As filed with the Securities and Exchange Commission on July 17, 2007

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, 2007

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 

509,769,452

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, 2006 and 2005, 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, 2006, 2005 and 2004
contained herein have been adjusted from those consolidated financial statements previously
presented to reflect changes in accounting policy. In addition, the Telkom Group US GAAP income
statement and balance sheet have been restated for the 2006 and 2005 financial years as the group
retrospectively adopted SFAS123(R), share based payments, as of April 1, 2006. The Telkom Group
balance sheet for the 2006 and 2005 financial years has also been restated to reclassify certain
deferred tax balances from non-current assets and liabilities to current assets and liabilities in
accordance with the requirements of SFAS109. Amounts in accordance with US GAAP in respect of
the 2004 financial year have not been restated. In addition, the Vodacom Group US GAAP income
statement and balance sheet have been restated for the 2006, 2005 and 2004 financial years as the
group retrospectively adopted SFAS123(R), share based payments as of April 1, 2006. The
consolidated financial statements and related financial information of the Telkom Group and Vodacom
as of and for the year ended March 31, 2003 cannot be provided without unreasonable effort or
expense due to certain changes in accounting policy and restatements in the 2006 financial year
described in the Telkom Group’s Annual Report on Form 20-F for the year ended March 31, 2006 filed
with the SEC (the “2006 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 changes in
accounting policy that ended prior to the year ended March 31, 2007. 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 changes in accounting policy, 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 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.

2

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; the significant political, economic, regulatory and legal risks associated with
Vodacom’s and Telkom’s investments outside South Africa; continued mobile growth and reductions in
Vodacom’s and Telkom’s net interconnect margins; Telkom’s and Vodacom’s ability to expand their
operations and make acquisitions and investments in other African countries; our ability to improve
and maintain our management information and other systems; 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 negative working capital; continuing rapid
changes in technology and delays in the implementation of new technologies; our ability to reduce
high rates of theft, vandalism, network and payphone fraud and lost revenue to non-licensed
operators; health risks related to 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 amount of
damages Telkom is ultimately required to pay to Telcordia Technologies Incorporated; the outcome of
regulatory, legal and arbitration proceedings, including tariff approvals, and the outcome of Telkom’s
hearings before the Competition Commission and others; any requirements that we unbundle the local
loop, our ability to negotiate favorable terms, rates and conditions for the provision of interconnection
services and facilities leasing services or if ICASA finds that we or Vodacom have significant market
power or otherwise imposes unfavorable terms and conditions on us; 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 and the impact of these requirements on our business; 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, HIV infection, labor laws and labor relations 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

40

Item 5.

Operating and financial review and prospects 

130

Item 6.

Directors, senior management and employees

182

Item 7.

Major shareholders and related party transactions 

207

Item 8.

Financial information

215

Item 9.

The offer and listing

220

Item 10.

Additional information 

222

Item 11.

Quantitative and qualitative disclosures about market risk

252

Item 12.

Description of securities other than equity securities

258

PART II

Item 13.

Defaults, dividend arrearages and delinquencies

259

Item 14.

Material modifications to the rights of security holders and
use of proceeds 

259

Item 15.

Controls and procedures 

259

Item 16A.

Audit committee financial expert 

261

Item 16B.

Code of ethics

261

Item 16C.

Principal accountant fees and services 

262

Item 16D.

Exemptions from the listing standards for audit committees

263

Item 16E.

Purchases of equity securities by the issuer and affiliated purchasers

264

PART III

Item 17.

Consolidated financial statements

265

Item 18.

Consolidated financial statements 

265

Item 19.

Exhibits 

266

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,
TDS Directory Operations, previously Telkom Directory Services; wireless data services through our
wholly owned subsidiary, Swiftnet; and internet services outside South Africa through our newly
acquired wholly owned subsidiary, Africa Online.

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

changes to the basis of preparation:

•  the adoption of revised IAS21 and IAS39 and the adoption of new IFRIC4, which are applicable

for financial years beginning on or after January 1, 2006; and

•  the adoption of new IFRIC7, which is applicable for financial periods beginning on or after

March 1, 2006.

For a more detailed description of these items, please refer to 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.

In addition, the Telkom Group US GAAP income statement and balance sheet have been restated

for the 2006 and 2005 financial years as the group retrospectively adopted SFAS123(R), share based
payments, as of April 1, 2006. The Telkom Group balance sheet for the 2006 and 2005 financial years
has also been restated to reclassify certain deferred tax balances from non-current assets and
liabilities to current assets and liabilities in accordance with the requirements of SFAS109. Amounts in
accordance with US GAAP in respect of the 2004 financial year have not been restated.

