (continued)

11.1      Loans and receivables

Planetel Communications Limited

43.0

42.7

42.1

The loan with a nominal value of US$6.8 million issued during the
2003 year, bears interest at LIBOR plus 5%. Planetel Communications
Limited utilised this loan to ensure sufficient shareholder loan funding
by itself as a shareholder of Vodacom Tanzania Limited. The loans and
capitalised interest are collateralised by cession over all shareholder
distributions and a pledge over their shares of Vodacom Tanzania Limited.
All the shareholders subordinated their loans to Vodacom Tanzania Limited
for the duration of the project finance funding (Note 19).

Caspian Construction Company Limited

51.0

50.6

50.0

The loan with a nominal value of US$8.1 million issued during the
2003 year, bears interest at LIBOR plus 5%. Caspian Construction
Company Limited utilised this loan to ensure sufficient shareholder loan
funding by itself as a shareholder of Vodacom Tanzania Limited.
The loans and capitalised interest are collateralised by cession over
all shareholder distributions and a pledge over their shares of Vodacom
Tanzania Limited. All the shareholders subordinated their loans to
Vodacom Tanzania Limited for the duration of the project finance
funding (Note 19).

ABSA Bank Limited

78.3

–

–

The Group’s share of Vodacom Congo (RDC) s.p.r.l.’s deposit account
amounted to 10.1 million at March 31, 2004, which was charged
as security for the extended credit facility of Vodacom Congo (RDC) s.p.r.l.
The deposit bore interest at EURIBOR less 0.2%. The deposit was refunded
when the facility was replaced by a medium-term loan from Standard Bank
London and RMB International (Dublin) Limited on July 30, 2004 (Note 19).

Vodacom Congo (RDC) s.p.r.l.

150.9

–

–

The joint venture partner’s share of the loan issued by Vodacom
International Limited to Vodacom Congo (RDC) s.p.r.l. amounted to
US$23.9 million at March 31, 2004. The loan bore interest at LIBOR
plus 6.5%. With effect from April 1, 2004 the Group’s effective control
over the company changed resulting in Vodacom Congo (RDC) s.p.r.l.
being accounted for as a subsidiary from this date.

323.2

93.3

92.1

Less: Short-term portion of loans and receivables

ABSA Bank Limited

(78.3)

–

–

Vodacom Congo (RDC) s.p.r.l.

(150.9)

–

–

Short-term portion of loans and receivables

(229.2)

–

–

Long-term portion of loans and receivables

94.0

93.3

92.1

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-130

2004
Details of the maturity periods and interest rates of the money
market investments at year-end are as follows:

0 – 6 months

7.2 – 12.1

70.8

Over 12 months

8.1 – 8.8

9.3

80.1

Less: Short-term portion of investments held for trading

(70.8)

Long-term portion of investments held for trading

9.3

2005
Details of the maturity periods and interest rates of the money
market investments at year-end are as follows:

0 – 12 months

7.3 – 8.5

101.1

Less: Short-term portion of investments held for trading

(101.1)

Long-term portion of investments held for trading

–

2006
Details of the maturity periods and interest rates of the money
market investments at year-end are as follows:

0 – 12 months

5.6 – 7.3

111.7

Less: Short-term portion of investments held for trading

(111.7)

Long-term portion of investments held for trading

–

11.

FINANCIAL ASSETS (continued)

11.2 Investments at fair value through profit and loss
11.2.1 Investments held for trading

Maturity period

Interest rate

Market value

(%)

Rm

F-131

2004

2005

2006

Rm

Rm

Rm

11.

FINANCIAL ASSETS (continued)

11.3     Available-for-sale investments

Listed investment – SAGE shares

16.5

16.8

–

9 090 909 ordinary shares of R0.01 each.

Unlisted preference shares in Vodacom Congo (RDC) s.p.r.l.

119.1

–

–

18 860 100 preference shares of US$1.0 each totalling
US$18.9 million at March 31, 2004. The preference shares bore
interest at a rate of 4% per annum and are redeemable, but only
after the first three years from date of inception and only on the
basis that the shareholders are repaid simultaneously and in
proportion to their shareholding. With effect from April 1, 2004
the Group’s control over the company changed resulting in
Vodacom Congo (RDC) s.p.r.l. being accounted for as a
subsidiary from this date.

135.6

16.8

–

Short-term portion of available-for-sale

Listed investment – SAGE shares

(16.5)

(16.8)

–

Short-term portion of available-for-sale

(16.5)

(16.8)

–

Long-term portion of available-for-sale

119.1

–

–

11.4 Derivative financial assets

Interest rate swap asset (Note 39)

35.9

44.2

37.6

Foreign currency derivative asset (Note 39)

1.9

25.0

–

37.8

69.2

37.6

2007

2008

2009

2010

2011

2012

Total

onwards

Rm

Rm

Rm

Rm

Rm

Rm

Rm

11.5 Maturity of

financial assets
Loans and receivables

–

–

–

–

–

92.1

92.1

Investments at fair value
through profit and loss

111.7

–

–

–

–

–

111.7

Derivative financial assets

37.6

–

–

–

–

–

37.6

149.3

–

–

–

–

92.1

241.4

The fair value of the Group’s investments is R241.4 million (2005: R280.4 million; 2004: R576.7 million).

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-132

12.

DEFERRED TAXATION
Deferred taxation assets

277.8

308.1

297.6

Deferred taxation liabilities

(410.1)

(472.1)

(602.3)

(132.3)

(164.0)

(304.7)

12.1      Components

Capital allowances

(959.6)

(1,086.6)

(1,243.6)

Foreign equity revaluation reserve

12.0

12.0

12.0

Remeasurement of shareholder loans liability

(33.0)

(21.7)

(19.5)

Remeasurement of shareholder loans asset

42.1

36.4

32.5

Taxation losses

323.5

278.8

223.1

Provisions and deferred income

861.5

634.1

797.2

Prepayments and other allowances

(255.8)

(24.2)

10.8

Customer base

(88.9)

(77.0)

(46.7)

Trademark and patent

(46.5)

(33.4)

(56.4)

Fair value adjustment of property

(2.2)

(2.2)

(2.0)

Foreign exchange

22.2

88.9

(22.3)

Secondary taxation on companies credits

–

3.8

3.8

Other

(7.6)

27.1

6.4

(132.3)

(164.0)

(304.7)

12.2     Reconciliation

Balance at the beginning of the year

(265.5)

(132.3)

(164.0)

Deferred taxation – Income statement (expense)/income (Note 8)

248.5

(88.0)

(115.1)

Foreign equity revaluation reserve

10.9

–

–

Acquired from the minorities of Vodacom Congo (RDC) s.p.r.l.

–

96.3

–

Business combinations

Acquisition of customer base

(69.1)

(41.7)

–

Acquisition of trademark and patents

(47.5)

–

(35.8)

Acquisition of subsidiary

–

1.7

–

Fair value adjustment of property

(2.2)

–

–

Foreign exchange differences on consolidation of foreign subsidiaries

(7.4)

–

10.2

Balance at the end of the year

(132.3)

(164.0)

(304.7)

Provision for taxation, which could arise if undistributed retained profit of certain subsidiaries is remitted, is only made
where a decision has been taken to remit such retained profits. The Group did not provide for secondary taxation on
companies (“STC”) on its undistributable earnings which is payable when it declares dividends to its shareholders,
as the taxation will only be payable once the dividends are declared.

2004

2005

2006

Rm

Rm

Rm

F-133

2004

2005

2006

Rm

Rm

Rm

12.

DEFERRED TAXATION (continued)

12.3     Utilisation of taxation losses

Opening taxation loss

1,119.3

1,187.1

1,194.8

Foreign exchange movement on opening taxation loss

(231.6)

(8.1)

(142.3)

Acquired from the minorities of Vodacom Congo (RDC) s.p.r.l.

–

158.0

–

Prior year over/(under) statement

(134.5)

72.9

24.3

Current year taxation loss created/(utilised)

433.9

(215.1)

461.9

Closing taxation loss

1,187.1

1,194.8

1,538.7

Utilised to reduce net deferred taxation liability

(1,022.1)

(839.6)

(662.3)

Deferred taxation at 40%

(165.6)

(268.7)

(244.1)

Deferred taxation at 35%

(6.6)

–

–

Deferred taxation at 30%

(849.9)

(570.9)

(418.2)

Taxation losses available to reduce deferred taxation

165.0

355.2

876.4

There are unused taxation losses to the value of R876.4 million (2005: R355.2 million; 2004: R165.0 million) available
to reduce the net deferred taxation liability. The effect of this would be a R279.4 million (2005: R109.3 million;
2004: R24.8 million) reduction in the net deferred taxation liability for the year to R25.3 million (2005: R54.7 million;
2004: R107.5 million). During 2003 uncertainty existed as to whether the accumulated losses incurred by Vodacom
Congo (RDC) s.p.r.l. during their taxation holiday period will be available to reduce future taxable profits after expiry
of the taxation holiday period, and therefore no deferred taxation asset was raised. During the 2004 financial year it
was confirmed by the local taxation authority that the accumulated taxation losses will still be available after expiry of
the taxation holiday, resulting in the accumulated taxation asset being recognised. Vodacom Congo (RDC) s.p.r.l. has
recorded a deferred taxation asset as the company is generating taxable income. The Group has performed a detailed
calculation of future taxable income to support the recognition of the deferred taxation asset.

The growth of the Group following its geographical expansion into other African countries over the past few years has
made the estimation and judgement more challenging. The resolution of taxation issues is not always within the control of
the Group and it is often dependant on the efficiency of the legal processes in the relevant taxation jurisdictions in which
the Group operates. Issues can, and therefore often do, take many years to resolve. Payments in respect of taxation
liabilities for an accounting period results from payments on account and on the final resolution of open items. As a result
there can be substantial differences between the taxation charge in the consolidated income statement and taxation payments.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-134

13.

INVENTORY
Merchandise

260.4

438.4

397.5

Other inventory

28.1

41.1

56.8

288.5

479.5

454.3

Inventory carried at net realisable value

202.7

289.8

215.1

13.1     Inventory valuation allowance included above

Balance at the beginning of the year

(48.3)

(78.9)

(62.8)

Foreign exchange movement on opening balance

0.3

–

0.7

(Charged to)/Reversed from costs and expenses

(30.9)

17.5

(15.9)

Business combinations

–

(1.4)

–

Balance at the end of the year

(78.9)

(62.8)

(78.0)

14.

TRADE AND OTHER RECEIVABLES
Trade receivables

3,072.4

3,316.5

4,097.2

Prepayments

240.6

185.3

205.2

Value added taxation

58.5

69.0

88.1

Interest income receivable

18.9

35.7

41.5

Guarantee fees receivable

13.1

–

–

Finance leases

–

–

13.1

Other

46.5

14.9

42.0

3,450.0

3,621.4

4,487.1

14.1     Doubtful receivable allowance included above

Balance at the beginning of the year

(82.6)

(75.6)

(94.0)

Foreign exchange movement on opening balance

6.2

(0.2)

2.9

Reversed from/(Charged to) costs and expenses

0.8

(11.3)

6.0

Business combinations

–

(6.9)

–

Balance at the end of the year

(75.6)

(94.0)

(85.1)

Within

Between

After

Total

one year

two and

five years

five years

Rm

Rm

Rm

Rm

14.2     Finance leases

Staff benefits

7.5

2.9

–

10.4

Computers

5.6

3.3

–

8.9

13.1

6.2

–

19.3

2004

2005

2006

Rm

Rm

Rm

F-135

14.

TRADE AND OTHER RECEIVABLES (continued)

14.2     Finance leases (continued)

The Group provides motor vehicles to certain of its executives for their use. These executives may retain these assets at the
end of the lease period, normally between three and four years. In terms of IAS 19: Employee benefits, these arrangements
are regarded as finance leases and the cost of the assets are capitalised as finance lease receivables and amortised on
a straight-line basis over the period of the use agreement to employee cost. The implicit interest rate is zero. The Group
reclassified these assets from property, plant and equipment in terms of IFRIC 4: Determining whether an arrangement
contains a lease. Prior years have not been restated due to amounts being insignificant.

The Group provides laptop or desktop computers to certain subscribers who enter into contract agreements. The customer
retain these computers at the end of the contract period. In terms of IAS 17: Leases, these arrangements are regarded as
finance leases and accounted for, using the effective interest rate method.

The long-term portion of R6.2 million is reflected as part of lease assets on the face of the consolidated balance sheet.

2004

2005

2006

R

R

R

15.

ORDINARY SHARE CAPITAL
Authorised

100,000 ordinary shares of 1 cent each

1,000

1,000

1,000

Issued

10,000 ordinary shares of 1 cent each

100

100

100

Unissued share capital is not under the control of the Board of Directors.

2004

2005

2006

Rm

Rm

Rm

16.

NON-DISTRIBUTABLE RESERVES
Foreign currency translation reserve (Note 16.1)

(347.2)

(321.5)

(203.8)

Deferred taxation on foreign currency translation reserve (Note 16.1)

12.0

12.0

12.0

Contingency reserve (Note 16.2)

10.3

11.3

13.5

Revaluation of available-for-sale investments (Note 16.3)

–

0.2

–

(324.9)

(298.0)

(178.3)

Reconciliation
Balance at the beginning of the year

(141.0)

(324.9)

(298.0)

Foreign currency translation reserve

(183.1)

25.7

117.7

Acquisition of Vodacom Congo (RDC) s.p.r.l. (Note 30)

–

82.1

–

Foreign currency translation for the year

(194.0)

(56.4)

117.7

Deferred taxation for the year

10.9

–

–

Other non-distributable reserves

Transferred from distributable reserves – contingency reserve

(0.8)

1.0

2.2

Revaluation of available-for-sale investments

–

0.2

(0.2)

Balance at the end of the year

(324.9)

(298.0)

(178.3)

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-136

16.

NON-DISTRIBUTABLE RESERVES (continued)

16.1      Foreign currency translation reserve and deferred taxation

The financial results of foreign operations are translated into South African Rands for incorporation into the consolidated
results. Assets and liabilities are translated at the foreign exchange rates ruling at balance sheet date. Income, expenditure
and cash flow items are translated at the actual foreign exchange rate or average foreign exchange rates for the period.
All resulting unrealised foreign exchange differences are classified as equity.

This reserve also includes gains and losses on the translation of equity loans to foreign entities that are intended to be
permanent and only if the loans are denominated in one of the entities’ functional currencies.

Deferred taxation on the foreign currency translation reserve relates only to the translation of equity loans advanced to
foreign subsidiaries.

16.2 Contingency reserve

In terms of the Short-term Insurance Act, 1998 the Group’s cell captive partner, Nova Risk Partners Limited is required
to raise a contingency reserve equal to 10% of premiums written less approved reinsurance (as defined in the act).
This reserve can be utilised only with the prior permission of the Registrar of Short-term Insurance.

16.3 Revaluation of available-for-sale investments

Gains and losses from changes in the fair value of available-for-sale investments are recognised directly in equity until the
financial asset is disposed of (Note 11.3).

2004

2005

2006

Rm

Rm

Rm

17.

MINORITY INTERESTS
Distributable reserves

150.7

187.8

358.1

Non-distributable reserves

(57.7)

(59.1)

(74.8)

93.0

128.7

283.3

Reconciliation
Balance at the beginning of the year

88.0

93.0

128.7

Profit transferred from distributable reserves

26.2

30.8

116.7

Foreign currency translation reserve

(21.2)

(1.5)

(15.6)

Revaluation of available-for-sale investments

–

0.1

(0.1)

Acquisition of subsidiary

–

10.1

46.5

Minority shares of VM, S.A.R.L.

–

–

8.0

Dividend

–

(3.8)

(0.9)

Balance at the end of the year

93.0

128.7

283.3

F-137

2004

2005

2006

Rm

Rm

Rm

18.

STATEMENT OF RECOGNISED INCOME AND EXPENSES
(Loss)/Gain on revaluation of available-for-sale investment

–

0.3

(0.3)

Foreign currency translation reserve

(215.2)

(57.9)

102.1

Tax on items taken directly to equity

10.9

–

–

Net profit/(loss) recognised directly in equity

(204.3)

(57.6)

101.8

Net profit for the year

3,052.3

3,886.3

5,129.0

Total recognised income and expense for the year

2,848.0

3,828.7

5,230.8

Attributable to:
Equity shareholders

2,843.0

3,799.3

5,129.8

Minority interests

5.0

29.4

101.0

2004

2004

2004

2005

2005

2005

Short-term

Long-term

Total

Short-term

Long-term

Total

portion

portion

portion

portion

Rm

Rm

Rm

Rm

Rm

Rm

19.

INTEREST-BEARING DEBT
Finance leases (Note 19.1)

29.0

856.7

885.7

50.5

807.2

857.7

Funding loans (Note 19.2)

807.7

359.9

1,167.6

323.7

1,406.3

1,730.0

Other short-term loans (Note 19.3)

3.2

–

3.2

7.4

–

7.4

839.9

1,216.6

2,056.5

381.6

2,213.5

2,595.1

2006

2006

2006

Short-term

Long-term

Total

portion

portion

Rm

Rm

Rm

Finance leases (Note 19.1)

79.2

728.3

807.5

Funding loans (Note 19.2)

1,527.3

90.9

1,618.2

Other short-term loans (Note 19.3)

39.0

–

39.0

1,645.5

819.2

2,464.7

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-138

19.

INTEREST-BEARING DEBT (continued)

19.1      Finance leases

Vodacom (Proprietary) Limited

596.4

574.9

537.7

The finance leases are collateralised by various land
and buildings with a book value of R489.1 million
(2005: R500.1 million; 2004: R512.1 million), bearing
interest at fixed effective interest rates of between 12.1% and
16.9% per annum and are repayable between 2 and 7 years.

Vodacom Service Provider Company (Proprietary) Limited

289.3

282.8

269.8

The finance lease is collateralised by land and buildings with
a book value of R256.8 million (2005: R262.4 million;
2004: R268.0 million), and bearing interest at a fixed
effective interest rate of 14.8% per annum. Payments
are made every six months in arrears and commenced
on March 1, 2002. The finance lease expires
on September 1, 2011.