The selected financial information presented below as of and for the years ended March 31, 2006,

2005 and 2004 has been adjusted to reflect changes in accounting policy. The consolidated financial
statements and related financial information of the Telkom Group and Vodacom as of and for the year
ended March 31, 2003 cannot be provided without unreasonable effort or expense due to certain
changes in accounting policy and restatements in the 2006 financial year described in the 2006
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 changes in accounting policy that
ended prior to the year ended March 31, 2007. 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.

5

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

each of the three years ended March 31, 2007 was extracted from the Telkom Group’s consolidated
financial statements included in this annual report, which have been audited by Ernst & Young Inc.,
Registered Auditors, Chartered Accountants (SA). The following selected historical consolidated
financial data of the Telkom Group as of and for the year ended March 31, 2004 was extracted from
the Telkom Group’s consolidated financial statements not included in this annual report, which have
also been audited by Ernst & Young Inc., Registered 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 46 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, 2007 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, prepaid lines, ADSL
lines 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 in service 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.

Rand amounts as of and for the year ended March 31, 2007 have been translated into Dollars

solely for your convenience at R7.29 per $1.00, the Rand noon buying rate discussed in Item 3. “Key
Information – Exchange Rates” on March 30, 2007, the last business day prior to 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.

6

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.

THE TELKOM GROUP

Year ended March 31,

2004

2005

2006

2007

2007

ZAR

ZAR

ZAR

ZAR

USD

(in millions, except per share amounts)

Income Statement Data
Amounts in accordance with IFRS

Operating revenue

40,582

43,160

47,625

51,619

7,081

Other income

(1)

255

280

480

384

53

Operating expenses

(31,499) (32,179) (33,428) (37,533)

(5,149)

Employee expenses

(2)

(7,408)

(8,111)

(7,489)

(8,454)

(1,160)

Payments to other operators

(5,985)

(6,132)

(6,826)

(7,590)

(1,041)

Selling, general and administrative

(3)

(7,665)

(8,824) (10,273) (12,902)

(1,770)

Services rendered

(2,269)

(2,021)

(2,114)

(2,291)

(314)

Operating leases

(924)

(803)

(850)

(981)

(135)

Depreciation, amortization, impairments
and write-offs

(4)

(7,248)

(6,288)

(5,876)

(5,315)

(729)

Operating profit

9,338

11,261

14,677

14,470

1,985

Investment income

322

350

397

235

32

Finance charges

(3)

(3,264)

(1,694)

(1,223)

(1,125)

(154)

Profit before tax

6,396

9,917

13,851

13,580

1,863

Taxation

(1,738)

(3,082)

(4,523)

(4,731)

(649)

Profit for the year

4,658

6,835

9,328

8,849

1,214

Attributable to:

Equity holders of Telkom

4,589

6,752

9,189

8,646

1,186

Minority interest

69

83

139

203

28

Weighted average number of ordinary shares
outstanding

Basic

557

541

526

514

514

Diluted

557

543

529

516

516

Earnings per share (cents)

Basic

823.9 1,246.9 1,746.1 1,681.0

230.6

Diluted

823.9 1,244.5 1,736.6 1,676.3

229.9

Dividends per share (cents)

90.0

110.0

900.0

900.0

123.5

Amounts in accordance with US GAAP

RESTATED RESTATED

Operating revenue

30,541

30,887

32,035

32,540

4,464

Operating income

6,853

8,123

10,278

9,097

1,248

Net income

4,215

6,185

8,870

8,394

1,151

Earnings per share (cents)

Basic

756.7 1,142.2 1,685.4 1,632.0

223.8

Diluted

756.7 1,140.0 1,676.3 1,627.5

223.2

7

As of March 31,

2004

2005

2006

2007

2007

ZAR

ZAR

ZAR

ZAR

USD

(in millions)

Balance Sheet Data
Amounts in accordance with IFRS

Total assets

53,174

57,597

57,544

59,146

8,113

Current assets

11,423

15,045

12,731

10,376

1,423

Cash and cash equivalents

3,218

3,210

4,948

749

103

Other current assets

8,205

11,835

7,783

9,627

1,320

Non-current assets

41,751

42,552

44,813

48,770

6,690

Total liabilities

(5)

31,346

31,236

28,078

27,138

3,722

Current liabilities

(6)

14,639

17,366

15,687

18,584

2,549

Short-term debt

(5)(6)

4,473

5,408

4,161

6,467

887

Other current liabilities

10,166

11,958

11,526

12,117

1,662

Non-current liabilities

(7)

16,707

13,870

12,391

8,554

1,173

Long-term debt

(5)(7)

12,703

9,504

7,655

4,338

595

Other non-current liabilities

4,004

4,366

4,736

4,216

578

Total equity

21,828

26,361

29,466

32,008

4,391

Attributable to:

Equity holders of Telkom

21,628

26,141

29,165

31,724

4,352

Minority interest

200

220

301

284

39

Amounts in accordance with US GAAP

RESTATED   RESTATED

Total assets

47,940

52,766

52,452

52,660

7,223

Total liabilities

27,179

28,122

25,158

24,167

3,314

Shareholders’ equity

20,608

24,489

27,135

28,320

3,885

8

Year ended March 31,

2004

2005

2006

2007

2007

ZAR

ZAR

ZAR

ZAR

USD

(in millions)

Cash Flow Data
Amounts in accordance with IFRS

Cash flows from operating activities

13,884

15,711

9,506

9,356

1,283

Cash flows from investing activities

(5,423)

(6,306)

(7,286) (10,412)

(1,428)

Cash flows from financing activities

(6,481)

(9,897)

(258)

(2,920)

(401)

Other Data
Amounts in accordance with IFRS

EBITDA

(8)

16,586

17,549

20,553

19,785

2,714

Total debt (at period end)

(5)(9)

17,176

14,912

11,816

10,805

1,482

Capital expenditures excluding intangibles

4,936

4,464

6,310

8,648

1,186

Capital expenditures including intangibles

5,368

5,851

7,506

10,249

1,406

Year ended March 31,

2003

2004

2005

2006

2007

Fixed-Line Statistical Data
Fixed access lines (thousands) (at period end)

(10)

4,709

4,680

4,726

4,708

4,642

Postpaid

(10)

PSTN

(11)

3,197

3,048

3,006

2,996

2,971

ISDN channels

516

601

664

693

718

Prepaid

817

856

887

854

795

Payphones

(12)

179

175

169

165

158

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

(10)

10.4

10.1

10.1

10.0

9.8

Revenue per fixed access line (ZAR)

(10)

5,157

5,341

5,250

5,304

5,275

Total fixed-line traffic (millions of minutes)

(13)

32,868

32,942

31,706

31,015

29,344

Local

20,396

20,547

19,314

18,253

16,655

Long distance

4,728

4,616

4,453

4,446

4,250

Fixed-to-mobile

4,135

3,980

3,911

4,064

4,103

International outgoing

439

427

415

515

558

International voice over internet protocol

–

25

89

83

38

Interconnection

3,170

3,347

3,524

3,654

3,740

Data Communications Services
(at period end)

Managed network sites

7,729

9,061

11,961

16,887

21,879

Internet dial-up subscribers

98,690    142,208   202,410    228,930    210,453

Internet ADSL subscribers

–

8,559

22,870

53,997

92,140

Internet satellite subscribers

–

192

1,427

1,981

2,420

Total ADSL subscribers

(14)

2,632

20,145

58,278   143,509    255,633

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

(15)

35,361

32,358

28,972

25,575

25,864

Fixed-lines per Telkom employee
(at period end)

(10)(15)

133

145

163

184

180

9

(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 R24 million, R88 million, R961 million and R302 million in
the years ended March 31, 2007, 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. In the year ended March 31, 2007 we recorded a provision of R527 million for probable liabilities related to
Telkom’s arbitration with Telcordia, excluding legal fees, of which R510 million is included in selling, general and
administrative expenses and R11 million for interest and R6 million for foreign exchange rate effect is included in finance
charges.

(4)

Depreciation, amortization, impairments and write-offs include costs in respect of write-offs of R284 million, R188 million,
R210 million and R201 million in the 2007, 2006, 2005 and 2004 financial years, respectively.

(5)

As of March 31, 2007, R4.5 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

2007

2007

ZAR

ZAR

ZAR

ZAR

USD

(in millions)

EBITDA

16,586

17,549

20,553

19,785

2,714

Depreciation, amortization, impairments
and write-offs

(7,248)

(6,288)

(5,876)

(5,315)

(729)

Investment income

322

350

397

235

32

Finance charges

(3,264)

(1,694)

(1,223)

(1,125)

(154)

Taxation

(1,738)

(3,082)

(4,523)

(4,731)

(649)

Profit for the year

4,658

6,835

9,328

8,849

1,214

Attributable to:

Equity holders of Telkom

4,589

6,752

9,189

8,646

1,186

Minority interest

69

83

139

203

28

(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 rate ISDN line includes two access channels
and each primary rate ISDN line includes 30 access channels. Restated revenue per fixed access lines for the 2003
financial year 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 dial up internet traffic.