885.7

857.7

807.5

Less: Short-term portion of finance leases

Vodacom (Proprietary) Limited

(22.5)

(37.6)

(58.3)

Vodacom Service Provider Company (Proprietary) Limited

(6.5)

(12.9)

(20.9)

Short-term portion of finance leases

(29.0)

(50.5)

(79.2)

Long-term portion of finance leases

856.7

807.2

728.3

The fair value of the Group’s finance lease liability is R911.5 million (2005: R956.8 million; 2004: R955.4 million).

Repayment of finance leases:

2007

2008

2009

2010

2011

2012

Total

onwards

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Future minimum
lease payments

190.7

211.7

269.2

153.6

200.6

180.4

1,206.2

Finance costs

(111.5)

(98.2)

(77.0)

(55.0)

(38.9)

(18.1)

(398.7)

Net present value

79.2

113.5

192.2

98.6

161.7

162.3

807.5

2004

2005

2006

Rm

Rm

Rm

F-139

2004

2005

2006

Rm

Rm

Rm

19.

INTEREST-BEARING DEBT (continued)

19.2     Funding loans

Planetel Communications Limited

35.4

38.5

41.6

The shareholder loan of US$8.4 million (2005: US$8.4 million;
2004: US$8.4 million) is subordinated for the duration of the
project finance funding period of Vodacom Tanzania Limited,
bears no interest from April 1, 2002 and is thereafter available
for repayment, by approval of at least 60% of the shareholders
of Vodacom Tanzania Limited. The loan became non interest-
bearing and was remeasured at amortised cost at an effective
interest rate of LIBOR plus 5% (Note 11) during the 2003
financial year. The gain on re-measurement was included
in equity.

Caspian Construction Company Limited

42.1

45.7

49.3

The shareholder loan of US$10.0 million (2005: US$10.0 million;
2004: US$10.0 million) is subordinated for the duration of the
project finance funding period of Vodacom Tanzania Limited,
bears no interest from April 1, 2002 and is thereafter available
for repayment, by approval of at least 60% of the shareholders
of Vodacom Tanzania Limited. This loan became non interest-
bearing and was remeasured at amortised cost at an effective
interest rate of LIBOR plus 5% (Note 11) during the 2003
financial year. The gain on remeasurement was included
in equity.

Project finance funding to Vodacom Tanzania Limited

348.7

285.1

184.0

The drawn down portions of the project finance funding
from external parties include the following:

(a) Netherlands Development Finance Company of

US$7.6 million (2005: US$10.1 million;
2004: US$11.3 million);

(b) Deutsche Investitions- und Entwicklungsgesellschaft mbH

of €7.8 million (2005: €10.4 million; 2004:€11.5 million);

(c) Standard Corporate and Merchant Bank of US$8.0 million

(2005: US$12.0 million; 2004: US$16.0 million);

(d) Barclays Bank (Local Syndicate Tanzania) of

TSH5,703.8 million (2005: TSH10,968.8 million;
2004: TSH15,356.3 million).

The funding is collateralised by a charge over 51% of the shares,
the licence and Vodacom Tanzania Limited’s tangible and
intangible assets. The loans bear interest based upon the foreign
currency denomination of the project financing between 6.0%
and 14.5% per annum and will be fully repaid by March 2008.
The full amount of R184.0 million has been classified as current
liabilities due to the Group not having an unconditional right to
defer its settlement for at least 12 months after the balance
sheet date.

Balance carried forward

426.2

369.3

274.9

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-140

19.

INTEREST-BEARING DEBT (continued)

19.2     Funding loans (continued)

Balance brought forward

426.2

369.3

274.9

Extended credit facility to Vodacom Congo (RDC) s.p.r.l.

310.1

–

–

The Group’s share of Vodacom Congo (RDC) s.p.r.l.’s extended
credit facility amounted to €38.8 million at March 31, 2004
which was partially collateralised by guarantees (Note 41) and
a cash deposit (Note 11), and bore interest at a rate of between
EURIBOR plus 1.5% and EURIBOR plus 1.75%. The facility was
replaced by a medium-term loan from Standard Bank London
Limited and RMB International (Dublin) Limited on July 30, 2004.

Revolving credit facilities to Vodacom Congo (RDC) s.p.r.l.

312.2

–

–

The Group’s share of the short-term revolving credit facility
provided by ABSA amounted to US$16.3 million at
March 31, 2004. The credit facility was collateralised
by guarantees (Note 41) provided by the Group, which
bore interest at an effective interest rate of LIBOR plus 1.5%.
The facility was replaced by a medium-term loan from Standard
Bank London Limited and RMB International (Dublin) Limited
on July 30, 2004.

The Group’s share of the short-term Euro revolving credit facility
provided by Standard Finance (Isle of Man) Limited amounted
to €11.5 million at March 31, 2004. The credit facility was
collateralised by guarantees (Note 41) provided by the Group
and bore interest at an effective interest rate of EURIBOR
plus 1.5%. The facility was replaced by a medium-term loan
from Standard Bank London Limited and RMB International
(Dublin) Limited on July 30, 2004.

The Group’s share of the short-term Dollar revolving credit
facility provided by Standard Finance (Isle of Man) Limited
amounted to US$19.1 million at March 31, 2004. The credit
facility was collateralised by guarantees (Note 41) provided
by the Group and bore interest at an effective interest rate
of LIBOR plus 1.5%. The facility was replaced by a medium-term
loan from Standard Bank London Limited and RMB International
(Dublin) Limited on July 30, 2004.

Medium-term loan to Vodacom International Limited

–

1,128.8

1,114.4

The medium-term loan provided by Standard Bank London Limited
and RMB International (Dublin) Limited that amounts to
US$180.0 million (2005: US$180.0 million) is collateralised
by guarantees provided by the Group. The loan is repayable
on July 19, 2006 and bears interest at an effective interest rate
of LIBOR plus 0.6%.

Balance carried forward

1,048.5

1,498.1

1,389.3

F-141

2004

2005

2006

Rm

Rm

Rm

2004

2005

2006

Rm

Rm

Rm

19.

INTEREST-BEARING DEBT (continued)

19.2     Funding loans (continued)

Balance brought forward

1,048.5

1,498.1

1,389.3

Preference shares issued by Vodacom Congo (RDC) s.p.r.l.

119.1

231.9

228.9

The preference shares of US$37.0 million (2005: US$37.0 million;
2004: US$18.9 million) bear interest at a rate of 4% per annum.
The preference shares are redeemable, but only after the first
three years from date of inception and only on the basis that the
shareholders are repaid simultaneously and in proportion to
their shareholding.

1,167.6

1,730.0

1,618.2

Less: Short-term portion of funding loans

Project finance funding to Vodacom Tanzania Limited

(66.3)

(91.8)

(184.0)

Extended credit facility to Vodacom Congo (RDC) s.p.r.l.

(310.1)

–

–

Revolving credit facilities to Vodacom Congo (RDC) s.p.r.l.

(312.2)

–

–

Medium-term loan to Vodacom International Limited

–

–

(1,114.4)

Preference shares issued by Vodacom Congo (RDC) s.p.r.l.

(119.1)

(231.9)

(228.9)

Short-term portion of funding loans

(807.7)

(323.7)

(1,527.3)

Long-term portion of funding loans

359.9

1,406.3

90.9

The fair value of the Group’s funding loan liability is R1,618.2 million
(2005: R1,730.0 million; 2004: R1,167.6 million).

19.3 Other short-term loans

Vodacom Congo (RDC) s.p.r.l.

3.2

6.3

37.1

The short-term facilities amounts to US$6.0 million
(2005: US$1.0 million; 2004: US$0.5 million). US$1.0 million
of these facilities bears interest at 18% per annum with no fixed
repayment terms. US$5.0 million of these facilities is repayable
on May 20, 2006 and bears interest at LIBOR plus 6% per annum.

Other

–

1.1

1.9

3.2

7.4

39.0

The fair value of the Group’s short-term loans is R39.0 million
(2005: R7.4 million; 2004: R3.2 million).

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-142

Finance leases
Vodacom (Proprietary) Limited

58.3

82.9

149.6

41.5

86.9

118.5

537.7

Vodacom Service Provider Company
(Proprietary) Limited

20.9

30.6

42.6

57.1

74.8

43.8

269.8

Funding loans
Planetel Communications Limited

–

–

–

–

–

41.6

41.6

Caspian Construction Company Limited

–

–

–

–

–

49.3

49.3

Project finance funding to
Vodacom Tanzania Limited

184.0

–

–

–

–

–

184.0

Medium-term loan to
Vodacom International Limited

1,114.4

–

–

–

–

–   1,114.4

Preference shares issued by
Vodacom Congo (RDC) s.p.r.l.

228.9

–

–

–

–

–

228.9

Other short-term loans

39.0

–

–

–

–

–

39.0

1,645.5

113.5

192.2

98.6

161.7

253.2     2,464.7

2004

2005

2006

Rm

Rm

Rm

20.

TRADE AND OTHER PAYABLES
Trade payables

2,900.9

3,466.8

3,315.4

Capital expenditure creditors

774.4

1,089.9

1,478.7

Value added taxation

101.6

91.6

100.3

Sundry accruals

43.0

75.4

89.4

Revenue charged in advance

28.0

67.2

64.2

Interest accrual

14.2

39.9

56.7

3,862.1

4,830.8

5,104.7

19.

INTEREST-BEARING DEBT (continued)

19.4     Repayment of interest-bearing debt

2007

2008

2009

2010

2011

2012

Total

onwards

Rm

Rm

Rm

Rm

Rm

Rm

Rm

F-143

2004

2005

2006

Rm

Rm

Rm

21.

NON INTEREST-BEARING DEBT
Sekhametsi Investment Consortium

4.3

4.3

4.3

The minority shareholders’ loan is uncollateralised and
no repayment terms have been determined.

4.3

4.3

4.3

The fair value of the Group’s non interest-bearing debt liabilities
could not be readily determined.

22.

PROVISIONS
Deferred bonus incentive provision (Note 22.1)

359.5

423.9

452.4

Bonus provision (Note 22.2)

149.1

203.1

279.8

Leave pay provision (Note 22.3)

53.9

58.3

70.8

Warranty provision (Note 22.4)

34.3

28.2

32.8

Long-term incentive provision (Note 22.5)

–

–

122.1

Other (Note 22.6)

55.3

65.9

37.4

652.1

779.4

995.3

Deferred

Bonus

Leave pay

Warranty

Long-term

Other

bonus

provision

provision

provision

incentive

incentive

provision

provision

Rm

Rm

Rm

Rm

Rm

Rm

Reconciliation 2004
Balance at the beginning
of the year

231.7

128.8

52.4

9.5

–

58.3

Provision created

169.5

165.7

10.1

28.9

–

67.5

Provision utilised

(41.7)

(145.4)

(8.6)

(4.1)

–

(70.5)

Balance at the end of the year

359.5

149.1

53.9

34.3

–

55.3

Reconciliation 2005
Balance at the beginning
of the year

359.5

149.1

53.9

34.3

–

55.3

Provision created

207.1

240.0

15.7

11.3

–

65.5

Provision utilised

(142.7)

(186.0)

(11.3)

(17.4)

–

(54.9)

Balance at the end of the year

423.9

203.1

58.3

28.2

–

65.9

Reconciliation 2006
Balance at the beginning
of the year

423.9

203.1

58.3

28.2

–

65.9

Provision created

188.0

321.1

25.1

38.5

139.0

25.3

Provision utilised

(159.5)

(244.4)

(12.6)

(33.9)

(16.9)

(53.8)

Balance at the end of the year

452.4

279.8

70.8

32.8

122.1

37.4

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-144

22.

PROVISIONS (continued)
Timing of provisions
Within one year

473.7

595.0

623.0

After one year

178.4

184.4

372.3

652.1

779.4

995.3

Provisions are required to be recorded when the Group has a present legal or constructive obligation as a result of past
events, for which it is probable that an outflow of economic benefits will occur, and where a reliable estimate can be made
of the amount of the obligation.

Best estimates, being the amount that the Group would rationally pay to settle the obligation, are recognised as provisions
at balance sheet date. Risks, uncertainties and future events are taken into account by management in determining the best
estimates. Provisions are discounted where the effect of discounting is material. The discount rate used is the rate that reflects
current market assessments of the time value of money and, where appropriate, the risks specific to the liability, all of which
requires management judgement. All provisions are reviewed at each balance sheet date.

Various uncertainties can result in obligations not being considered probable or estimable for significant periods of time. As
a consequence, potentially material obligations may have no provisions and a change in facts or circumstances that result in
an obligation becoming probable or estimable can lead to a need for the establishment of material provisions. In addition,
where estimated amounts vary from initial estimates the provisions may be revised materially, up or down.

The Group is required to record provisions for legal contingencies when the contingency is probable of occurring and the
amount of the loss can be reasonably estimated. Liabilities provided for legal matters require judgements regarding
projected outcomes and ranges of losses based on historical experience and recommendations of legal counsel. Litigation is
however unpredictable and actual costs incurred could differ materially from those estimated at the balance sheet date.

22.1     Deferred bonus incentive provision

The deferred bonus incentive provision represents the present value of the expected future cash outflows of the entitlement
value at the balance sheet date less the value at which the entitlements were issued, multiplied by the number of entitlements
allocated to a participant.

The value of the bonus entitlements are determined based upon the audited consolidated annual financial statements of the
Group. Periodically, a number of entitlements are issued to employees, the value of which depends on the seniority of the
employee. The participating rights of employees vest at different stages and employees are entitled to cash in their
entitlements within one year after the participating rights have vested. The provision is utilised when eligible employees
receive the value of vested entitlements.

22.2     Bonus provision

The bonus provision consists of a performance bonus based on the achievement of the predetermined financial targets,
payable to all levels of staff.

22.3     Leave pay provision

The leave pay provision relates to vested leave pay to which employees may become entitled upon leaving the employment
of the Group. The provision arises as employees render a service that increases their entitlement to future compensated
leave. The provision is utilised when employees who are entitled to leave pay, leave the employment of the Group or when
the accrued leave due to an employee, is utilised.

22.4      Warranty provision

The warranty provision covers manufacturing defects in the second year of warranty on handsets sold to customers.
The estimate is based on claims notified and past experience.

2004

2005

2006

Rm

Rm

Rm

F-145

22.

PROVISIONS (continued)

22.5     Long-term incentive provision

The long-term incentive provision represents the present value of the expected future cash outflows to eligible employees who
qualify. The amount of the liability is based on an actuarial valuation. The provision is utilised when eligible employees
receive the value of vested benefits.

2004

2005

2006

Rm

Rm

Rm

Net liability at the beginning of the year

–

–

–

Interest cost

–

–

6.5

Current service cost

–

–

9.1

Recognised actuarial losses

–

–

123.4

Net cost

–

–

139.0

Total benefit payments

–

–

(16.9)

Net liability at the end of the year

–

–

122.1

Key assumptions:
General inflation rate (%)

–

–

4.7

Discount rate (%)

–

–

7.4

Salary inflation (%)

–

–

5.7

Valuation date

–

–

March 31,

2006

22.6     Other

Other provisions for the Group include provisions for advertising received from suppliers of handsets and various other
smaller provisions. The advertising provision represents the advertising expenditure not yet spent or claimed by the Group
or external service providers.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-146

23.

CHANGE IN ACCOUNTING POLICIES, RECLASSIFICATIONS AND RESTATEMENTS

Balance as

Operating

Investment

Interest

Software

Balance as

previously

leases

property

rate

reclassifi-

restated

reported

swap

cation

Rm

Rm

Rm

Rm

Rm

Rm

Reconciliation 2004
Income statement
Direct network operating cost

12,430.1

5.0

–

–

–

12,435.1

General administration expenses

682.3

4.9

–

–

–

687.2

Taxation

1,725.0

(3.0)

–

–

–

1,722.0

Net profit (Profit after taxation)

(3,059.2)

6.9

–

–

–

(3,052.3)

Retained earnings
(Opening balance)

(6,962.8)

53.6

–

–

–

(6,909.2)

Balance sheet
Non-current assets
Property, plant and equipment

10,858.6

–

53.9

–

–

10,912.5

Investment properties

63.8

–

(53.9)

–

–

9.9

Financial assets

258.3

–

–

(35.9)

–

222.4

Lease assets

–

22.2

–

–

–

22.2

Current assets
Short-term financial assets

318.4

–

–

35.9

–

354.3

Equity
Retained earnings

(7,896.6)

60.5

–

–

–

(7,836.1)

Non-current liabilities
Deferred taxation

(436.0)

25.9

–

–

–

(410.1)

Operating lease liabilities

–

(108.6)

–

–

–

(108.6)

Reconciliation 2005
Income statement
Direct network operating cost

14,614.1

3.7

–

–

–

14,617.8

Depreciation

2,611.1

–

–

–

(197.5)

2,413.6

General administration expenses

747.9

3.4

–

–

–

751.3

Amortisation of intangible assets

232.1

–

–

–

197.5

429.6

Taxation

2,614.2

(1.2)

–

–

–

2,613.0

Net profit (Profit after taxation)

(3,892.2)

5.9

–

–

–

(3,886.3)

Retained earnings
(Opening balance)

(7,896.6)

60.5

–

–

–

(7,836.1)

Balance sheet
Non-current assets
Property, plant and equipment

12,230.7

–

49.7

–

(703.5)

11,576.9

Investment properties

49.7

–

(49.7)

–

–

–

Intangible assets

940.8

–

–

–

703.5

1,644.3

Financial assets

137.5

–

–

(44.2)

–

93.3

Lease assets

–

28.9

–

–

–

28.9

Current assets
Short-term financial assets

142.9

–

–

44.2

–

187.1

Equity
Retained earnings

(8,123.6)

66.4

–

–

–

(8,057.2)

Non-current liabilities
Deferred taxation

(499.2)

27.1

–

–

–

(472.1)

Operating lease liabilities

–

(122.4)

–

–

–

(122.4)

F-147

23.

CHANGE IN ACCOUNTING POLICIES, RECLASSIFICATIONS AND RESTATEMENTS (continued)
The Group changed some of its accounting policies as a result of the adoption of the following revised standards:
•    IAS 16 (revised): Property, Plant and Equipment (“IAS 16”)
•    IAS 17 (revised): Leases (“IAS 17”)

The tables above reflect the changes that were made to the 2005 and 2004 years as a result of certain restatements and
balance sheet reclassifications.

Change in accounting policies

23.1

Property, plant and equipment
The Group adopted IAS 16 on April 1, 2005. Each significant component included in an item of property, plant and
equipment is now separately recorded and depreciated. Useful lives and residual values are now reviewed on an annual
basis. The impact of the adoption is not material and therefore has no impact on prior year numbers.

23.2

Leases
The Group adopted IAS 17 on April 1, 2005. A lease of land and buildings is classified by considering the land and
buildings elements separately. Minimum lease payments are allocated between the land and buildings elements in
proportion to the relative fair values of the leasehold interest in the land and buildings elements of the lease. With regards
to finance leases, initial direct costs are added to the amount recognised as an asset. The adoption does not impact the
Group’s results or cash flow information for the years ended March 31, 2005 and 2004.

Restatements impacting net profit

23.3

Operating leases
The Group restated lease payments and receipts under operating leases in order to recognise the expenses and income on
a straight-line basis over the lease terms. This ensures that the income statement charge/income is more representative of the
time pattern of the operating lease benefit to the Group. The Group previously recognised the expenses and the income
based on the amount paid or payable and received or receivable for each period. The restatement impacts the Group’s
results for the years ended March 31, 2005 and 2004.

Restatements resulting in balance sheet reclassifications

23.4

Investment properties
The Group previously classified its Vodaworld property as an investment property. However, the property’s primary purpose
is to service and connect Vodacom customers. The property, therefore, does not meet the criteria of IAS 40: Investment
Property, i.e. to earn rentals or for capital appreciation. Accordingly, a restatement was processed retrospectively to classify
the Vodaworld property as property, plant and equipment.

23.5

Interest rate swap
Derivatives not accounted for as hedges are classified as trading instruments under IAS 39: Financial Instruments:
Recognition and Measurement. Furthermore, IAS 1: Presentation of Financial Statements requires that all trading instruments
be classified as short term and therefore current assets. The Group previously classified its derivatives based on maturity
date, and therefore, restated its interest rate swaps retrospectively. The change in classification does not impact the Group’s
results or cash flow information for the years ended March 31, 2005 and 2004.

23.6

Software reclassification
The Group previously classified computer software as property, plant and equipment. Under IAS 38: Intangible Assets
(“IAS 38”), computer software that is not considered integral to the related hardware should be classified as an intangible
asset. Accordingly, the Group reclassified computer software cost and accumulated depreciation that are not considered
integral to the related hardware to intangible assets. The Group also reclassified software depreciation to amortisation
of intangible assets. The restatement was performed retrospective from April 1, 2004, the date at which the Group
adopted IAS 38. The change in classification does not impact the Group’s results or cash flow information for the year
ended March 31, 2005.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-148

24.

CASH GENERATED FROM OPERATIONS
Profit from operations

5,225.2

6,478.2

8,865.7

Adjusted for:

Depreciation of property, plant and equipment

2,316.9

2,413.6

2,651.6

Net loss/(profit) on disposal of property, plant and equipment

6.8

(1.8)

26.8

Bad debts written off

48.8

52.2

42.3

Impairment of assets

–

268.4

(52.8)

Amortisation of intangible assets

214.8

429.6

344.2

Cash flow from operations before working capital changes

7,812.5

9,640.2

11,877.8

Increase in trade and other receivables

(937.8)

(330.1)

(1,035.0)

Decrease/(Increase) in inventory

(32.2)

(161.1)

16.8

Increase in trade and other payables and provisions

754.2

863.0

230.7

Cash generated from operations

7,596.7

10,012.0

11,090.3

25.

FINANCE COSTS PAID
Bank overdraft

(27.3)

(39.1)

(15.2)

Finance leases

(130.1)

(127.3)

(121.6)

Funding loans

(64.4)

(32.2)

(73.8)

Interest on minority shareholder loan

(7.6)

(7.2)

(8.1)

Leasehold property

(5.2)

–

–

Other finance costs

(13.3)

(24.2)

(30.6)

Interest on shareholder loans

(47.2)

–

–

Interest accrual at the beginning of the year

–

(14.2)

(39.9)

Interest accrual at the end of the year

14.2

39.9

56.7

(280.9)

(204.3)

(232.5)

Interest rate swap interest

(1.1)

(5.5)

–

Interest rate swap revaluation

(18.9)

(11.3)

(10.8)

Loss on foreign exchange contract revaluation

(479.1)

(143.4)

(471.8)

Loss on foreign liability and asset revaluation

(313.3)

(251.5)

(586.3)

Unrealised losses on foreign exchange contract revaluation

393.2

126.8

411.7

Unrealised losses on foreign liability and asset revaluation

155.9

211.5

417.6

Unrealised losses on interest rate swap

18.9

11.3

10.8

Other non-cash flow items

13.0

7.2

14.9

(512.3)

(259.2)

(446.4)

F-149

2004

2005

2006

Rm

Rm

Rm

26.

INTEREST, DIVIDENDS AND OTHER FINANCIAL
INCOME RECEIVED
Banks and loans

68.4

93.6

89.4

Dividends received

5.4

–

–

Guarantee fees

26.4

–

–

Income from investments at fair value through profit and loss

11.2

8.0

7.8

Other interest income

6.2

15.8

19.7

Interest income receivable at the beginning of the year

10.3

18.9

35.7

Interest income receivable at the end of the year

(18.9)

(35.7)

(41.5)

Guarantee fees accrual at the beginning of the year

14.7

13.1

–

Guarantee fees accrual at the end of the year

(13.1)

–

–

Elimination on consolidation of Vodacom Congo (RDC) s.p.r.l.

–

(13.1)

–

110.6

100.6

111.1

Gain on foreign exchange contract revaluation

269.6

155.1

211.2

Gain on foreign liability and asset revaluation

238.0

358.3

314.0

Interest rate swap interest

5.1

11.6

13.0

Interest rate swap revaluation

26.3

20.4

4.2

Unrealised gain on foreign exchange contract revaluation

(210.3)

(120.5)

(117.1)

Unrealised gain on foreign liability and asset revaluation

(38.9)

(258.2)

(193.6)

Unrealised gain on interest rate swap revaluation

(26.3)

(20.5)

(4.2)

Other non-cash flow items

(5.4)

–

–

368.7

246.8

338.6

27.

TAXATION PAID
Taxation per the consolidated income statement

(1,722.0)

(2,613.0)

(3,077.8)

Taxation payable at the beginning of the year

(315.2)

(852.0)

(632.6)

Taxation payable at the end of the year

852.0

632.6

630.2

Deferred taxation at the beginning of the year

(265.5)

(132.3)

(164.0)

Deferred taxation at the end of the year

132.3

164.0

304.7

Business combination – deferred taxation

(118.8)

(40.0)

(35.8)

Business combination – taxation payable

(29.6)

–

(15.2)

Movement due to foreign equity revaluation reserve

10.9

–

10.2

Exchange difference on consolidation of foreign subsidiary

(7.4)

–

–

Acquired from the minorities of Vodacom Congo (RDC) s.p.r.l.

–

96.3

–

(1,463.3)

(2,744.4)

(2,980.3)

28.

ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment (Note 8)

(2,890.7)

(3,288.4)

(4,699.4)

Less: Vodacom (Proprietary) Limited finance leases

10.4

–

–

Increase in capital expenditure related creditors

66.5

240.4

353.1

(2,813.8)

(3,048.0)

(4,346.3)

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

2004

2005

2006

Rm

Rm

Rm

F-150

29.

ACQUISITION OF SUBSIDIARIES
Acquisition of subsidiaries
Smartphone SP (Proprietary) Limited and subsidiaries (Note 29.1)

149.6

(233.8)

–

Smartcom (Proprietary) Limited (Note 29.2)

–

(15.9)

–

Customer base of Tiscali (Proprietary) Limited (Note 29.3)

–

(40.1)

0.3

Vodacom Properties No. 1 (Proprietary) Limited (Note 29.4)

–

–

–

Cointel VAS (Proprietary) Limited (Note 29.5)

–

–

(0.4)

Cash (outflow)/inflow from acquisitions

149.6

(289.8)

(0.1)

29.1      Smartphone SP (Proprietary) Limited and subsidiaries

On March 1, 2004, the Group acquired a 51% interest in the
equity of Smartphone SP (Proprietary) Limited, which has a 100%
shareholding in Stand 13 Eastwood Road Dunkeld (Proprietary)
Limited and 52% in Ithuba Smartcall (Proprietary) Limited.
The fair value of the assets and liabilities acquired were
determined by the Group and are as follows:

Fair value of net assets acquired

(9.8)

–

–

Property, plant and equipment

6.2

–

–

Investment properties

9.9

–

–

Prepaid customer base

230.4

–

–

Trademark

158.2

–

–

Investments

16.4

–

–

Deferred taxation asset

0.2

–

–

Inventory

31.0

–

–

Accounts receivable

115.8

–

–

Cash and cash equivalents

149.6

–

–

Deferred taxation liability (including taxation effect on intangibles)

(119.0)

–

–

Accounts payable

(558.8)

–

–

Taxation payable

(29.6)

–

–

Long-term loan

(0.3)

–

–

Provision

(0.2)

–

–

Goodwill

(224.0)

–

–

Purchase price (including capitalised costs)

(233.8)

–

–

Cash and cash equivalents

149.6

–

–

Cash consideration

(84.2)

–

–

Less: Amount payable

233.8

–

–

149.6

–

–

The purchase price of R231.2 million together with capitalised costs of R2.6 million totalling R233.8 million, was paid
on April 7, 2004. The outstanding amount accrued interest at prime less 2% per annum from March 1, 2004 up to the
date of payment.

The company had a contingent asset of R70.9 million at the date of acquisition. The Group valued the asset at Rnil. The
contingent asset realised during the current financial year. The Group had an obligation under the shareholders agreement
to pay the company an additional amount should the asset realise. The additional amount paid by the Group qualified
as a contingent purchase consideration and resulted in an adjustment of R36.2 million to goodwill. The recognition of the
contingent asset therefore resulted in a profit of R70.9 million in the consolidated income statement for the year ended
March 31, 2006 with R34.7 million being allocated to minority interest.

2004

2005

2006

Rm

Rm

Rm

F-151

29.

ACQUISITION OF SUBSIDIARIES (continued)

29.2     Smartcom (Proprietary) Limited

On April 16, 2004, the Group acquired an 85.75% interest
in the equity of Smartcom (Proprietary) Limited through its 51%
owned subsidiary, Smartphone SP (Proprietary) Limited. The fair
value of the assets and liabilities acquired were determined
by the Group and are as follows:

Fair value of net assets acquired

–

(70.5)

–

Property, plant and equipment

–

5.0

–

Contract customer base

–

95.6

–

Deferred taxation asset

–

1.7

–

Inventory

–

3.9

–

Accounts receivable

–

55.4

–

Cash and cash equivalents

–

61.5

–

Deferred taxation liability (including taxation effect on intangibles)

–

(28.7)

–

Accounts payable

–

(113.6)

–

Dividends payable

–

(10.0)

–

Provision

–

(0.3)

–

Minority interest

–

10.1

–

Goodwill

–

(8.9)

–

Purchase price (including capitalised costs)

–

(69.3)

–

Cash and cash equivalents

–

61.5

–

Cash consideration

–

(7.8)

–

Less: Capitalised costs paid in previous financial year

–

0.5

–

Plus: Smartphone SP (Proprietary) Limited’s share
of the dividend paid by Smartcom (Proprietary) Limited

–

(8.6)

–

–

(15.9)

–

The carrying value of the assets and liabilities at acquisition
was as follows:

–

3.2

–

Non-current assets

–

6.7

–

Current assets

–

120.4

–

Current liabilities

–

(123.9)

–

The purchase price of R77.9 million (including capitalised costs, excluding dividend from Smartcom (Proprietary) Limited)
was paid during April 2004. The company declared a dividend to its shareholders from pre-acquisition reserves on
August 18, 2004. The dividend was paid on August 31, 2004.

The goodwill related to the acquisition represents future synergies and the ability to directly control the Group’s customers.

Revenue amounting to R173.3 million and net profit before allocation to minorities of R26.6 million is included in the
March 31, 2005 results.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

2004

2005

2006

Rm

Rm

Rm

F-152

29.

ACQUISITION OF SUBSIDIARIES (continued)

29.3     Customer base of Tiscali (Proprietary) Limited

Effective February 1, 2005 the Group acquired the cellular
business of Tiscali (Proprietary) Limited. The fair value of the
assets and liabilities acquired were determined as follows:

Fair value of net assets acquired

–

(30.3)

–

Contract customer base

–

43.3

–

Deferred taxation liability

–

(13.0)

–

Goodwill

–

(9.8)

0.3

Purchase price

–

(40.1)

0.3

The customer base was not previously recorded in the accounting
records of Tiscali (Proprietary) Limited as it was an internally
generated intangible asset. The goodwill related to the acquisition
represents future synergies and the ability to directly control the
Group’s customers. It is impracticable to disclose the revenue and
profit of the business that is included in the prior years results as
the customer base was integrated into Vodacom Service Provider
Company (Proprietary) Limited. The profit and revenue related to
these customers were not separately recorded. For the same reason
stated above it would not be practicable to determine the impact
on revenue and profits of the Group for a full year.

29.4 Vodacom Properties No. 1 (Proprietary) Limited

During the 2003 financial year the Group exercised its option
included in the finance lease agreement and acquired 100% of
Skyprops 157 (Proprietary) Limited. The name of the company was
subsequently changed to Vodacom Properties No. 1
(Proprietary) Limited.

The fair value of the net assets acquired are as follows:

–

–

–

Property, plant and equipment

1.6

–

–

Long-term loan

(1.6)

–

–

Purchase price

–

–

–

2004

2005

2006

Rm

Rm

Rm

F-153

29.

ACQUISITION OF SUBSIDIARIES (continued)

29.5     Cointel VAS (Proprietary) Limited

On August 1, 2005, the Group acquired a 51% interest in the
equity of Cointel VAS (Proprietary) Limited. The fair values of
the assets and liabilities acquired were preliminary determined
by the Group and are as follows:

Fair value of net assets acquired

–

–

(94.9)

Property, plant and equipment

–

–

1.7

Intangible assets

–

–

179.3

Trade and other receivables

–

–

7.4

Cash and cash equivalents

–

–

83.9

Deferred taxation liability (including taxation effect on intangibles)

–

–

(35.8)

Trade and other payables

–

–

(114.2)

Taxation payable

–

–

(15.2)

Provisions

–

–

(1.2)

Dividends payable

–

–

(11.0)

Minority interest

–

–

46.5

Goodwill

–

–

(35.9)

Purchase price (including capitalised costs)

–

–

(84.3)

Cash and cash equivalents

–

–

83.9

Cash consideration

–

–

(0.4)

The carrying value of the assets and liabilities
at acquisition was as follows:

–

–

6.3

Non-current assets

–

–

56.7

Current assets

–

–

91.3

Current liabilities

–

–

(140.5)

Non-current liabilities

–

–

(1.2)

The purchase price of R83.6 million (excluding capitalised costs) was paid on August 23, 2005.

Revenue amounting to R89.9 million and net profit of R17.8 million are included in the current year results. Consolidated
revenue would have amounted to R34,062.5 million and consolidated net profit to R5,139.4 million if the entity had been
consolidated for the full year ended March 31, 2006.

The goodwill related to the acquisition represents future synergies and are allocated to the South African cash-generating unit.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

2004

2005

2006

Rm

Rm

Rm

F-154

30.

ACQUIRED RESERVES FROM THE MINORITIES OF VODACOM CONGO (RDC) S.P.R.L.
Vodacom Congo (RDC) s.p.r.l. (“Vodacom Congo”) was prior to April 1, 2004 accounted for as a joint venture (Note 35).
During the previous financial year the shareholders’ agreement was amended to remove some of the participative rights
of the minorities, resulting in Vodacom Congo now being controlled and considered to be a 51% owned subsidiary of
the Group from April 1, 2004. The Group’s interest in the company was consolidated from this date in accordance with
IAS 27: Consolidated and Separate Financial Statements.

The 49% portion of the assets, liabilities and losses attributable to the joint venture partner as at March 31, 2004 that had
not been consolidated at that date, were as follows:

As at

March 31,

2004

Rm

Net loss for the year after taxation

(13.7)

Total liabilities (including preference shares)

(1,133.2)

Total assets

981.9

The following assets and liabilities were consolidated on April 1, 2004
to account for Vodacom Congo (RDC) s.p.r.l. as a subsidiary:

Total assets

981.9

Property, plant and equipment

596.3

Intangible assets

101.9

Deferred taxation asset

96.3

Inventory

26.1

Accounts receivable

64.9

Short-term investments and loans

75.2

Cash and cash equivalents

21.2

Total liabilities

(1,133.2)

Accounts payable

(138.7)

Short-term interest-bearing debt

(985.8)

Provision

(0.4)

Bank overdraft

(8.3)

Non-distributable reserve

(82.1)

Distributable reserves

(233.4)

No portion was allocated to the minorities as a result of the negative net equity position of the company. The negative net
equity was recorded directly in reserves on April 1, 2004.

F-155

31.

CASH AND CASH EQUIVALENTS AT END OF YEAR
Bank and cash balances

2,370.1

2,990.1

3,146.1

Short-term bank deposits

–

1,000.0

–

Bank borrowings

(772.4)

(1,817.1)

(1,385.8)

1,597.7

2,173.0

1,760.3

The short-term bank deposits at the end of March 31, 2005
bore interest at an effective interest rate of 7.4% and matured
on April 1, 2005.

2004

2005

2006

R

R

R

32.

EARNINGS AND DIVIDEND PER SHARE

32.1     Basic and diluted earnings per share

The calculation of basic earnings per ordinary share before
adjustments for changes in accounting policies, reclassifications
and restatements (Note 23) was based on earnings of
R3,861.4 million (2004: R3,033.0 million) at March 31, 2005
and 10,000 issued ordinary shares (2004: 10,000)
at March 31, 2005. The following adjustments were made:

303,300

386,140

Operating leases

(690)

(590)

Earnings per share – restated

302,610

385,550

The calculation of basic earnings per ordinary share is based
on earnings of R5,012.3 million (2005: R3,855.5 million;
2004: R3,026.1 million) and 10,000 issued ordinary shares
(2005: 10,000; 2004: 10,000).

302,610

385,550

501,230

Due to no dilution factors being present, basic earnings per share
equals diluted earnings per share.