(14)  Excludes Telkom internal ADSL services of 523, 249, 254, 168 and 37 as of March 31, 2007, 2006, 2005, 2004 and 2003,

respectively.

(15)  Includes employees of Telkom only.

10

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 statement 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, 2007, 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 the revised and new IFRS8 and IFRIC8, respectively, which are applicable

for the financial years beginning on or after May 1, 2006 and January 1, 2009, respectively;

• the adoption of revised IAS21 and IAS39, which are applicable for financial years beginning on

or after January 1, 2006; and

• the adoption of new IFRIC7, which is applicable for financial periods beginning on or after

March 1, 2006.

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.

In addition, the Vodacom Group US GAAP income statement and balance sheet have been

restated for the 2006, 2005 and 2004 financial years as the group retrospectively adopted
SFAS123(R), share based payments, as of April 1, 2006.

The selected financial information presented below and the audited consolidated financial

statements as of and for each of the three years ended March 31, 2007 reflect the above described
restatements. The selected financial information and consolidated financial statements as of and for
the year ended March 31, 2003 have not been presented as these cannot be provided on a restated
basis, without unreasonable effort or expense due to certain changes in accounting policy and
restatements in the 2006 financial year described in the 2006 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 restatements that ended prior to March 31, 2007. 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, 2007 have been extracted from Vodacom’s consolidated financial
statements included in this annual report, which were audited by Deloitte & Touche, Registered
Auditors, Chartered Accountants (SA). The following selected historical consolidated financial data of

11

Vodacom as of and for the year ended March 31, 2004 was extracted from Vodacom’s consolidated
financial statements not included in this annual report, which were also audited by Deloitte & Touche,
Registered Auditors, Chartered Accountants (SA).

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 consolidated 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,
2007 included in this annual report.

EBITDA represents net profit, which includes profit on sale of investments, 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, 2007 have been translated into Dollars

solely for your convenience at R7.29 per $1.00, the Rand noon buying rate discussed in Item 3.
“Key Information – Exchange Rates,” on March 30, 2007, the last business day prior to 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.

12

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.

VODACOM GROUP

Year ended March 31,

2004

2005

2006

2007

2007

ZAR

ZAR

ZAR

ZAR

USD

RESTATED  RESTATED RESTATED

(in millions)

Income Statement Data
Amounts in accordance with IFRS

Revenue

22,855

27,315

34,043

41,146

5,644

Operating expenses

(1)

(17,630)   (20,837)  (25,177)   (30,286)

(4,154)

Operating profit

(2)

5,225

6,478

8,866

10,860

1,490

Interest, dividends and other financial income

657

623

612

1,336

183

Finance cost

(1,108)

(600)

(1,251)

(1,800)

(247)

Profit before tax

4,774

6,501

8,227

10,396

1,426

Taxation

(1,722)

(2,613)

(3,084)

(3,836)

(526)

Net profit

3,052

3,888

5,143

6,560

900

Attributable to:

Equity shareholders

3,026

3,857

5,026

6,342

870

Minority interest

26

31

117

218

30

RESTATED    RESTATED   RESTATED

Amounts in accordance with US GAAP

Net profit for the year

2,985

3,762

4,773

6,559

900

.

13

As of March 31,

2004

2005

2006

2007

2007

ZAR

ZAR

ZAR

ZAR

USD

RESTATED RESTATED RESTATED

(in millions)

Balance Sheet Data
Amounts in accordance with IFRS

Total assets

20,174

22,595

24,768

28,470

3,905

Current assets

7,323

8,706

8,689

7,626

1,046

Cash and cash equivalents

2,370

3,990

3,146

771

106

Other current assets

4,953

4,716

5,543

6,855

940

Non-current assets

12,851

13,889

16,079

20,844

2,859

Total liabilities

12,570

14,707

16,096

18,823

2,582

Current liabilities

10,252

11,474

13,859

15,011

2,059

Short-term debt

(3)

1,617

2,203

3,036

1,380

189

Other current liabilities

8,635

9,271

10,823

13,631

1,870

Non-current liabilities

2,318

3,233

2,237

3,812

523

Long-term debt

(4)

1,217

2,214

819

2,054

282

Other non-current liabilities

1,101

1,019

1,418

1,758

241

Total equity

7,604

7,888

8,672

9,647

1,323

Attributable to:

Equity shareholders of Vodacom

7,511

7,759

8,389

9,426

1,293

Minority interest

93

129

283

221

30

RESTATED RESTATED RESTATED

Amounts in accordance with US GAAP

Shareholders’ equity

6,706

6,850

7,221

8,225

1,128

14

Year ended March 31,

2004

2005

2006

2007

2007

ZAR

ZAR

ZAR

ZAR

USD

RESTATED RESTATED RESTATED

(in millions)

Cash Flow Data
Amounts in accordance with IFRS

Cash flows from operating activities

4,790

4,150

4,501

4,858

666

Cash flows from investing activities

(3,000)

(3,374)

(4,791)

(6,584)

(903)

Cash flows from financing activities

(798)

(195)

(108)

(200)

(27)

Other Data
Amounts in accordance with IFRS

EBITDA

(2)(5)

7,757

9,590

11,809

14,244

1,954

Total debt (at period end)

(6)

2,833

4,417

3,855

3,435

471

Capital expenditures excluding intangibles

2,891

3,288

4,699

6,137

842

South Africa

1,659

2,617

3,977

4,651

638

Other African countries

1,232

671

722

1,486

204

Capital expenditures including intangibles

3,012

3,494

5,142

7,214

990

South Africa

1,666

2,800

4,400

5,638

774

Other African countries

1,346

694

742

1,576

216

Year ended March 31,

2003

2004

2005

2006

2007

Statistical Data
South Africa
Total mobile customers (thousands)
(at period end)

(7)

7,874

9,725

12,838

19,162

23,004

Contract

1,181

1,420

1,872

2,362

3,013

Prepaid

6,664

8,282

10,941

16,770

19,896

Community services telephones

29

23

25

30

95

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

(8)

n/a

n/a

7.9

8.7

10.7

Contract

n/a

n/a

1.5

2.4

3.1

Prepaid

n/a

n/a

9.0

9.6

11.8

Mobile churn (%)

(9)

30.4

36.6

27.1

17.7

33.8

Contract

11.9

10.1

9.1

10.0

9.7

Prepaid

34.0

41.3

30.3

18.8

37.5

Mobile market share (%) (at period end)

57

54

56

58

58

Mobile penetration (%) (at period end)

30.2

39.0

49.5

70.6

84.2

Total mobile traffic (millions of minutes)

(10)

n/a

12,172

14,218

17,066

20,383

Outgoing

n/a

7,647

9,231

11,354

13,638

Incoming

n/a

4,525

4,987

5,712

6,745

Mobile ARPU (ZAR)

183

177

163

139

125

Contract

629

634

624

572

517

Prepaid

90

90

78

69

63

Community services

1,861

2,155

2,321

1,796

902

15

Year ended March 31,

2003

2004

2005

2006

2007

Average MOU

101

96

84

74

69

Contract

269

263

226

206

188

Prepaid

54

56

52

49

47

Community services

3,162

3,061

3,185

2,327

1,151

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

1,933

1,720

1,515

1,257

1,187

Number of mobile employees (at period end)

(11)

3,904

3,848

3,919

4,305

4,727

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

(11)

2,017

2,527

3,276

4,451

4,867

Other African countries

(12)

Total mobile customers (thousands)
(at period end)

(7)

773

1,492

2,645

4,358

7,146

Lesotho

78

80

147

206

279

Tanzania

447

684

1,201

2,091

3,247

Democratic Republic of the Congo

248

670

1,032

1,571

2,632

Mozambique

n/a

58

265

490

988

Churn (%)

(9)

Lesotho

70.6

65.1

17.3

22.3

19.0

Tanzania

13.3

30.0

29.6

28.5

35.6

Democratic Republic of Congo

24.2

20.2

23.1

28.1

30.4

Mozambique

n/a

0.3

11.3

32.2

41.7

Gross connections (thousands)

Lesotho

76

51

70

98

119

Tanzania

262

404

746

1,353

2,092

Democratic Republic of the Congo

260

513

565

892

1,688

Mozambique

n/a

58

225

342

797

Penetration (%) (at period end)

(13)

Lesotho

4.3

5.1

7.4

12.9

17.2

Tanzania

2.2

3.3

5.1

9.2

15.8

Democratic Republic of the Congo

1.0

2.3

3.5

5.5

8.9

Mozambique

n/a

2.6

4.2

8.4

14.3

ARPU

Lesotho (ZAR)

104

125

92

78

75

Tanzania (ZAR)

217

128

81

67

52

Democratic Republic of the Congo (ZAR)

200

150

98

86

77

Mozambique (ZAR)

n/a

110

52

36

28

Number of employees (at period end)

(11)

502

761

1,074

1,154

1,522

Lesotho

74

68

63

67

63

Tanzania

224

316

350

438

527

Democratic Republic of the Congo

204

334

538

479

745

Mozambique

n/a

43

123

170

187

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

(11)

1,540

1,961

2,463

3,776

4,695

16

(1)

Includes other income of R119.8 million, R125.1 million, R63.8 million and R57.6 million in the years ended March 31,
2007, 2006, 2005 and 2004, respectively.