32.2     Dividend per share

The calculation of the dividend per ordinary share is based
on a declared ordinary dividend of R4,500.0 million
(2005: R3,400.0 million; 2004: R2,100.0 million) and
10,000 issued ordinary shares (2005: 10,000; 2004: 10,000).
The dividends were declared as follows:

Declared March 9, 2006 to shareholders registered
on April 3, 2006 and paid on April 5, 2006 (Final)

–

–

280,000

Declared September 9, 2005 to all shareholders registered
on October 1, 2005 and paid on October 3, 2005 (Interim)

–

–

170,000

Declared March 10, 2005 to shareholders registered
on March 31, 2005 and paid on April 1, 2005 (Final)

–

180,000

–

Declared September 10, 2004 to all shareholders registered
on October 1, 2004 and paid on October 1, 2004 (Interim)

–

160,000

–

Declared March 11, 2004 to shareholders registered
on May 28, 2004 and paid on May 31, 2004 (Final)

150,000

–

–

Declared September 11, 2003 to shareholders registered
on September 11, 2003 and paid on September 30, 2003 (Interim)

60,000

–

–

210,000

340,000

450,000

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

2004

2005

2006

Rm

Rm

Rm

F-156

33.

CAPITAL COMMITMENTS
Capital expenditure contracted for at the balance sheet
date but not yet incurred is as follows:

Vodacom (Proprietary) Limited

448.4

1,272.2

709.1

Vodacom Congo (RDC) s.p.r.l.

42.5

62.2

99.5

Vodacom Tanzania Limited

169.8

37.1

201.2

Vodacom Service Provider Company (Proprietary) Limited

39.7

18.0

16.9

Vodacom Group (Proprietary) Limited

0.2

0.3

222.9

VM, S.A.R.L.

–

78.0

34.2

700.6

1,467.8

1,283.8

Capital expenditure commitments approved by the Board of
Directors but not yet contracted for at the balance sheet date
are as follows:

Vodacom (Proprietary) Limited

3,875.7

3,268.0

4,872.3

Vodacom Tanzania Limited

118.8

332.1

650.6

Vodacom Congo (RDC) s.p.r.l.

102.7

283.8

293.4

Vodacom Service Provider Company (Proprietary) Limited

71.1

138.8

164.7

Vodacom Lesotho (Proprietary) Limited

12.2

16.2

24.9

Vodacom Group (Proprietary) Limited

9.2

88.8

111.7

VM, S.A.R.L.

277.8

281.4

71.7

Smartphone SP (Proprietary) Limited

0.1

3.7

15.2

Cointel VAS (Proprietary) Limited

–

–

2.2

4,467.6

4,412.8

6,206.7

The capital expenditure of the Group will be financed through
internal cash generation, extended supplier credit and bank credit.

34.

OTHER COMMITMENTS
Operating leases (Note 34.1)

3,180.0

5,841.7

6,277.8

Sport and marketing contracts (Note 34.2)

727.4

624.9

1,133.7

Site rentals (Note 34.3)

713.5

811.6

567.8

4,620.9

7,278.2

7,979.3

Within

Between

After

Total

one year

two and

five years

five years

Rm

Rm

Rm

Rm

34.1      Operating leases

Transmission and data lines GSM

1,145.1

4,554.3

3.4

5,702.8

Accommodation

132.9

435.9

2.9

571.7

Other operating leases

0.8

2.2

0.3

3.3

1,278.8

4,992.4

6.6

6,277.8

34.2     Sport and marketing contracts

298.1

835.6

–

1,133.7

34.3     Site rentals

132.8

433.6

1.4

567.8

2004

2005

2006

Rm

Rm

Rm

F-157

34.

OTHER COMMITMENTS (continued)

34.4     Interception of Communications and Provision of Communication-related Information Act

(“the Act”)
The Act was proclaimed in the Government Gazette and has been made effective September 30, 2005 with the exception
of the provisions dealing with customer registration which comes into effect on June 30, 2006. The cellular operators
have succeeded in obtaining in principle support by the Department of Justice for an electronic registration process.
The legislative amendments necessary to allow for such an electronic registration process have not yet been effected, but
are anticipated prior to the effective date of June 30, 2006. The Group has until May 28, 2006 to acquire and implement
the monitoring and interception facilities as per the technical specifications of the facilities agreed upon between the Group
and the Department of Justice and promulgated on November 28, 2005. A reliable estimate of capital and operating costs
that will potentially be incurred in order to comply with the provisions of the Act cannot be determined at this stage.

34.5 Service providers

Service provider agreements with the Group’s independent service providers were extended for a further period of
five years during the current financial year.

34.6 Cellular licence fees

Network operators in the Group pay monthly licence fees based on their net operational income as defined in the licence
agreement. Net operational income is defined as the total invoiced revenue of the licencee excluding discounts, Value
Added Taxation and other direct taxes derived from customers of the licencee for the provision to them of the service,
less net interconnect fees and bad debts actually incurred.

34.7 Global alliance fees

The Group pays annual fees from February 18, 2005 for services provided to the Group by Vodafone Group Plc.
The fee is calculated as a percentage of revenue and amounted to R175.2 million (2005: R17.0 million).

34.8 Retention incentives

The Group has committed a maximum of R456.0 million (2005: R373.1 million) in respect of customers already beyond
their normal 24-month contract period, but who have not yet upgraded into new contracts, and therefore have not utilised
the incentives available for such upgrades. The Group has not provided for the liability, as no legal obligation exists, since
the customers have not yet entered into new contracts.

34.9 Activation bonuses

The Group has a potential liability in respect of activation bonuses payable related to starterpacks sold which have not
yet been validated. The exposure is estimated at approximately R8.9 million (2005: R6.0 million).

34.10 Other

An offer to acquire the cellular business of Africell Cellular Services (Proprietary) Limited (“Africell”) was made and
accepted. The suspensive conditions as well as Competition Commission approval, is currently being attended to.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-158

35.

CONTINGENT LIABILITIES
Various other legal matters

9.2

4.9

5.0

35.1      Vodacom Congo (RDC) s.p.r.l.

The Group has a 51% equity interest in Vodacom Congo (RDC) s.p.r.l. (“Vodacom Congo”), which commenced business
on December 11, 2001. This investment is governed by a shareholders’ agreement, which previously provided the minority
shareholder with certain protective and participative rights and therefore, in terms of IAS 31: Interest in Joint Ventures,
Vodacom Congo was considered to be a joint venture resulting in it being proportionally consolidated in the annual
financial statements for the year ended March 31, 2004.

The Group, in terms of the previous shareholders’ agreement was, however, ultimately responsible for the funding of the
operations of Vodacom Congo. The shareholders’ agreement also gave the Group the right to appoint management and
the majority of the Board of the company. The Group also had a management agreement to manage the company on
a day-to-day basis.

During the previous financial year the shareholders’ agreement was amended to remove some of the participative
rights, resulting in Vodacom Congo now being controlled and considered to be a 51%-owned subsidiary of the Group
from April 1, 2004. The Group’s interest in the company is consolidated from this date in accordance with IAS 27:
Consolidated and Separate Financial Statements (Note 30).

The 49% portion attributable to the joint venture partner of the liabilities and losses as at March 31, 2004 was as follows:

Net loss for the year after taxation

(13.7)

Total liabilities (including preference shares)

(1,133.2)

Total assets

981.9

All guarantees issued are disclosed in Note 41.

35.2 Negative working capital ratio

For financial years ended 2006, 2005 and 2004 the Group had a negative working capital ratio. A negative working
capital ratio arises when the Group’s current liabilities are greater than the current assets. The Group’s management believes
that based on its operating cash flow, it will be able to meet liabilities as they arise and that it is in compliance with all
covenants contained in the borrowing agreements.

35.3 Other

The Group is regularly subject to an evaluation, by the taxation authorities, of its direct and indirect taxation filings and in
connection with such reviews, disputes can arise with the taxation authorities over the interpretation or application of certain
taxation rules applicable to the Group’s business. These disputes may not necessarily be resolved in a manner that is
favourable for the Group. Additionally the resolution of the disputes could result in an obligation for the Group.

During each of the years presented, provisions have been made or adjusted for anticipated obligations related to these
taxation matters under review. The provisions made include estimates of anticipated interest and penalties where
appropriate. Where no reliable assessment could be made, no provisions have been raised.

The Group is in discussions with relevant taxation authorities on specific matters regarding the application and interpretation
of taxation legislation affecting the Group and the industry in which it operates. No reliable assessment can be made at this
time of any exposure, if any, that the Group may incur.

2004

2005

2006

Rm

Rm

Rm

F-159

36.

RETIREMENT BENEFITS
All eligible employees of the Group are members of the Vodacom Group pension fund, a defined contribution pension
scheme. Certain executive employees of the Group are also members of the Vodacom executive provident fund, a defined
contribution provident scheme. Both schemes are administered by ABSA Consultants and Actuaries (Proprietary) Limited.
Current contributions to the pension fund amounted to R76.4 million (2005: R70.7 million; 2004: R65.9 million). Current
contributions to the provident fund amounted to R12.9 million (2004: R4.2 million; 2004: R5.9 million). South African funds
are governed by the Pension Funds Act of 1956.

37.

EVENTS SUBSEQUENT TO YEAR-END
The directors are not aware of any other matter or circumstance arising since the end of the financial year, not otherwise
dealt with in the Group consolidated financial statements, which significantly affected the financial position of the Group
and results of its operations.

2004

2005

2006

Rm

Rm

Rm

38.

RELATED PARTY TRANSACTIONS

38.1     Balances with related parties

Included in accounts receivable

Telkom SA Limited – Interconnect

491.1

487.9

509.7

Telkom SA Limited – Other

8.4

11.7

6.3

Vodafone Group Plc and subsidiaries

8.0

22.7

12.7

Included in accounts payable

Telkom SA Limited – Interconnect

(78.9)

(74.0)

(85.3)

Telkom SA Limited – Other

(4.1)

(9.6)

(16.5)

Vodafone Group Plc and subsidiaries

(2.6)

(20.3)

(3.7)

VenFin Telecommunication Investments Limited

–

–

(0.1)

Dividends payable

Telkom SA Limited

(750.0)

(900.0)

(1,400.0)

Vodafone Holdings (SA) (Proprietary) Limited

(525.0)

(630.0)

(980.0)

VenFin Telecommunication Investments Limited

(225.0)

(270.0)

(420.0)

These outstanding balances are unsecured and will be settled in cash in the ordinary course of business. No guarantees
have been provided.

During the current financial year, shareholding changed. Vodafone Holdings (SA) (Proprietary) Limited increased its effective
shareholding in the Group from 35% to 50%. This was achieved by acquiring a 100% shareholding in VenFin Limited,
who ultimately owns 15% in the Group.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-160

38.

RELATED PARTY TRANSACTIONS (continued)

38.2      Transactions with related parties

Telkom SA Limited (entity with joint control over the Group)

304.0

(82.0)

(798.5)

Audit fees recovered

6.8

4.6

4.8

Cellular usage

31.1

33.1

37.0

Installation of transmission lines

(28.1)

(49.9)

(93.4)

Interconnect expense

(417.2)

(465.3)

(464.3)

Interconnect income

2,732.8

2,728.2

2,817.8

Interest paid – commercial

(0.1)

–

(0.1)

Lease of transmission lines

(438.0)

(511.9)

(752.1)

Other

(3.2)

–

4.8

Site costs

(18.3)

(19.9)

(26.3)

Telephone landline usage

(30.2)

(33.6)

(26.7)

Site costs

–

7.6

10.8

Telkom prepaid vouchers

–

(74.9)

(60.8)

Interest payments on shareholder loan

(21.6)

–

–

Shareholder loan repayment

(460.0)

–

–

Dividend payable

(750.0)

(900.0)

(1,400.0)

Dividend paid

(300.0)

(800.0)

(850.0)

Vodafone Group Plc and subsidiaries

(127.7)

(14.9)

(192.0)

Roaming income

54.9

65.5

73.6

Roaming expense

(50.9)

(63.4)

(90.6)

Global alliance agreement

–

(17.0)

(175.2)

Secondee cost recovery

–

–

0.2

Interest payments on shareholder loan

(7.4)

–

–

Shareholder loan repayment

(124.3)

–

–

Vodafone Holdings (SA) (Proprietary) Limited
(entity with joint control over the Group)

(944.5)

(1,190.0)

(1,575.0)

Interest payments on shareholder loan

(11.8)

–

–

Shareholder loan repayment

(197.7)

–

–

Dividend payable

(525.0)

(630.0)

(980.0)

Dividend paid

(210.0)

(560.0)

(595.0)

VenFin Finance Corporation (Proprietary) Limited

(156.2)

(5.1)

(4.8)

Interest payments

(11.0)

(4.3)

(1.9)

Facility fees

(0.7)

(0.8)

(0.9)

Aircraft charter fees

–

–

(2.0)

Interest payments on shareholder loan

(6.5)

–

–

Shareholder loan repayment

(138.0)

–

–

VenFin Telecommunication Investments Limited
(entity with joint control over the Group)

(315.0)

(510.0)

(675.0)

Dividend payable

(225.0)

(270.0)

(420.0)

Dividend paid

(90.0)

(240.0)

(255.0)

Transactions with entities in which related parties
have an interest

–

–

(20.3)

2004

2005

2006

Rm

Rm

Rm

F-161

38.

RELATED PARTY TRANSACTIONS (continued)

38.3     Key management personnel compensation

(excluding directors’ emoluments)
Key management personnel remuneration

(13.5)

(29.7)

(56.0)

Salaries

(4.4)

(9.9)

(17.1)

Fringe benefits

(0.3)

(0.8)

(0.6)

Bonuses and incentives

(8.8)

(16.7)

(38.2)

Other

–

(2.3)

(0.1)

Included in key management personnel’s remuneration

(0.9)

(1.4)

(2.2)

Pension fund employer contributions

(0.3)

(0.7)

(1.2)

Provident fund employer contributions

(0.4)

(0.3)

(0.6)

Medical aid employer contributions

(0.2)

(0.4)

(0.4)

38.4 Directors’ emoluments

Directors’ remuneration

(27.3)

(52.8)

(96.7)

Executive directors – fees as directors: salaries and
restraint of trade payments

(8.7)

(21.4)

(35.6)

Executive directors – fees as directors: fringe benefits

(0.7)

(0.8)

(0.7)

Executive directors – fees as directors: bonuses and incentives

(17.2)

(30.0)

(59.8)

Non-executive directors – fees as directors

(0.7)

(0.6)

(0.6)

Included in directors’ remuneration

(2.1)

(2.2)

(4.2)

Pension fund employer contributions

(0.7)

(0.8)

(0.5)

Provident fund employer contributions

(1.2)

(1.2)

(3.5)

Medical aid employer contributions

(0.2)

(0.2)

(0.2)

Directors’ remuneration and emoluments paid and accrued by:

(27.3)

(52.8)

(96.7)

Vodacom Group (Proprietary) Limited

(21.4)

(37.0)

(77.1)

Subsidiaries

(5.9)

(15.8)

(19.6)

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

2004

2005

2006

Rm

Rm

Rm

F-162

39.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Group purchases or issues financial instruments in order to finance its operations and to manage the interest rate and
currency risks that arise from its operations and sources of finance. Various financial assets and liabilities for example trade
and other receivables, trade and other payables and provisions, arise directly from the Group’s operations. Changing
market conditions expose the Group to various financial risks and have highlighted the importance of financial risk
management as an element of control for the Group. Principal financial risks faced in the normal course of the Group’s
business are foreign currency risk, interest rate risk, credit risk, price risk and liquidity risk. These risks are managed within
an approved treasury policy, subject to the limitations of the local markets in which the various Group companies operate
and the South African Reserve Bank.

The Group finances its operations through a mixture of retained profits, bank borrowings and long-term loans. Long-term
financing is arranged locally by the South African entities. A treasury division within Vodacom Group (Proprietary) Limited
has been established to provide treasury related services to the Group, including coordinating access to domestic and
international financial markets, and the managing of various financial risks relating to the Group’s operations. The treasury
division is subject to arm’s length fees in terms of transfer pricing for services to offshore subsidiaries.

The Group utilises derivative instruments, the objective of which is to reduce exposure to fluctuations in foreign currency
rates and interest rates, and to manage the liquidity of cash resources within the Group. Trading in derivative instruments for
speculative purposes is strictly prohibited.

Group treasury policies, risk limits and control procedures are continuously monitored by management and the Board of
Directors, through the Audit Committee, the objective being to minimise exposure to foreign currency risk, interest rate risk,
credit risk and liquidity risk. These risks are managed within an approved treasury policy.

39.1 Foreign currency management

The Group enters into foreign exchange contracts to buy specified amounts of various foreign currencies in the future at a
predetermined exchange rate. The contracts are entered into in order to manage the Group’s exposure to fluctuations in
foreign currency exchange rates on specific transactions. The contracts are matched with anticipated future cash flows in
foreign currencies primarily from purchases of capital equipment. The Group’s policy is to enter into foreign exchange
contracts for 100% of the committed net foreign currency payments from South Africa.

The Group has entered into numerous foreign exchange contracts to cover foreign capital commitments in respect of future
imports of GSM infrastructure. The total fair value of foreign exchange contracts at year-end was:

2004

2005

2006

Rm

Rm

Rm

Foreign currency asset
To buy

–

25.0

–

To sell

1.9

–

–

Foreign currency liability
To buy

(64.5)

–

(60.9)

To sell

–

(1.0)

–

(62.6)

24.0

(60.9)

F-163

39.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

39.1     Foreign currency management (continued)

Foreign

Forward Fair

value

contract value

value

Million

Rm

Rm

Forward contracts to buy foreign currency
2004
United States Dollar

10.6

74.7

(7.0)

Euro

91.7

756.2

(41.4)

Pound Sterling

18.4

230.7

(16.1)

Swiss Franc

0.1

0.5

*

1,062.1

(64.5)

2005
United States Dollar

11.8

70.1

3.9

Euro

156.5

1,281.3

14.9

Pound Sterling

45.2

529.1

6.2

Swiss Franc

*

0.1

*

1,880.6

25.0

2006
United States Dollar

7.1

45.0

(0.7)

Euro

154.8

1,208.6

(34.5)

Pound Sterling

41.7

477.8

(25.7)

Swiss Franc

*

0.1

*

1,731.5

(60.9)

Forward contracts to sell foreign currency
2004
United States Dollar

2.2

14.5

0.7

Euro

9.0

70.5

1.2

Pound Sterling

0.2

2.0

*

87.0

1.9

2005
United States Dollar

5.5

33.7

(0.7)

Euro

7.1

57.7

(0.3)

Pound Sterling

0.2

2.6

*

94.0

(1.0)

2006
United States Dollar

0.1

0.8

*

Euro

4.0

30.3

*

Pound Sterling

0.3

3.2

*

Swiss Franc

*

0.1

*

34.4

*

Forward value represents the foreign contract value multiplied by the contracted forward exchange rate.