(2)

Operating profit and EBITDA includes an impairment of R268 million in respect of assets in Mozambique in the 2005
financial year, 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 in Mozambique and an impairment loss of R23 million in the 2007 financial year in respect of the
assets in Mozambique due to a decrease in the fair value of the assets.

(3)

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

(4)

Includes long-term portion of finance leases, funding loans and non-interest bearing debt.

(5)

EBITDA can be reconciled to net profit as follows:

Year ended March 31,

2004

2005

2006

2007

2007

ZAR

ZAR

ZAR

ZAR

USD

RESTATED RESTATED RESTATED

(in millions)

EBITDA

7,757

9,590

11,809

14,244

1,954

Depreciation, amortization and impairments

(2,532)

(3,112)

(2,943)

(3,384)

(464)

Interest, dividends and other financial income

657

623

612

1,336

183

Finance costs

(1,108)

(600)

(1,251)

(1,800)

(247)

Taxation

(1,722)

(2,613)

(3,084)

(3,836)

(526)

Net profit

3,052

3,888

5,143

6,560

900

Attributable to:
Equity shareholders of Vodacom

3,026

3,857

5,026

6,342

870

Minority interest

26

31

117

218

30

(6) Includes interest bearing and non-interest bearing debt, funding 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. Up to June 15, 2006, calls forwarded to voicemail were regarded as
revenue generating activity and such SIM cards were classified as active customers. Because a large number of SIM
cards have calls forwarded to voicemail as their only revenue generating activity and a majority of such messages are
never retrieved by the customer, resulting in estimated ARPUs of less than R1 per month, Vodacom changed its definition
of active customers to exclude calls forwarded to voicemail from the definition of revenue generating activity effective
June 15, 2006. Vodacom subsequently changed its definition of revenue generating activity back to include calls
forwarded to voicemail effective September 1, 2006. Vodacom deleted approximately 3 million customers during the
period of this rule change. As a result of the rule change, prepaid churn rates and ARPUs increased during the 2007
financial year.

(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.”

17

(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 the prior year is unavailable.

(11)   Vodacom had a total of 581, 469, 183, 280 and 219 temporary and contract employees as of March 31, 2007, 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

2007

(2)

9.00

(3)

1.25

(3)

36.00

(3)

4.99

(3)

4,677.4

(3)

647.8

(3)

1.9x

2006

(4)

9.00

(5)

1.30

(5)

36.00

(5)

5.22

(5)

4,801.2

(5)

695.8

(5)

1.9x

2005

(6)

1.10

(7)

0.18

(7)

4.40

(7)

0.72

(7)

606.7

(7)

99.1

(7)

11.1x

2004

(8)

0.90

(9)

0.13

(9)

3.60

(9)

0.53

(9)

501.3

(9)

74.5

(9)

9.2x

2003

–

–

–

–

–

–

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 519,711,236 ordinary shares outstanding. As of March 31, 2007, 23,086,074 of the 532,855,528 issued ordinary
shares were held by Telkom’s subsidiaries.

(3)

Includes a 2006 financial year final ordinary dividend No. 11 of R5.00 per share and a special dividend of R4.00 per share
that was paid on July 14, 2006 to shareholders registered as of July 7, 2006.

(4)

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

(5)

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.

(6)

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

(7)

Paid on July 9, 2004.

(8)

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

(9)

Special dividend.

On June 13, 2007, Telkom’s board of directors declared a 2007 financial year final ordinary

dividend No. 12 of R6.00 per share and a special dividend of R5.00 per share to be paid on July 9,
2007 to shareholders registered as of July 6, 2007, which are not included in the table.

Telkom did not declare any dividends in the year 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;

19

• our capital requirements;

• general business conditions and strategies and other investment opportunities;

• dividends received from Vodacom;

• cash flows and the availability of cash;

• net debt levels;

• interest coverage and future expectations;

• share buy back plans;

• the possible effects on our credit worthiness;

• contractual restrictions on the payment of dividends;

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

communications providers; 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 retained earnings in accordance with IFRS for the periods indicated.