* Amounts less than R50 000

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-164

39.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

39.1     Foreign currency management (continued)

The Group has various monetary assets and liabilities in currencies other than the Group’s functional currency. The following
table represents the net currency exposure of the Group according to the different functional currencies of each entity within
the Group.

South Euro

Pound

United

Congolese

Swiss

Australian Tanzanian

African

Sterling

States

Franc

Franc

Dollar

Shilling

Rand

Dollar

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

2004
Net foreign currency
monetary assets/
(liabilities)
Functional currency of
company operation

South African Rand

–

(145.1)

(0.1)

(30.0)

–

(0.7)

(0.4)

–

United States Dollar

(7.0)

(682.3)

–

–

14.5

–

–

9.8

Mozambican Meticals (12.5)

–

–

(11.2)

–

–

–

–

(19.5)

(827.4)

(0.1)

(41.2)

14.5

(0.7)

(0.4)

9.8

South Euro

Pound

United

Congolese

Swiss

Mauritian Tanzanian

African

Sterling

States

Franc

Franc

Rupee

Shilling

Rand

Dollar

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

2005
Net foreign currency
monetary assets/
(liabilities)
Functional currency of
company operation

South African Rand

–

(157.0)

(0.4)

(5.3)

–

(0.7)

–

–

United States Dollar

–

(5.0)

–

–

23.8

–

–

–

Tanzanian Shilling

(9.6)

(65.0)

–

45.1

–

(0.1)

–

–

Mozambican Meticals (12.6)

(1.5)

–

(58.7)

–

–

–

–

(22.2)

(228.5)

(0.4)

(18.9)

23.8

(0.8)

–

–

2006
Net foreign currency
monetary assets/
(liabilities)
Functional currency of
company operation

South African Rand

–

(850.5)

(330.4)

45.0

–

(0.2)

(0.8)

–

United States Dollar

(55.9)

(26.2)

–

–

(11.4)

(0.1)

0.1

37.9

Tanzanian Shilling

4.7

(13.6)

–

106.9

–

–

–

–

Mozambican Meticals (0.2)

–

–

–

–

–

–

–

(51.4)

(890.3)

(330.4)

151.9

(11.4)

(0.3)

(0.7)

37.9

F-165

39.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

39.2     Interest rate risk management

The Group’s interest rate profile consisting of fixed and floating rate borrowings which exposes the Group to fair value
interest rate risk and cash flow interest rate risk and can be summarised as follows:

2004

2005

2006

Rm

Rm

Rm

Interest rates
Financial liabilities
Loans and bank borrowings at fixed rates of interest

1,205.1

1,283.7

1,134.5

Bank borrowings linked to money market rates

0.4

0.2

–

Bank borrowings linked to South African prime rates

742.2

1,752.0

1,361.8

Bank borrowings linked to Lesotho prime rates

21.2

15.5

7.5

Loans linked to LIBOR

371.8

1,276.5

1,286.2

Loans linked to EURIBOR

488.2

84.3

58.6

2,828.9

4,412.2

3,848.6

Financial assets
Investments and bank deposits at fixed rates of interest

180.7

1,177.1

168.1

Investments and bank deposits linked to money market rates

1,473.8

2,017.5

471.0

Investments and bank deposits linked to South African prime rates

703.6

829.1

2,603.1

Bank deposits linked to Lesotho prime rates

6.3

6.4

13.5

Interest rate swaps linked to BA rate

35.9

44.2

37.6

Loans and bank deposits linked to LIBOR

449.8

154.4

94.2

Deposits linked to EURIBOR

78.3

–

–

2,928.4

4,228.7

3,387.5

Maturity of financial instruments exposed to interest rate risk

2007

2008

2009

2010

2011

2012

Total

onwards

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Financial liabilities
Linked to fixed rates

406.2

113.5

192.2

98.6

161.7

162.3 1,134.5

Linked to South African prime rates

1,361.8

–

–

–

–

– 1,361.8

Linked to Lesotho prime rates

7.5

–

–

–

–

–

7.5

Loans linked to LIBOR

1,195.3

–

–

–

–

90.9 1,286.2

Linked to EURIBOR

58.6

–

–

–

–

–

58.6

3,029.4

113.5

192.2

98.6

161.7

253.2 3,848.6

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-166

39.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

39.2     Interest rate risk management (continued)

Maturity of financial instruments exposed to interest rate risk (continued)

2007

2008

2009

2010

2011

2012

Total

onwards

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Financial assets
Linked to fixed rates

168.1

–

–

–

–

–

168.1

Linked to money market rates

471.0

–

–

–

–

–

471.0

Linked to South African prime rates

2,603.1

–

–

–

–

–    2,603.1

Linked to Lesotho prime rates

13.5

–

–

–

–

–

13.5

Interest rate swaps linked to BA rate

37.6

–

–

–

–

–

37.6

Loans linked to LIBOR

2.1

–

–

–

–

92.1

94.2

3,295.4

–

–

–

–

92.1     3,387.5

The Group has entered into interest rate swap contracts that entitle, or oblige it to receive interest at a fixed rate on notional
principal amounts and entitle, or oblige it to pay interest at floating rates on the same notional principal amounts. The
interest rate swaps allow the Group to swap long-term debt from fixed rates into floating rates that are lower, or higher,
than those available if it had borrowed at floating rates directly. Under the interest rate swaps, the Group agrees with other
parties to exchange, at specified quarterly intervals, the difference between fixed rate and floating rate interest amounts
calculated by reference to the agreed notional principal amounts.

At March 31, 2006 the Group had three interest rate swaps:

Vodacom Group (Proprietary) Limited – the company swapped its fixed interest rate of 14.9% NACQ (Nominal Annual
Compounded Quarterly) for a floating rate, linked to the BA (Banker’s Acceptance) rate plus margin of 2.0%. The
termination date of the agreement is January 30, 2009.

Vodacom (Proprietary) Limited – the company swapped its fixed interest rate of 20.1% NACQ for a floating rate linked to
the BA rate plus margin of 2.25%. The termination date of the agreement is August 24, 2012.

Vodacom (Proprietary) Limited – the company swapped its fixed interest rate of 13.3% NACM (Nominal Annual
Compounded Monthly) for a floating rate linked to the BA rate plus margin of 2.0%. The termination date of the agreement
is December 1, 2012.

2004

2005

2006

Rm

Rm

Rm

Fair value of interest rate swap asset

35.9

44.2

37.6

The fair value of the interest rate swap asset is represented by a notional principal amount of R217.7 million
(2005: R229.7 million; 2004: R235.0 million) at a weighted average floating interest rate of 9.3% NACM
(2005: 10.0%; 2004: 12.9%).

F-167

39.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

39.3     Credit risk management

Financial assets, which potentially subject the Group to concentrations of credit risk, consist principally of cash, short-term
deposits and trade receivables. The Group’s cash and cash equivalents and short-term deposits are placed with high credit
quality financial institutions. Trade receivables are presented net of an allowance for doubtful receivables. Credit risk with
respect to trade receivables is limited due to the large number of customers comprising the Group’s customer base and
stringent credit approval processes for contracted subscribers. The Group, for its South African operations, spreads its
credit risk exposure amongst the high credit quality financial institutions.

The Group does not have any significant exposure to any individual customer or counter-party, except commercially to
Telkom SA Limited, Mobile Telecommunications Network (Proprietary) Limited and Cell C (Proprietary) Limited.

With respect to the forward exchange contracts, the Group’s exposure is on the full amount of the foreign currency payable
on settlement. The Group minimises such risk by limiting the counter-parties to a group of major local and international
banks, and does not expect to incur any losses as a result of non-performance by these counter-parties. The positions in
respect of these counter-parties are closely monitored.

The carrying amounts of financial assets, excluding foreign currency derivatives and interest rate swaps, included in the
consolidated balance sheet represent the Group’s exposure to credit risk in relation to these assets. The credit exposure of
forward exchange contracts is represented by the fair value of the contracts.

39.4 Price risk management

The Group is exposed to price risk as a result of changes in market prices of financial assets at fair value through profit and
loss and market tradable shares available for sale.

39.5 Liquidity risk management

The Group is exposed to liquidity risk as a result of uncertain accounts receivable related cash flows and the capital
commitments of the Group. In terms of its borrowing requirements, the Group ensures that adequate funds are available to
meet its expected and unexpected financial commitments through utilisation of undrawn borrowing facilities (Note 41). In
terms of its long-term liquidity risk, a reasonable balance is maintained between the period over which assets generate funds
and the period over which the respective assets are funded.

39.6 Fair value of financial instruments

At the balance sheet date, the carrying amounts of cash and short-term deposits, trade and other receivables, trade and
other payables, short-term provisions, dividends payable, bank borrowings and accrued expenses and short-term debt
approximated their fair values due to the short-term maturities of these assets and liabilities.

The fair value of forward exchange contracts and interest rate swaps are determined using quoted prices or, where such
prices are not available, a discounted cash flow analysis is used. These amounts reflect the approximate values of the
derivative positions at balance sheet date.

The fair value of long-term loans and finance leases are determined by discounting contractual cash flows at market related
interest rates.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-168

39.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

39.7      VM, S.A.R.L. call option

In terms of the shareholders’ agreement, the Group’s minority shareholder in VM, S.A.R.L., Empresa Moçambicana De
Telecommunicaçòes S.A.R.L. (“Emotel”) has a call option for a period of four years following the commencement date,
August 23, 2003. In terms of the option, Emotel shall be entitled to call on Vodacom International Limited such numbers
of shares in and claims on loan account against VM, S.A.R.L. as constitute 25% of the entire issued share capital of that
company. Emotel can exercise this option in full increments of 1%. The option can only be exercised on April 1 or
October 1 of each calendar year for the duration of the option. The option price is specified in the shareholders agreement.
The call option has a nil value at March 31, 2006 (2005: Rnil; 2004: Rnil).

39.8 Smartphone SP (Proprietary) Limited put option

In terms of the shareholders’ agreement, the minority shareholders of Smartphone SP (Proprietary) Limited have a put option
against Vodacom Group (Proprietary) Limited, should the Group or the company terminate or fail to renew the Service
Provider Agreement for any reason other than the expiry or cancellation of the Group’s South African licence. The put
option has a nil value at March 31, 2006, 2005 and 2004 as the conditions set out in the agreement have not been met.

39.9 Smartcom (Proprietary) Limited put option

In terms of the agreement between Vodacom Group (Proprietary) Limited (“the Group”), Smartphone SP (Proprietary) Limited
(“Smartphone”) and the minority shareholders of Smartcom (Proprietary) Limited (“Smartcom”), the minority shareholders of
Smartcom have a put option against the Group, should the Group reduce the standard service provider discount below
certain percentages as stipulated in the put option agreement. The put option has a nil value at March 31, 2006 (2005:
Rnil) as the conditions set out in the agreement have not been met.

39.10 Skyprops 134 (Proprietary) Limited call option

In terms of the call option agreement between Vodacom Group (Proprietary) Limited (“Vodacom Group”), FirstRand Bank
Limited (“FirstRand”), Vodacom (Proprietary) Limited (“Vodacom”) and Skyprops 134 (Proprietary) Limited (“company”),
FirstRand grants to Vodacom Group an irrevocable call option to require FirstRand at any time to sell the shares in and
claims against the company to Vodacom Group. Vodacom Group gave notice to exercise the option during the financial
year ended March 31, 2006.

39.11 Congolese Wireless Network s.p.r.l. (“CWN”) put option

In terms of a shareholders agreement, the Group’s joint venture partner in Vodacom Congo (RDC) s.p.r.l., Congolese
Wireless Network s.p.r.l. (“CWN”) has a put option which comes into effect three years after the commencement date,
December 1, 2001, and for a maximum of five years thereafter. In terms of the option, CWN shall be entitled to put to
Vodacom International Limited such number of shares in and claims on loan account against Vodacom Congo (RDC) s.p.r.l.
as constitute 19% of the entire issued share capital of that company. CWN can exercise this option in a maximum of three
tranches and each tranche must consist of at least 5% of the entire issued share capital of Vodacom Congo (RDC) s.p.r.l.
The option price will be the fair market value of the related shares at the date the put option is exercised. The option has
a nil value at March 31, 2006, 2005 and 2004.

39.12 Cointel VAS (Proprietary) Limited

In terms of the sale of shares agreement between Vodacom Group (Proprietary) Limited (“Vodacom Group”) and the sellers
of shares in Cointel VAS (Proprietary) Limited (“Cointel”), the sellers have been granted a put option that requires Vodacom
Group to purchase all (and not part only) of the sellers’ shares in Cointel. The sellers will only be capable to exercise the put
option if the recharge agreement with Vodacom (Proprietary) Limited is not continued after August 31, 2008 on terms and
conditions reasonably acceptable to the sellers. The put option has a nil value at March 31, 2006 as the conditions set out
in the agreement have not been met.

F-169

40.

GOODWILL IMPAIRMENT TEST
The Group periodically evaluates its non-current assets for impairment, whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. The Group’s judgements regarding the existence
of impairment indicators are based on market conditions and operational performance of the business. Future events could
cause management to conclude that impairment indicators exist.

Goodwill impairment tests are performed annually in terms of IFRS 3: Business Combinations (“IFRS 3”) to compare the fair
value of each of the cash generating units to its carrying amount. Goodwill impairment testing is conducted at cash
generating unit levels of the business and is based on a cash flow-based valuation model to determine the fair value of the
cash generating unit. The assumptions used in estimating future cash flows were based upon the business forecasts and
incorporated external information from industry sources, where applicable. Changes in certain of these estimates could have
an effect on the estimated fair value of the cash generating unit. Judgements in estimating discounted cash flows also include
the selection of the pre-tax discount rate (weighted average cost of capital) to be used in the valuation model. The discount
rate used in the valuation model considered a targeted debt and equity mix, a market risk premium, and other factors
considered with valuation methodologies.

Based on the results of the impairment evaluation described above, the recorded goodwill was not impaired as the fair
value of each reporting unit exceeded the carrying value. Minor changes to the valuation model would not significantly
impact the results of the valuation; however, if future cash flows were materially different to the forecasts, then the
assessment of the potential impairment of the carrying value may be impacted.

Goodwill has been allocated for impairment testing purposes to six cash generating units of which four are in South Africa,
one in the Democratic Republic of the Congo and one in Tanzania.

South Africa
The recoverable amounts of goodwill relating to Vodacom Service Provider Company (Proprietary) Limited, Smartphone
SP (Proprietary) Limited, Smartcom (Proprietary) Limited and Cointel VAS (Proprietary) Limited have been determined on the
basis of value in use calculations. These companies operate in the same economic environment for which the same key
assumptions were used. These value in use calculations use cash flow projections based on financial budgets approved by
management covering a four to five year period and discount rates of between 10.6% and 14.9% in Rand terms. None of
the cash flows were extrapolated beyond a five year period and therefore no nominal growth rates are applicable. Cash
flow projections during the budget period for these companies are also based on the same expected growth in operating
profit and earnings before interest, taxation, depreciation and amortisation (“EBITDA”). Management believes that any
reasonable change in any of these key assumptions would not cause the aggregate carrying amount of these companies to
exceed the aggregate recoverable amount of these units.

Democratic Republic of Congo
The recoverable amount of this cash generating unit was based on a value in use calculation for Vodacom Congo (RDC)
s.p.r.l. The calculation uses cash flow projections based on financial budgets approved by management covering a five-year
period and a discount rate of 19.3% in US Dollar terms. Cash flows beyond this period have been extrapolated using
annual nominal growth rates of between 2.5% and 4.4%. Management believes that these growth rates do not exceed the
long-term average growth rate for the market in which this company operates. Management believes that any reasonable
possible change in the key assumptions on which the recoverable amount is based would not cause the carrying amount to
exceed its recoverable amount.

Tanzania
The recoverable amount of this cash generating unit was based on a value in use calculation for Vodacom Tanzania Limited.
The calculation uses cash flow projections based on financial budgets approved by management covering a five year
period and a discount rate of 14.6% in US Dollar terms. Cash flows were not extrapolated beyond this initial five year
period and therefore no nominal growth rate is applicable. Management believes that any reasonable possible change in
the key assumptions on which the recoverable amount is based would not cause the carrying amount to exceed its
recoverable amount.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-170

40.

GOODWILL IMPAIRMENT TEST (continued)

March 31, 2006

South Africa

Democratic

Tanzania

Republic of Congo

Rm

Rm

Rm

Carrying amount of
goodwill

374.3

102.6

7.0

Key assumption

Expected customer base

Expected customer base

Expected customer base

Basis for determining

Closing customer base in

Closing customer base in

Closing customer base in

value(s) assigned to

the period immediately

the period immediately

the period immediately

key assumptions

preceding the budget

preceding the budget

preceding the budget

period increased for

period increased for

period increased for

expected growth.

expected growth.

expected growth.

Value assigned to key

Value assigned to key

Value assigned to key

assumption reflects past

assumption reflects past

assumption reflects past

experience, except for

experience, except for

experience, except for

potential growth. Growth is

potential growth. Growth is

potential growth. Growth is

based on market expectation.

based on market expectation.

based on market expectation.

Key assumption

ARPU

ARPU

ARPU

Basis for determining

Closing customer base in

Closing customer base in

Closing customer base in

value(s) assigned to

the period immediately

the period immediately

the period immediately

key assumptions

preceding the budget

preceding the budget

preceding the budget

period increased for

period increased for

period increased for

expected growth.

expected growth.

expected growth.

Value assigned to key

Value assigned to key

Value assigned to key

assumption reflects past

assumption reflects past

assumption reflects past

experience. Growth is

experience. Growth is

experience. Growth is

based on expected market

based on expected market

based on expected market

forces and external sources

forces and external sources

forces and external sources

of information.

of information.

of information.

Key assumption

Gross margin

Gross margin

Gross margin

Basis for determining

Average gross margin

Average gross margin

Average gross margin

value(s) assigned to

achieved in period

achieved in period

achieved in period

key assumptions

immediately before the

immediately before the

immediately before the

budget period, increased

budget period, increased

budget period, increased

for expected efficiency

expected efficiency

expected efficiency

improvements.

improvements.

improvements.

Value assigned to key

Value assigned to key

Value assigned to key

assumption reflects past

assumption reflects past

assumption reflects past

experience, except for

experience, except for

experience, except for

efficiency improvements.

efficiency improvements.

efficiency improvements.

F-171

40.

GOODWILL IMPAIRMENT TEST (continued)

March 31, 2006

South Africa

Democratic

Tanzania

Republic of Congo

Key assumption

Capital expenditure

Capital expenditure

Capital expenditure

Basis for determining

Total capital expenditure

Total capital expenditure

Total capital expenditure

value(s) assigned to

achieved in period

achieved in period

achieved in period

key assumptions

immediately before the

immediately before the

immediately before the

budget period, adjusted

budget period, adjusted

budget period, adjusted

for expected network

for expected network

for expected network

coverage roll out.

coverage roll out.

coverage roll out.

Value assigned based on

Value assigned based on

Value assigned based on

managements expected

managements expected

managements expected

network coverage roll out.

network coverage roll out.

network coverage roll out.

Key assumption

ZAR/USD exchange rate

ZAR/TZS and USD/TZS

Basis for determining

during the five-year

exchange rates during the

value(s) assigned to key

budget period

five-year budget period

assumptions

Average market forward

Average market forward

exchange rate over the

exchange rate over the

budget period.

budget period.

Value assigned to key

Value assigned to key

assumption is consistent with

assumption is consistent with

external sources of information.

external sources of information.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-172

41.

UNDRAWN BORROWING FACILITIES AND GUARANTEES

41.1     Rand denominated facilities and guarantees

The Group has Rand denominated credit facilities totalling R7,083.0 million with R1,114.0 million utilised at March 31,
2006. The facilities are uncommitted and can also be utilised for loans to foreign entities and are subject to review at
various dates (usually on an annual basis). Certain of the facilities are still subject to the Group’s final acceptance.

Guarantor

Details

Beneficiary

2004

2005

2006

Rm

Rm

Rm

Vodacom (Proprietary) Limited

All guarantees less than
R2.0 million.

Various

3.0

2.8

2.6

Vodacom Service Provider

All guarantees less than

Company (Proprietary) Limited

R2.0 million.

Various

3.1

3.0

2.8

Vodacom Service Provider

Guarantee in respect of

SA Insurance

Company (Proprietary) Limited

receipt by independent

Association

intermediaries of premiums

for benefit

on behalf of short-term insurers

of insurers

14.2

17.8

21.1

and Lloyd’s underwriters, and
relating to short-term insurance
business carried on in South Africa.
Terminates on May 31, 2006.

Smartcom (Proprietary) Limited

Guarantees for salary bank
account and debit orders.

Various

–

3.0

2.9

20.3

26.6

29.4

41.2 Foreign denominated facilities and guarantees

The following foreign denominated facilities are in place:

As at

As at

March 31

March 31

2006

2006

Million

Million

Company

Details

Total facility

Utilised

Vodacom Tanzania Limited

Project finance

US$29.7

US$29.7

Vodacom International Limited

Revolving term loan

US$180.0

US$180.0

Vodacom Congo (RDC) s.p.r.l.

Various

US$5.0

US$5.0

Vodacom Lesotho (Proprietary) Limited

Overdraft facilities with various banks

M47.0

M0.0

VM, S.A.R.L.

Overdraft facility

US$0.5

US$0.0

F-173

41.

UNDRAWN BORROWING FACILITIES AND GUARANTEES (continued)

41.2     Foreign denominated facilities and guarantees (continued)

Guarantor/Issuer

Details

Beneficiary

Currency

2004

2005

2006

Rm

Rm

Rm

Nedbank Limited on

Unsecured standby

Alcatel CIT

€11.4 million

behalf of Vodacom

letters of credit

(2005: €40.7 million;

(Proprietary) Limited

2004: €25.2 million)

194.6

330.0

85.7

Vodacom Group

Guarantees issued

ABSA

€nil (2005:

(Proprietary) Limited

for the obligations of

€nil; 2004:

of Vodacom Congo

€53.8 million)

415.6

–

–

(RDC) s.p.r.l.*

Vodacom Group

Guarantees issued

ABSA

US$nil (2005:

202.1

–

–

(Proprietary) Limited

for the obligations of

US$nil; 2004:

Vodacom Congo

US$32.0 million)

(RDC) s.p.r.l.’s
revolving credit
facility*

Vodacom Group

Guarantees issued

Standard Finance

€nil (2005:

173.8

–

–

(Proprietary) Limited

for the obligations of

(Isle of Man)

€nil; 2004:

Vodacom Congo

Limited

€22.5 million)

(RDC) s.p.r.l.*

Vodacom Group

Guarantees issued

Standard Finance US$nil (2005:

236.8

–

–

(Proprietary) Limited

for the obligations

(Isle of Man)

US$nil; 2004:

of Vodacom Congo

Limited

US$37.5 million)

(RDC) s.p.r.l.*

Vodacom Group

Guarantees issued

Standard Bank

US$180.0 million

–

1,128.8     1,114.4

(Proprietary) Limited

for the obligations of

London Limited

(2005:

Vodacom

and RMB

US$180.0 million;

International Limited’s

International

2004: US$nil)

term loan facility*#

(Dublin) Limited

Vodacom International Guarantees issued

Alcatel CIT

€5.0 million (2004

193.1

121.6

37.6

Limited

for the obligations

€15.0 million;

of Vodacom Congo

2004:€ 25.0 million)

(RDC) s.p.r.l.*

1,416.0

1,580.4     1,237.7

The following foreign denominated guarantees have been issued:

* Foreign denominated guarantees amounting to R1,152.0 million (2005: R1,189.6 million; 2004: R622.3 million) issued in support of Vodacom

Congo (RDC) s.p.r.l. are included as liabilities in the consolidated balance sheet.

# The Group is in compliance with the covenants attached to the term loan facility.

Vodacom (Proprietary) Limited provides an unlimited guarantee for borrowings entered into by Vodacom Group (Proprietary)
Limited.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-174

42.       SEGMENTAL INFORMATION

The Group is primarily an integrated mobile telecommunication and data communication business located in South Africa
and other African countries. The primary reporting format therefore comprises the geographic segments of the Group. The
Group’s two reportable segments are South Africa and other African countries, which represents the aggregate of the
various African operating segments.

South Africa

Other

Eliminations

Total

African

countries

2004

Rm

Rm

Rm

Rm

Geographical segments
Segment revenue

21,369.8

1,496.8

(11.4)

22,855.2

External

21,358.4

1,496.8

–

22,855.2

Inter-segment

11.4

–

(11.4)

–

Segment profit/(loss) from operations

5,296.8

(65.2)

(6.4)

5,225.2

Interest, dividends and other financial income

656.6

Finance costs

(1,107.5)

Profit before taxation

4,774.3

Included in segment profit/(loss) from operations
Depreciation and amortisation

(2,259.2)

(266.1)

(6.4)

(2,531.7)

Property, plant and equipment

(2,062.6)

(254.3)

–

(2,316.9)

Intangible assets

(196.6)

(11.8)

(6.4)

(214.8)

Bad debts written off

(23.5)

(25.3)

–

(48.8)

Capital expenditure

(1,666.3)

(1,345.5)

–

(3,011.8)

Property, plant and equipment

(1,659.3)

(1,231.4)

–

(2,890.7)

Intangible assets

(7.0)

(114.1)

–

(121.1)

Assets
Segment assets

18,958.5

3,350.9

(2,413.2)

19,896.2

Deferred taxation assets

277.8

20,174.0

Liabilities
Segment liabilities

(8,054.9)

(2,427.4)

674.6

(9,807.7)

Deferred taxation liabilities

(410.1)

Taxation liabilities

(852.0)

Dividends payable

(1,500.0)

(12,569.8)

F-175

42.      SEGMENTAL INFORMATION (continued)

South Africa

Other

Eliminations

Total

African

countries

2005

Rm

Rm

Rm

Rm

Geographical segments
Segment revenue

25,049.4

2,270.5

(4.6)

27,315.3

External

25,044.8

2,270.5

–

27,315.3

Inter-segment

4.6

–

(4.6)

–

Segment profit/(loss) from operations

5,492.1

(175.1)

1,161.2

6,478.2

Interest, dividends and other financial income

662.8

Finance costs

(641.7)

Profit before taxation

6,499.3

Included in segment profit/(loss) from operations
Depreciation and amortisation

(2,380.5)

(462.7)

–

(2,843.2)

Property, plant and equipment

(1,974.3)

(439.3)

–

(2,413.6)

Intangible assets

(406.2)

(23.4)

–

(429.6)

Bad debts written off

(19.1)

(33.1)

–

(52.2)

Impairment of assets

(1,161.2)

(268.4)

1,161.2

(268.4)

Capital expenditure

(2,799.8)

(694.0)

–

(3,493.8)

Property, plant and equipment

(2,617.1)

(671.3)

–

(3,288.4)

Intangible assets

(182.7)

(22.7)

–

(205.4)

Assets
Segment assets

20,180.7

3,851.9

(1,745.9)

22,286.7

Deferred taxation assets

308.1

22,594.8

Liabilities
Segment liabilities

(9,430.5)

(3,376.7)

1,005.0

(11,802.2)

Deferred taxation liabilities

(472.1)

Taxation liabilities

(632.6)

Dividends payable

(1,800.0)

(14,706.9)

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-176

42.       SEGMENTAL INFORMATION  (continued)

South Africa

Other

Eliminations

Total

African

countries

2006

Rm

Rm

Rm

Rm

Geographical segments
Segment revenue

31,101.3

2,974.0

(32.8)

34,042.5

External

31,081.7

2,960.8

–

34,042.5

Inter-segment

19.6

13.2

(32.8)

–

Segment profit/(loss) from operations

8,841.6

261.2

(237.1)

8,865.7

Interest, dividends and other financial income

659.3

Finance costs

(1,318.2)

Profit before taxation

8,206.8

Included in segment profit/(loss) from operations
Depreciation and amortisation

(2,454.2)

(541.6)

–

(2,995.8)

Property, plant and equipment

(2,128.6)

(523.0)

–

(2,651.6)

Intangible assets

(325.6)

(18.6)

–

(344.2)

Bad debts written off

(32.4)

(9.9)

–

(42.3)

Impairment of assets

(270.0)

52.8

270.0

52.8

Capital expenditure

(4,435.6)

(742.1)

–

(5,177.7)

Property, plant and equipment

(3,976.9)

(722.5)

–

(4,699.4)

Intangible assets

(458.7)

(19.6)

–

(478.3)

Assets
Segment assets

22,340.6

4,030.3

(1,900.7)

24,470.2

Deferred taxation assets

297.6

24,767.8

Liabilities
Segment liabilities

(9,654.7)

(3,558.1)

1,149.8

(12,063.0)

Deferred taxation liabilities

(602.3)

Taxation liabilities

(630.2)

Dividends payable

(2,800.0)

(16,095.5)

F-177

42.       SEGMENTAL INFORMATION (continued)

Unallocated

Networks

Service

Other

Eliminations

Total

providers

2004

Rm

Rm

Rm

Rm

Rm

Rm

Business segments
Segment revenue

–

20,787.9

5,526.1

174.2

(3,633.0)

22,855.2

External

–

20,787.9

1,939.8

127.5

–

22,855.2

Inter-segment

–

–

3,586.3

46.7

(3,633.0)

–

Segment profit/(loss)
from operations

26.7

4,876.1

614.1

(114.8)

(176.9)

5,225.2

Interest, dividends and other
financial income

656.6

Finance costs

(1,107.5)

Profit before taxation

4,774.3

Included in segment profit/
(loss) from operations
Depreciation and amortisation

(3.3)

(2,222.9)

(114.0)

(1.4)

(190.1)

(2,531.7)

Property, plant and equipment

(3.3)

(2,204.4)

(108.0)

(1.2)

–

(2,316.9)

Intangible assets

–

(18.5)

(6.0)

(0.2)

(190.1)

(214.8)

Bad debts written off

–

(30.9)

(17.9)

–

–

(48.8)

Capital expenditure

(4.1)

(2,934.1)

(72.3)

(1.3)

–

(3,011.8)

Property, plant and equipment

(4.1)

(2,820.0)

(65.3)

(1.3)

–

(2,890.7)

Intangible assets

–

(114.1)

(7.0)

–

–

(121.1)

Assets
Segment assets

9,991.1

16,775.5

3,606.5

1,651.1

(12,128.0)

19,896.2

Deferred taxation assets

277.8

20,174.0

Liabilities
Segment liabilities

(2,531.2)

(13,332.9)

(3,734.6)

(327.4)

10,118.4

(9,807.7)

Deferred taxation liabilities

(410.1)

Taxation liabilities

(852.0)

Dividends payable

(1,500.0)

(12,569.8)

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-178

42.        SEGMENTAL INFORMATION (continued)

Unallocated

Networks

Service

Other

Eliminations

Total

providers

2005

Rm

Rm

Rm

Rm

Rm

Rm

Business segments
Segment revenue

–

24,926.3

6,734.4

135.2

(4,480.6)

27,315.3

External

–

24,950.3

2,274.4

90.6

–

27,315.3

Inter-segment

–

(24.0)

4,460.0

44.6

(4,480.6)

–

Segment profit/(loss)
from operations

(1,123.7)

5,749.8

841.4

(318.8)

1,329.5

6,478.2

Interest, dividends and other
financial income

662.8

Finance costs

(641.7)

Profit before taxation

6,499.3

Included in segment profit/(loss)
from operations
Depreciation and amortisation

(3.6)

(2,508.7)

(140.9)

(1.2)

(188.8)

(2,843.2)

Property, plant and equipment

(3.6)

(2,335.5)

(73.3)

(1.2)

–

(2,413.6)

Intangible assets

–

(173.2)

(67.6)

–

(188.8)

(429.6)

Bad debts written off

–

(33.1)

(19.1)

–

–

(52.2)

Impairment of assets

(1,161.2)

(268.4)

–

(355.1)

1,516.3

(268.4)

Capital expenditure

(22.9)

(3,385.0)

(85.5)

(0.4)

–

(3,493.8)

Property, plant and equipment

(22.9)

(3,217.4)

(47.7)

(0.4)

–

(3,288.4)

Intangible assets

–

(167.6)

(37.8)

–

–

(205.4)

Assets
Segment assets

8,624.2

17,530.3

6,854.8

2,399.1

(13,121.7)

22,286.7

Deferred taxation assets

308.1

22,594.8

Liabilities
Segment liabilities

(2,160.9)

(13,564.9)

(6,784.7)

(1,481.7)

12,190.0

(11,802.2)

Deferred taxation liabilities

(472.1)

Taxation liabilities

(632.6)

Dividends payable

(1,800.0)

(14,706.9)

F-179

42.       SEGMENTAL INFORMATION (continued)

Unallocated

Networks

Service

Other

Eliminations

Total

providers

2006

Rm

Rm

Rm

Rm

Rm

Rm

Business segments
Segment revenue

274.2

30,403.9

9,384.5

139.6

(6,159.7)

34,042.5

External

–

30,398.9

3,549.2

94.4

–

34,042.5

Inter-segment

274.2

5.0

5,835.3

45.2

(6,159.7)

–

Segment profit/(loss)
from operations

(483.5)

5,731.2

1,428.2

(126.3)

2,316.1

8,865.7

Interest, dividends and other
financial income

659.3

Finance costs

(1,318.2)

Profit before taxation

8,206.8

Included in segment profit/(loss)
from operations
Depreciation and amortisation

(2.7)

(2,789.6)

(203.2)

(0.3)

–

(2,995.8)

Property, plant and equipment

(2.8)

(2,564.3)

(84.2)

(0.3)

–

(2,651.6)

Intangible assets

0.1

(225.3)

(119.0)

–

–

(344.2)

Bad debts written off

–

(10.0)

(32.1)

(0.2)

–

(42.3)

Impairments of assets

270.0

52.8

–

93.8

(363.8)

52.8

Capital expenditure

(52.7)

(4,945.2)

(130.4)

(49.4)

–

(5,177.7)

Property, plant and equipment

(16.5)

(4,521.0)

(112.5)

(49.4)

–

(4,699.4)

Intangible assets

(36.2)

(424.2)

(17.9)

–

–

(478.3)

Assets
Segment assets

5,784.1

20,049.4

5,368.3

2,550.1

(9,281.7)

24,470.2

Deferred taxation assets

297.6

24,767.8

Liabilities
Segment liabilities

(8,156.6)

(12,089.2)

(4,793.0)

(1,395.9)

14,371.7

(12,063.0)

Deferred taxation liabilities

(602.3)

Taxation liabilities

(630.2)

Dividends payable

(2,800.0)

(16,095.5)

“South Africa”, which is also the home country of the parent, comprises the segment information relating to the South
African-based cellular network as well as all the segment information of the service providers and other business segments.

“Other African countries” comprise only of cellular networks and are located in Tanzania, Lesotho, Democratic Republic of
Congo and Mozambique, and it also includes the international holding company situated in Mauritius.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-180

42.

SEGMENTAL INFORMATION (continued)
“Unallocated” comprises the reporting relevant to Vodacom Group (Proprietary) Limited, the parent company in the Group.
This company is primarily a management services company, that offers combined administrative, advisory and management
services to companies within the rest of the Group.

“Networks” comprise services provided by cellular networks within South Africa and other African countries. Services
offered by the companies include the standard voice telecommunication services of cellular networks as well as data
communication services through the cellular network, including short message servicing (“SMS”), wireless application
protocol (“WAP”), general packet radio system (“GPRS”) and multimedia messaging services (“MMS”).

“Service providers” comprise services provided by cellular telecommunication service providers within South Africa. Cellular
telecommunication service providers act as agents for the respective networks and on sells airtime to customers.

“Other” comprises of other companies and business lines of the Group which do not fall within the Group’s strategic focus
and do not constitute a separately reportable segment.