Year ended March 31,

2004

2005

2006

2007

2007

ZAR

ZAR

ZAR

ZAR

USD

(in millions)

Retained earnings of Telkom Group in accordance
with IFRS

13,482

19,232

22,904

26,499

3,635

Share of retained earnings of Vodacom

(3,918)

(4,030)

(4,292)

(4,762)

(653)

Distributable retained earnings in accordance
with IFRS

9,564

15,202

18,612

21,737

2,982

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

20

joint venture and certain subsidiaries. The Government announced that the rate will be reduced to
10% with effect from October 1, 2007 and that it intends to abolish secondary tax on companies in the
2008 financial year and replace it with a withholding tax at a rate of 10%, applicable to both South
African residents and non-residents. As a result of the payment of secondary tax on companies and
any future withholding tax, 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 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 and 2007 financial years, 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 October 14, 2004,

October 21, 2005 and October 20, 2006, 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.

In the year ended March 31, 2007, Telkom repurchased 12,089,371 of its ordinary shares at a

volume weighted average price of R132.04 per share, including costs, 1,035,506 of which are in the
process of being cancelled from the issued share capital by the Registrar of Companies. 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.

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

21

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 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, including market

conditions, availability of cash and other investment opportunities and needs. 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. As of March 31, 2007, Telkom had
fully utilized its share premium for this purpose. The tax on such a deemed dividend is payable by the
company at a rate of 12.5%. The Government announced that the rate will be reduced to 10% with
effect from October 1, 2007 and that it intends to abolish secondary tax on companies in the 2008
financial year and replace it with a withholding tax at a rate of 10% applicable to both South Africa
residents and non-residents.

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 R7.29 per $1.00, the Rand noon buying rate on March 30, 2007, the last business day prior
to 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.

End of

Year ended March 31,

High

Low

Average

period

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

2007

7.94

5.98

7.09

7.29

January

7.33

6.88

February

7.28

7.07

March

7.48

7.19

2008

April

7.28

6.98

May

7.18

6.88

June

7.27

7.04

July (through July 13)

7.03

6.96

On July 13, 2007, the Rand noon buying rate was R6.98 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 is currently the only provider of residential public switched telecommunications services in

South Africa. Neotel (Proprietary) Limited, or Neotel, formerly known as SNO Telecommunications
(Pty) Limited, which was granted an additional license to provide public switched telecommunications
services in South Africa, was licensed on December 9, 2005 and commercially launched on August
31, 2006 and commenced providing services in the beginning of the 2007 calendar year to large
corporations and other licensees. Neotel 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. Neotel has indicated that it will begin providing services to residential
customers in the 2007 calendar year. The Government has created an infrastructure company,
Infraco, which is expected to provide inter-city bandwidth at cost price to Neotel, and later to the rest
of the industry, which will further compete with our communications network. A process to issue
additional licenses to small business operators to provide telecommunications services in
underserviced areas with a teledensity of less than 5%, commenced in 2005 and is continuing. 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 the Minister has issued invitations to apply for licenses in 14 additional areas. In August
2006 ICASA recommended to the Minister that licenses be granted to successful applicants in 13 of
these areas. It is expected that further licenses will be issued in the 2007 calendar year.

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 the Electronic Communications Act, No. 36 of 2005, which
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 layered 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, pursuant to the Electronic
Communications Act and determinations issued by the Minister of Communications:

•   mobile cellular operators are permitted to obtain fixed telecommunications links from parties

other than Telkom;

•   VANS operators and private network operators are permitted to resell the telecommunications

facilities that they obtain from Telkom;

•   VANS operators are 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.

24

VANS providers are our main competitors in the data market. They provide competitive internet

protocol virtual private networks and internet service provider services to the business segment.
We also face competition from consumer oriented internet service providers. In addition, our data
services have faced increased competition from competitors in the wireless area that offer competing
broadband services, and, to a lesser extent, Sentech, which owns and operates satellite transmission
systems, a packaged, always-on, bi-directional broadband service via satellite and a wireless
high-speed internet service offer. Competition in the data market is expected to increase.

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
products 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 announced in June 2006 that it entered 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, MTN’s
and Cell C’s 3G networks, mobile customers are also now able to browse the internet on a broadband
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.

There are significant political, economic, regulatory and legal risks associated with Vodacom’s
and Telkom’s African investments outside of South Africa, which could adversely affect their
businesses and cause their financial condition and net income to decline.