Accounting policies and basis of preparation
Segment information is prepared in conformity with the accounting policies adopted for preparing and presenting the
consolidated financial statements.

Segment revenue excludes Value Added Taxation and includes inter-Group revenue. Net revenue represents segment
revenue from which inter-Group revenue has been eliminated. Sales between segments are made on a commercial basis.
Segment profit/(loss) from operations represents segment revenue less segment operating expenses. Segment expenses
include direct and operating expenses. Integration costs, disposals of operations and impairments, depreciation and
amortisation have been allocated to the segments to which they relate.

The segment assets and liabilities comprise all assets and liabilities of the different segments that are employed by the
segment and that either are directly attributable to the segment, or can be allocated to the segment on a reasonable basis.
Unallocated assets and liabilities comprise of deferred taxation and other unallocatable balances.

Capital expenditure in property, plant and equipment, investment properties and intangible assets has been allocated to the
segments to which they relate.

Segment results and segment assets have been adjusted for the changes in accounting policies reflected in Note 23.

43.

INTEREST IN SUBSIDIARIES
The information discloses interests in subsidiaries material to the financial position of the Group. The interest in the ordinary
share capital is representative of the voting power.

RSA – Republic of South Africa; TZN – Tanzania; LES – Lesotho; MZ – Mozambique; MAU – Mauritius; C – Cellular;
S – Satellite; MSC – Management services company; PROP – Property company; OTH – Other

F-181

Cellular network operators
Vodacom (Proprietary)
Limited (C)

RSA

R100

R100

R100

100

100

100

Vodacom Lesotho
(Proprietary) Limited (C)

LES

M4,180

M4,180

M4,180

88.3

88.3

88.3

Vodacom Tanzania
Limited (C)

TZN

US$100

TZS10,000

TZS10,000

65

65

65

VM, S.A.R.L. (C)

#

MZ

US$60,000,000

US$60,000,000 US$60,000,000

98

98

98

Vodacom Congo
(RDC) s.p.r.l (C)

DRC

–

US$1,000,000

US$1,000,000

–

51

51

Service providers
Vodacom Service Provider
Company (Proprietary)
Limited (C)

RSA

R20

R20

R20

100

100

100

Smartphone SP
(Proprietary) Limited (C)

RSA

R20,000

R20,000

R20,000

51

51

51

Smartcom (Proprietary)
Limited (C)

RSA

–

R1,000

R1,000

–

43.7

43.7

Cointel VAS
(Proprietary) Limited (C)

RSA

–

–

R10,204

–

–

51

Other
VSP Holdings (Proprietary)
Limited (MSC)

RSA

R1,020

R1,020

R1,020

100

100

100

Vodacom Satellite Services
(Proprietary) Limited (S)*

RSA

R100

R100

R100

100

100

100

GSM Cellular
(Proprietary) Limited (C)*

RSA

R1,200

R1,200

R1,200

100

100

100

Vodacom Venture No. 1
(Proprietary) Limited (MSC)*

RSA

R158,999

R810

R810

100

100

100

Vodacom Equipment
Company (Proprietary)
Limited*

RSA

R100

R100

R100

100

100

100

Vodacare (Proprietary)
Limited (C)*

RSA

R100

R100

R100

100

100

100

Vodacom International
Holdings (Proprietary)
Limited (MSC)

RSA

R100

R100

R100

100

100

100

Vodacom International
Limited (MSC)

MAU

US$100

US$100

US$100

100

100

100

Vodacom Properties No. 1
(Proprietary) Limited (PROP)

RSA

R100

R100

R100

100

100

100

Vodacom Properties No. 2
(Proprietary) Limited (PROP)

RSA

–

R1,000

R1,000

–

100

100

Stand 13 Eastwood Road
Dunkeld West
(Proprietary) Limited (PROP)

RSA

R100

R100

R100

51

51

51

Ithuba Smartcall
(Proprietary) Limited (OTH)

RSA

R100

R100

R100

26.5

26.5

26.5

Vodacom Tanzania
Limited (Zanzibar)*

TZN

TZS10,000

TZS10,000

TZS10,000

100

100

100

Joycell Shops (Proprietary)
Limited*

RSA

R100

R100

R100

100

100

100

Vodacom Ventures
(Proprietary) Limited (OTH)

RSA

–

–

R100

–

–

100

* Dormant as at March 31, 2006.
# The issued share capital of the prior years have been restated as a result of the shareholders loan to VM, S.A.R.L. being converted retrospectively into

share capital.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

43.

INTEREST IN SUBSIDIARIES (continued)

Country of

Issued share capital

Interest in issued

incorporation

ordinary share capital

2004

2005

2006

2004

2005

2006

%

%

%

F-182

44.

INTEREST IN JOINT VENTURES
The Group’s joint ventures during the 2004 financial year consisted of Vodacom Congo (RDC) s.p.r.l. The Group acquired its
interest in Vodacom Congo (RDC) s.p.r.l. on December 11, 2001. During the previous financial year the shareholders’
agreement was renegotiated resulting in Vodacom Congo (RDC) s.p.r.l. considered to be a 51% owned subsidiary (Note 30).

2004

2005

2006

Vodacom

Vodacom

Vodacom

Congo (RDC)

Congo (RDC)

Congo (RDC)

s.p.r.l

s.p.r.l

s.p.r.l

Interest held

51%

–

–

Rm

Rm

Rm

The Group’s proportionate share of assets and liabilities:

Property, plant and equipment

620.6

–

–

Intangible assets*

106.0

–

–

Deferred taxation asset

100.2

–

–

Current assets

195.2

–

–

1,022.0

–

–

Long-term liabilities

–

–

–

Preference shares

(243.1)

–

–

Current liabilities

(936.3)

–

–

Net liabilities

(157.4)

–

–

The Group’s proportionate share of revenue and expenditure:

Revenue

475.9

–

–

Loss before taxation after reclassification of preference share dividends*

(128.1)

–

–

Taxation

113.8

–

–

Net loss*

(14.3)

–

–

The Group’s proportionate share of cash flows:

Net cash flows from operating activities

13.0

–

–

Net cash flows utilised in investing activities

(359.4)

–

–

Net cash flows from financing activities

365.4

–

–

Net cash flow

19.0

–

–

The Group’s proportionate share of contingent liabilities
and capital commitments:

Contingent liabilities (Note 35)

–

–

–

Capital commitments

145.2

–

–

*

Goodwill and goodwill amortisation was restated to closing rate and average rate in accordance with the Group’s change in accounting policy as a

result of the adoption of IAS 21: The Effects of Foreign Exchange Rates (“IAS 21”). Intangible assets have accordingly been restated.

F-183

45.

US GAAP INFORMATION
The consolidated annual financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”), which differs in certain respects from Generally Accepted Accounting Principles in the United States
(“US GAAP”). The effect of applying US GAAP principles to net profit and shareholders’ equity is set out below along with
an explanation of applicable differences between IFRS and US GAAP:

2004

2005

2006

Restated

Restated

Notes

Rm

Rm

Rm

Net profit as reported in accordance
with IFRS – restated

3,052.3

3,886.3

5,129.0

Attributable to minority interests

(j)

(26.2)

(30.8)

(116.7)

Net profit attributable to equity shareholders

3,026.1

3,855.5

5,012.3

Adjustments increasing/(decreasing) net profit:

Deferred bonus incentive scheme

(a)

8.6

15.5

5.2

Goodwill – non-amortisation

(b)

93.5

–

–

Business combinations

(m)

4.8

(4.8)

–

Derivative financial instruments – reclassification
of transition adjustments

(e)

7.8

7.8

7.8

Income taxation – other differences

(f)

(144.4)

(99.0)

(199.3)

Normal income taxation effect of US GAAP adjustments

(g)

(6.3)

(5.9)

(4.0)

Foreign exchange translation on net investment in foreign operations

(k)

–

1.0

2.5

Impairment reversal

–

–

(59.9)

Net profit in accordance with US GAAP – restated

2,990.1

3,770.1

4,764.6

Shareholders’ equity as reported in
accordance with IFRS – restated

7,604.2

7,887.9

8,672.3

Adjustments increasing/(decreasing) shareholders’ equity:

Deferred bonus incentive scheme

(a)

35.8

51.3

56.5

Goodwill – amortisation of taxation rate difference

(f)

(17.7)

(17.7)

(17.7)

Goodwill – non-amortisation

(b)

194.5

194.6

194.6

Goodwill – accumulated translation differences

(c)

(7.0)

(10.3)

(10.6)

Minority interest

(j)

(93.0)

(128.7)

(283.3)

Business combinations

(m)

4.8

–

–

Income taxation – other differences

(f)

(981.5)

(1,079.9)

(1,278.6)

Normal income taxation effect of US GAAP adjustments

(g)

(12.2)

(15.5)

(16.5)

Impairment reversal

–

–

(59.9)

Shareholders’ equity in accordance with US GAAP – restated

6,727.9

6,881.7

7,256.8

Movements in shareholders’ equity in
accordance with US GAAP
Balance at the beginning of the year

6,032.6

6,727.9

6,881.7

Net profit for the year

2,990.1

3,770.1

4,764.6

Dividends declared

(2,100.0)

(3,400.0)

(4,500.0)

Foreign currency translation reserve adjustment

(190.0)

(60.2)

115.4

Acquired reserves from the minorities of Vodacom Congo (RDC) s.p.r.l.

–

(151.3)

–

Gain on derivatives – reclassified to earnings, net of taxation

(4.8)

(4.8)

(4.9)

Balance at the end of the year

6,727.9

6,881.7

7,256.8

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-184

45.

US GAAP INFORMATION (continued)
Summary of differences between IFRS and US GAAP

(a)

Deferred bonus incentive scheme
Under IFRS, the total value of deferred bonus entitlements as calculated at the end of each financial period is based on the
net present value of expected future cash payments as determined under the bonus formula over the vesting period.

Under US GAAP, in accordance with FIN 28: “Accounting for Stock Appreciation Rights and Other Variable Stock Option
Awards Plans an Interpretation of APB Opinions No. 15 and 25”, compensation cost is recognised over the service period
or the vesting period if the service period is not defined, based upon the undiscounted value of the entitlements.

(b)

Goodwill – non-amortisation
The Group adopted IFRS 3: Business Combinations (“IFRS 3”) from April 1, 2004, under which acquired goodwill is no
longer amortised, but tested for impairment at least annually (or more frequently if impairment indicators arise). Accordingly,
goodwill arising from the Group’s investments is not subject to amortisation as from April 1, 2004.

Under US GAAP, SFAS 142: Goodwill and Other Intangible Assets (“SFAS 142”) is consistent with IAS 38: Intangible Assets
(“IAS 38”) and IFRS 3 which was adopted by the Group from April 1, 2004. From this date goodwill is no longer amortised.

(c)

Goodwill – translation of goodwill arising on the acquisition of a foreign entity
Under IFRS and US GAAP, goodwill arising on the acquisition of a foreign entity is treated as an asset of the entity and
translated at the foreign exchange rate ruling at the balance sheet date. The resulting foreign exchange transaction gain or
loss is recorded in equity. The difference in the carrying values of goodwill under IFRS and US GAAP which are summarised
below, results in a difference in the accumulated translation amount recorded in equity

2004

2005

2006

Rm

Rm

Rm

A reconciliation of goodwill reported under IFRS at the balance
sheet date to the amounts determined under US GAAP is as follows:
Included in total goodwill reported under IFRS – restated

344.3

413.5

483.9

Goodwill not amortised under US GAAP

194.5

205.0

205.0

Business combination (Note 45 m)

136.0

136.0

136.0

Additional goodwill – income taxation rate change (Note 45 f)

35.8

71.5

50.5

Translation difference on goodwill balance

(7.0)

(10.3)

(10.6)

Goodwill in joint venture (Note 45 i)

(61.2)

–

–

As adjusted under US GAAP

642.4

815.7

864.8

(d)

Income taxes – additional temporary differences
Under IFRS, no deferred taxation liability was recognised in respect of intangible assets acquired other than in a business
combination where there was a difference at the date of acquisition between the assigned values and the taxation bases of
the assets.

Under US GAAP, a deferred taxation liability (and corresponding increase in assets acquired) is recognised for all
temporary differences between the assigned values and the taxation bases of intangible assets acquired. The recording of
such deferred taxation liability has no net impact on net income or shareholder’s equity as determined under US GAAP as
the decrease in income taxation expense is offset by a corresponding increase in amortisation (Note 45 g).

F-185

45.

US GAAP INFORMATION (continued)

(e)

Derivative financial instruments
The Group adopted IAS 39: Financial Instruments – Recognition and Measurement (“IAS 39”) and SFAS 133: Accounting
for Derivative Instruments and Hedging Activities (“SFAS 133”) on April 1, 2001.

Under IFRS, upon adoption of IAS 39 the difference between previous carrying amounts and the fair value of derivatives,
which prior to the adoption of IAS 39 had been designated as either fair value or cash flow hedges but do not qualify as
hedges under IAS 39, is recognised as an adjustment of the opening balance of retained earnings at the beginning of the
financial year IAS 39 is initially applied. Changes in fair value of derivatives acquired after April 1, 2001 are recorded in
the consolidated income statement.

Under US GAAP, upon adoption of SFAS 133, the difference between previous carrying amounts and fair value of
derivatives, which prior to the adoption of SFAS 133 had been cash flow type hedges but do not qualify as hedges under
SFAS 133, is recognised as a cumulative effect adjustment of other comprehensive income in the year SFAS 133 is initially
applied. This amount is subsequently released into earnings in the same period or periods during which the hedged
transaction affects earnings. During the year ended March 31, 2006 R7.8 million (2005: R7.8 million; 2004: R7.8 million)
was released into earnings. The difference between previous carrying amounts and fair value of derivatives, which prior to
the adoption of SFAS 133 had been fair value type hedges, is recognised as a cumulative effect adjustment in earnings.
Changes in fair value of derivatives acquired after April 1, 2001 are recorded in the consolidated income statement.

The Group’s interest rate swaps are classified as trading instruments under IFRS. Under US GAAP, such swaps are classified
based on the maturity date of the swaps. Accordingly, some swaps are classified as long term under US GAAP.

(f)

Income taxation – other differences
Under IFRS, current and deferred taxation assets and liabilities are measured using taxation rates enacted unless
announcements of taxation rates by the government have the substantive effect of actual enactment. The Group’s deferred
taxation assets and liabilities at March 31, 2005 were recorded at the substantially enacted taxation rate of 29%.

The taxation rate in South Africa varies depending on whether income is distributed. Upon distribution an additional
taxation (secondary taxation on companies or “STC”) of 12.5% is due based on the amount of the dividends net of the STC
credit for dividends received during a dividend cycle.

In conformity with IFRS, the Group reflects the STC as a component of the income taxation charge for the period in which
dividends are declared. IFRS also requires that deferred taxation be provided for at the undistributed rate of 29%.

For the purpose of US GAAP, the Group believes that under SFAS 109: Accounting for Income Taxes (“SFAS 109”),
measurement of current and deferred taxation liabilities and assets is based on provisions of the enacted taxation law; the
effects of future changes in taxation laws or rates are not anticipated. Therefore, the enacted rate of 30% should be used for
all taxation amounts (prior to the calculation of STC). Temporary differences should be tax effected using the taxation rate
that will apply when income is distributed, i.e. an effective rate of 36.89% (2005: 37.78%; 2004: 37.78%) including STC.

The Group has therefore computed the estimated STC that would become payable upon distribution of relevant undistributed
earnings and accrued that amount as an additional liability for US GAAP purposes.

The use of the higher rate not only affects the measurement of deferred taxation assets and liabilities, and hence the taxation
charge for any period, but because temporary differences in a business combination need to be tax effected at the higher
rate there is a consequent effect on the amount of goodwill recognised in a business combination under US GAAP.

In addition, SFAS 109 prohibits recognition of deferred taxation assets or liabilities that under SFAS 52 are remeasured
from local currency into the functional currency using historical exchange rates and that result from either changes in
exchange rates or indexing for taxation purposes. The functional currency of Vodacom Congo (RDC) s.p.r.l. is the US$ and
it benefits from indexing for local Democratic Republic of the Congo taxation purposes which gives rise to a deferred
taxation benefit for IFRS purposes of R100.9 million at March 31, 2006.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-186

45.

US GAAP INFORMATION (continued)

(g)

Deferred taxation
The taxation effects of the US GAAP adjustments have been calculated based on the enacted taxation rate of 36.89%
(2005: 37.78%; 2004: 37.78%).

A reconciliation of the deferred taxation balances under IFRS to the approximate amounts determined under US GAAP,
where materially different, is as follows:

2004

2005

2006

Rm

Rm

Rm

Net deferred taxation liabilities:
As reported under IFRS

132.3

164.0

304.7

Additional temporary differences (Note 45 d)

46.0

38.9

37.7

Business combination (Note 45 m)

(58.3)

(62.4)

(41.0)

Income taxation – other difference (Note 45 f)

1,035.0

1,169.1

1,346.8

Taxation effect of US GAAP adjustments

12.2

15.5

16.5

Deferred taxation in joint venture (Note 45 i)

100.2

–

–

As adjusted under US GAAP

1,267.4

1,325.1

1,664.7

Under IFRS, deferred taxation assets on deductible temporary differences are only recognised to the extent that it is
probable that the future taxable profit will allow the deferred taxation asset to be recovered.

Under US GAAP, deferred taxation assets are recognised on all temporary differences. A valuation allowance is recognised
if it is more likely than not that the asset will not be recovered. For US GAAP purposes, an additional deferred taxation
asset and a corresponding valuation adjustment allowance of R279.4 million (2005: R109.3 million; 2004: R24.8 million)
have no effect on the net shareholder’s equity for the current year.

(h)

Capitalised interest
Under IFRS, interest cost incurred during the construction period is expensed as incurred.

Under US GAAP, interest cost incurred during the construction period (i.e. period of time necessary to bring a constructed
fixed asset to the condition and location necessary for its intended use) is capitalised. The capitalised interest is recorded as
part of the asset to which it relates and is amortised over the asset’s estimated useful life. Capitalised interest was nil for the
years ended March 31, 2006, 2005 and 2004 as the effect of capitalising interest, as compared with the effect of
expensing interest, was not material.

(i)

Joint ventures
Under IFRS, investments qualifying as joint ventures are accounted for under the proportionate consolidation method of
accounting. Under the proportionate consolidation method, the venturer records its share of each of the assets, liabilities,
income and expenses of the jointly controlled entity on a line-by-line basis with similar items in the venturer’s financial
statements. The venturer continues to record its share of losses in excess of its net investment of the joint venture.

Under US GAAP, joint ventures are accounted for under the equity method of accounting. Under the equity method, an
investment in a joint venture is shown in the consolidated balance sheet of an investor as a single amount. Likewise, an
investor’s share of earnings or losses from its investment is ordinarily shown in its consolidated income statement as a single
amount. Typically an investor discontinues applying the equity method when its net investment (including net advances) is
reduced to zero, unless the investor has guaranteed obligations of the investee or is otherwise committed to provide further
financial support from the investee.

F-187

45.

US GAAP INFORMATION (continued)

(i)

Joint ventures (continued)
In 2004 and 2003, the Group also proportionately consolidated Vodacom Congo (RDC) s.p.r.l. The summarised financial
statement information for Vodacom Congo (RDC) s.p.r.l. relating to the Group’s pro rata interest is set out in Note 44. Under
US GAAP, the Group’s share of losses of Vodacom Congo (RDC) s.p.r.l. does not exceed the carrying amount of the
investment in the joint venture.

2004

2005

2006

Rm

Rm

Rm

Investment in Vodacom Congo (RDC) s.p.r.l. under US GAAP is as follows:

Initial investment in ordinary shares reported under IFRS

5.1

–

–

Initial investment in preference shares reported under IFRS

243.1

–

–

Group’s share in accumulated losses of the joint venture net of dividends received

(216.6)

–

–

Foreign currency translation reserve under IFRS

85.5

–

–

Foreign currency translation reserve under US GAAP

(3.2)

–

–

Goodwill not amortised under US GAAP

11.2

–

–

Investment in associate under US GAAP

125.1

–

–

During the previous financial year the shareholders’ agreement was amended resulting in Vodacom Congo (RDC) s.p.r.l.
being accounted for as a 51% owned subsidiary (Note 30). Accordingly Vodacom Congo (RDC) s.p.r.l. is consolidated
under both IFRS and US GAAP.

(j)

Minority interest
Under IFRS, net profit attributable for minority interests is included in the Group’s net profit. Under US GAAP, net income attributable
for minority interest is presented as a single line item between the deduction for income taxes and income from continuing operations.

The Group adopted IAS 27: Consolidated and Separate Financial Statements (“IAS 27”), from April 1, 2004. In
accordance with the guidance, the Group has reclassified its minority interest in the consolidated balance sheet from a
liability into equity. The Group applied this reclassification retroactively.

Under US GAAP, minority interest is recorded outside of equity. Therefore, the minority interest under US GAAP is
reclassified at the end of each fiscal year in the shareholders’ equity reconciliation.

In 2003, all the shareholders of Vodacom Tanzania Limited changed the terms of their shareholders loans, which for the Group
were effectively long-term investments, to a non interest-bearing loan due to Vodacom Tanzania Limited securing external debt.
The change in the interest rate applicable to the loan changed the fair value of the loan on that date that the loan became
interest-free. The loan was remeasured to amortised cost and the difference between the nominal amount of the loan and the
fair value on remeasurement date was recorded as a gain in earnings. Under both IFRS and US GAAP, upon consolidation the
Group’s portion of the loan to Vodacom Tanzania Limited was eliminated. Under the revised IFRS accounting in terms of
IAS 27, the remaining portion related to the remeasurement of the loan advanced by the minority shareholders of Vodacom
Tanzania Limited was recorded as a capital contribution by the minority interest in equity. Under US GAAP, the Group recorded
the gain on remeasurement of the minority interest of the loan in “minority interest” and recognised in earnings.

(k)

Foreign exchange translation on net investment in foreign operations
Upon the adoption of IAS 21: The Effects of Changes in Foreign Exchange Rates, the Group has reclassified the foreign
exchange gains or losses of the monetary item that forms part of the net investment in foreign operations which is
denominated in a currency other than the functional currency of either the parent company or the foreign operation through
earnings and not as a separate component of equity.

For US GAAP, in accordance with SFAS 52: Foreign Currency Translation, foreign exchange gains or losses related to a
monetary item that forms part of the net investment in foreign operations are recognised upon consolidation as a component
of equity in other comprehensive income.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-188

45.

US GAAP INFORMATION (continued)

(l)

Comprehensive income

2004

2005

2006

Rm

Rm

Rm

Comprehensive income under US GAAP and accumulated other comprehensive
income balances under US GAAP are summarised as follows:
Net income under US GAAP

2,990.1

3,770.1

4,764.6

Other comprehensive (loss)/income:

Foreign currency translation adjustment

(190.0)

(59.5)

117.2

Gain on derivatives – reclassified to earnings net of tax

(4.8)

(4.8)

(4.9)

Other comprehensive (loss)/income

(194.8)

(64.3)

112.3

Comprehensive income

2,795.3

3,705.8

4,876.9

Accumulated other comprehensive income balances:

Cumulative foreign currency translation adjustments

(346.8)

(406.3)

(289.1)

Cumulative effect adjustment of adoption of SFAS 133

22.8

18.0

13.1

(m)

Business combinations
Under IFRS, the Group elected to fair value 100% of the assets acquired and liabilities assumed, including minority interests.
The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed
should be recognised as an asset referred to as goodwill.

Under US GAAP, the Group fair values the percentage of the assets acquired and liabilities assumed, excluding minority
interests. Similar to IFRS, the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired
and liabilities assumed should be recognised as an asset referred to as goodwill. As a result, the carrying amount of the
goodwill for US GAAP purposes is adjusted to reflect the different values assigned to the intangibles.

Under IFRS and US GAAP, losses are generally only allocated to the minority interest up to the amount of the minority’s
equity in the subsidiary entity. In 2004, the minority interest allocation was a net profit under US GAAP, and a net loss
under IFRS (due to the additional amortisation expense). Therefore, there was no minority interest allocation under IFRS, and
thus there was a GAAP difference effecting net income. In 2005, the minority interest allocation under both IFRS and US
GAAP was a net profit. Therefore, in accordance with IAS 27, the IFRS allocation to minority interest was net of the loss not
allocated to the minority in 2004. No difference in shareholders’ equity exists at the end of 2005.

(n)

Revenue recognition
Under US GAAP, the Group applies EITF 00-21 to its revenue arrangements with multiple deliverables. This application has
not resulted in a difference between the revenue recognised under US GAAP and IFRS.

F-189

45.

US GAAP INFORMATION (continued)

(o)

Recent accounting pronouncements
In December 2004, the FASB issued SFAS 123 (revised 2004), “Share-based Payments” (“SFAS 123R”). This statement
eliminates the option to apply the intrinsic value measurement provisions of APB 25, “Accounting for Stock Issued to
Employees” to stock compensation awards issued to employees. Rather, SFAS 123R requires companies to measure the cost
of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the
award. That cost will be recognised over the period during which an employee is required to provide services in exchange
for the award the requisite service period (usually the vesting period). SFAS 123R applies to all awards granted after the
required effective date and to awards modified, repurchased, or cancelled after that date. For public entities that do not file
as small business issuers, the standard is effective for the first annual reporting period that begins after June 15, 2005.
The Group is currently evaluating the impact of SFAS 123R on its results of operations, financial position and cash flows.

On November 24, 2004, the FASB issued SFAS 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS
151”). The amendments made by SFAS 151 clarify that “abnormal” amounts of idle facility expense, freight, handling costs,
and wasted materials (spoilage) should be recognised as current-period charges and require the allocation of fixed
production overheads to inventory based on the normal capacity of the production facilities. SFAS 151 is the result of a
broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International
Accounting Standards Board (“IASB”) toward development of a single set of high-quality accounting standards. The FASB
and the IASB noted that ARB 43, Chapter 4 and IAS 2, Inventories, are both based on the principle that the primary basis
of accounting for inventory is cost. Both of these accounting standards also require that “abnormal” amounts of idle freight,
handling costs, and wasted materials be recognised as period costs; however, the Boards noted that differences in the
wording of the two standards could have led to the inconsistent application of those similar requirements. The FASB
concluded that clarifying the existing requirements in ARB 43 by adopting language similar to that used in IAS 2 is
consistent with its goals of improving financial reporting in the United States and promoting convergence of accounting
standards internationally. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15,
2005. The Group does not expect the adoption of SFAS 151 to have a material impact on its operations, financial position
or cash flows.

In December 2004, the FASB issued SFAS 153, “Exchanges of Non-monetary Assets” (“SFAS 153”), which amends APB 29:
Accounting for Non-monetary Transactions” to eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS
153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Group does
not expect the adoption of SFAS 151 to have a material impact on its operations, financial position or cash flows.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections”. SFAS 154 replaces APB 20,
“Accounting Changes”, and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements”, and amends the
requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 establishes retrospective
application, unless impracticable, as the required method for reporting a change in accounting principle in the absence of
explicit transition requirements specific to the newly adopted accounting principle. In many, but not all, aspects under SFAS
154 the accounting for changes and error corrections are converged with IAS 8 “Accounting Policies, Changes in
Accounting Estimates and Errors”. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Group is currently evaluating the impact of SFAS 154 on its results of
operations, financial position and cash flows.

In February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments”. SFAS 155 amends
SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities” and resolves issues addressed in SFAS 133 Implementation
Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitised Financial Assets.” SFAS 155 is effective for
all financial instruments acquired or issued after the first fiscal year beginning after September 15, 2006. The Group is
currently evaluating the impact of SFAS 155 on its results of operations, financial position and cash flows.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

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45.

US GAAP INFORMATION (continued)

(o)

Recent accounting pronouncements (continued)
In March 2006, the FASB issued SFAS 156 “Accounting for Servicing of Financial Assets – an amendment of FASB
Statement No. 140”. SFAS 156 amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities”, with respect to the accounting for separately recognised servicing assets and servicing
liabilities. SFAS 156 requires a company to recognise a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract principally in a transfer of the servicer’s financial
assets that either meets the requirements for sale accounting, or is to a qualifying special-purpose entity in a guaranteed
mortgage securitisation in which the transferor retains all of the resulting securities and classifies them as either available-for-
sale securities or trading securities in accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity
Securities”. SFAS 156 requires all separately recognised servicing assets and servicing liabilities to be initially measured at
fair value, if practicable, and permits a company to choose to subsequently measure each class of separately recognised
servicing assets and servicing liabilities using either a specified amortisation method or a specified fair value measurement
method. SFAS 156 is applicable to all transactions entered into in fiscal years that begin after September 15, 2006. The
Group is currently evaluating the impact of SFAS 155 on its results of operations, financial position and cash flows.

46.

NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS ACCOUNTING PRONOUNCEMENTS
Accounting pronouncements adopted at March 31, 2006
The Group adopted the following revised and new International Financial Reporting Standards prior to their effective dates
in the current financial year:

IAS 19

Employee Benefits

IFRS 6

Exploration for and Evaluation of Mineral Resources

IFRIC 4

Determining Whether an Arrangement Contains a Lease

IFRIC 5

Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

IFRIC 6

Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment

The Group adopted the following revised and new International Financial Reporting Standards in accordance with their
effective dates during the current financial year:

IAS 16

Property, Plant and Equipment

IAS 17

Leases

IAS 40

Investment Property

IFRS 4

Insurance Contracts

IFRIC 1

Changes in the Existing Decommissioning, Restoration and Similar Liabilities

IFRIC 2

Member’s Shares in Co-operative Entities and Similar Instruments

The adoption of IFRS 6, IFRIC 1, IFRIC 2, IFRIC 5 and IFRIC 6 had no impact on the Group’s results or cash flow information
for the year ended March 31, 2006.

Please refer to Note 23: Change in Accounting Policies, Reclassifications and Restatements for the effect of the above
adoptions on the financial statements, if any.

Accounting pronouncements not adopted at March 31, 2006
In August 2005 the IASB amended IAS 1: Presentation of Financial Statements (“IAS 1”) to add requirements for disclosure
about capital. These disclosure requirements include the entity’s objectives, policies and processes for managing capital;
quantitative data about what the entity regards as capital; whether the entity has complied with any capital requirements;
and if it has not complied, the consequences of such non-compliance.

These disclosure requirements apply to all entities, effective for annual periods beginning on or after January 1, 2007, with
earlier adoption encouraged.

The Group will adopt the revised IAS 1 during the 2007 financial year and is currently evaluating the effects of the standard.

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46.

NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS ACCOUNTING PRONOUNCEMENTS
(continued)
Accounting pronouncements not adopted at March 31, 2006 (continued)
In April 2005 the IASB issued an amendment to IAS 39: Financial Instruments: Recognition and Measurement (“IAS 39”) to
permit the foreign currency risk of a highly probable intragroup forecast transaction to qualify as the hedged item in a cash
flow hedge in consolidated financial statements – provided that the transaction is denominated in a currency other than the
functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated financial
statements. The amendment also specifies that if the hedge of a forecast intragroup transaction qualifies for hedge
accounting, any gain or loss that is recognised directly in equity in accordance with the hedge accounting rules in IAS 39
must be reclassified into profit or loss in the same period or periods during which the foreign currency risk of the hedged
transaction affects consolidated profit or loss.

In June 2005 the IASB amended IAS 39 to restrict the use of the option to designate any financial asset or any financial
liability to be measured at fair value through profit and loss (the “fair value option”). The new revisions limit the use of the
option to those financial instruments that meet certain conditions. Those conditions are that:
•

The fair value option designation eliminates or significantly reduces an accounting mismatch,

•

A group of financial assets, financial liabilities, or both are managed and their performance is evaluated on a fair
value basis in accordance with a documented risk management or investment strategy,

•

An instrument contains an embedded derivative that meets particular conditions.

The fair value option amendment also provides that if a contract contains an embedded derivative, an entity may generally
elect to apply the fair value option to the entire hybrid (combined) contract, thereby eliminating the need to separate out the
embedded derivative. The abovementioned conditions are not relevant to this election.

In August 2005 the IASB amended the scope of IAS 39 to include financial guarantee contracts issued. However, if an
issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts
and has used accounting applicable to insurance contracts, the issuer may elect to apply either IAS 39 or IFRS 4: Insurance
Contracts (“IFRS 4”) to such financial guarantee contracts. A financial guarantee contract is a contract that requires the
issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make
payment when due.

Under IAS 39 as amended, financial guarantee contracts are recognised:
•

Initially at fair value.

•

Subsequently at the higher of (i) the amount determined in accordance with IAS 37: Provisions, Contingent Liabilities
and Contingent Assets and (ii) the amount initially recognised less, when appropriate, cumulative amortisation
recognised in accordance with IAS 18: Revenue.

The amendments to IAS 39 and IFRS 4 are effective for annual periods beginning on or after January 1, 2006. The Group will
adopt the amended IAS 39 during the 2007 financial year and is currently evaluating the effects of the amended standard.

In December 2005 the IASB amended IAS 21: The Effects of Changes in Foreign Exchange Rates (“IAS 21”). The
amendments concluded that the accounting treatment in consolidated financial statements of a monetary item that forms part
of an entity’s net investment in a foreign operation, should not be dependent on the currency of the monetary item. The
accounting should also not depend on which entity within the Group conducts a transaction with the foreign operation.

The amendment to IAS 21 is effective for annual periods beginning on or after January 1, 2006. The Group will adopt the
amended IAS 21 during the 2007 financial year and is currently evaluating the effects of the amended standard.

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

continued

March 31, 2006

F-192

46.

NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS ACCOUNTING PRONOUNCEMENTS
(continued)
Accounting pronouncements not adopted at March 31, 2006 (continued)
In August 2005 the IASB issued IFRS 7: Financial Instruments: Disclosures (“IFRS 7”). The standard is effective for annual
periods commencing on or after January 1, 2007. The standard adds certain new disclosures about financial instruments to
those currently required by IAS 32: Financial Instruments: Disclosure and Presentation (“IAS 32”). The standard replaces the
disclosures currently required by IAS 30: Disclosures in the Financial Statements of Banks and Similar Financial Institutions
(“IAS 30”). The standard therefore puts all of those financial instruments disclosures together in a new standard.

The Group will adopt IFRS 7 during the 2007 or 2008 financial years and is currently evaluating the effects of the standard.

In November 2005 the IASB issued IFRIC 7: Applying the Restatement Approach under IAS 29 Financial reporting in
Hyperinflationary Economies (“IFRIC 7”). The interpretation is effective for annual periods beginning on or after March 1,
2006. IFRIC 7 contains guidance on how an entity would restate its financial statements in the first year it identifies the
existence of hyperinflation in the economy of its functional currency.

The Group will adopt IFRIC 7 during the 2007 financial year and does not believe that the adoption of the interpretation
will have any effect.

In January 2006 the IASB issued IFRIC 8: Scope of IFRS 2 (“IFRIC 8”). The interpretation is effective for annual periods
beginning on or after May 1, 2006. IFRIC 8 clarifies that IFRS 2: Share-based Payments (“IFRS 2”) applies to arrangements
where an entity makes share-based payments for apparently nil or inadequate consideration. IFRIC 8 explains that, if the
identifiable consideration given appears to be less than the fair value of the equity instruments granted or liability incurred,
this situation typically indicates that other consideration has been or will be received. IFRS 2 therefore applies.

The Group will adopt IFRIC 8 during the 2007 financial year and does not believe that the adoption of the interpretation
will have any effect.

In March 2006 the IASB issued IFRIC 9: Reassessment of Embedded Derivatives (“IFRIC 9”). The interpretation is effective for
annual periods beginning on or after June 1, 2006. IAS 39: Financial Instruments: Recognition and Measurement (“IAS 39”)
requires an entity, when it first becomes a party to a hybrid contract, to assess whether any embedded derivatives contained
in the contract are required to be separated from the host contract and accounted for as if they were standalone derivatives.

IFRIC 9 addresses:
•

Whether IAS 39 requires such an assessment to be made only when the entity first becomes a party to the hybrid
contract, or whether the assessment be reconsidered throughout the life of the contract.

•

Whether a first-time adopter of IFRSs should make its assessment on the basis of the conditions that existed when the
entity first became a party to the contract, or those prevailing when the entity adopts IFRSs for the first time.

The Group will adopt IFRIC 9 during the 2007 or 2008 financial years and is currently evaluating the effects of the standard.

F-193