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

Tanzania, the Democratic Republic of the Congo and Mozambique and Telkom recently acquired
investments in Africa Online, an internet service provider active in Cote d’Ivoire, Ghana, Kenya,
Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe, and Multi-Links, which provides
telecommunications services throughout Nigeria. These countries have political, economic, regulatory
and legal systems that are still in the process of transformation and are subject to less developed
corporate governance and business practices and more bureaucratic and regulatory delays than those
in the Republic of South Africa. Many of these countries also suffer from poverty, civil strife, political
conflict, corruption and political mismanagement, all of which could make it difficult for Vodacom and
Telkom to comply with legal requirements, including, in the case of Telkom, the Sarbanes-Oxley Act of
2002, or the Sarbanes-Oxley Act, which could subject Vodacom and Telkom to fines and penalties,
adversely affect their business operations, and cause the value of their investments in these countries
and their revenue and net profit to decline. In particular, the Democratic Republic of the Congo has

25

had a history of civil war and its first democratic elections only took place on July 30, 2006. The
regulatory environments in these countries also often lack clarity in a number of areas and are subject
to varying interpretations. Political or economic upheaval or changes in laws and regulations or in their
application may harm the operations of the companies in which Vodacom and Telkom invest and
impact the value of these investments.

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 this in the Democratic Republic of the
Congo and Tanzania. Telkom’s new investments in African countries may experience similar
difficulties. 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. A number of jurisdictions in which Vodacom invests
have also 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 and
Telkom’s ability to fund their investments in these countries, and there are foreign exchange controls
in a majority of these countries, which may restrict Vodacom’s and Telkom’s ability to extract value
from these investments.

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
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.

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

Telkom is pursuing growth through acquisitions and investments in countries throughout the

African continent and elsewhere. In addition, Vodacom intends to continue to seek future growth
opportunities from acquisitions of telecommunications operators or licenses in other African countries.
There are significant risks associated with Telkom’s and Vodacom’s ability to identify and successfully
consummate acquisitions and investments. There are a limited number of acquisition and investment
opportunities and there is substantial competition for the types of acquisitions and investments that
would meet the criteria of Telkom and the shareholders of Vodacom. Increased competition has driven
up the prices for the types of acquisition and investment opportunities Telkom and Vodacom target,
which has made the identification and consummation of acquisition and investment opportunities in
other African countries more difficult. In addition, South African foreign exchange control limitations
could delay or prevent investments by Telkom and Vodacom in other countries. There are also a

26

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 has only recently made its first two
investments outside of South Africa and accordingly, does not have prior experience investing outside
of South Africa. To the extent that Telkom and Vodacom are not able to grow through other
acquisitions and investments, our stock price could decline. Moreover, Telkom and Vodacom could
expend a substantial amount of time and expense pursuing acquisitions they do not consummate,
which could adversely affect their business, financial condition, results of operations and growth.

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

management, financial, technical 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 communications and mobile businesses may involve, among other things,
implementation and integration of management, financial reporting and control systems, 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 Telkom or Vodacom
will be able to integrate successfully any businesses they may acquire.

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, 2007, 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 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.

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 and our current operating support system also 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. We also currently do not have an automated mechanism to manage and
optimize Telkom’s workforce dispatches and are not able to provide an end to end process of order
tracking for our voice customers. 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 and
have launched a scoping exercise to address the evolution to a next generation network. In addition,

27

we have renewed our focus on information risk management and have identified several requirements
for improved security of Telkom’s information technology systems. The full upgrade and integration
between our various operation and support systems and improvements to security of Telkom’s
information technology systems are not expected to be complete until the 2008 financial year. The
implementation of a solution to provide an end to end order tracking for Telkom’s customers with non-
voice related products and services was successfully implemented during the 2007 financial year. The
implementation for voice related products and services is targeted to commence during the 2008
financial year for completion in the 2009 financial year. In addition, some of the information systems in
Telkom’s and 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. 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 increasingly liberalized
South African communications market may be harmed.

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 in the
communications industry due to the continuous evolution and convergence of technologies. Telkom
and Vodacom do not have long term employment agreements with a majority of their senior
management, any of whom may terminate their employment at any time. The loss of key personnel
could disrupt our business operations if we are unable to replace them with similarly qualified
individuals. In April 2007, Papi Molotsane, Telkom’s prior chief executive officer, left the employment of
Telkom and Telkom is currently searching for a new chief executive officer, and in March 2007,
Telkom’s chief technical officer and chief sales and marketing officer resigned from Telkom. We expect
that competition for employees in the South African communications industry will increase as new
competitors enter the market, including Neotel. 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.

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 and Telkom does not have the ability to dictate or modify
Vodacom’s internal control over financial reporting nor the ability in practice to conduct an assessment
of Vodacom’s internal control over financial reporting and has accordingly excluded them from the
scope of Telkom’s Sarbanes-Oxley Section 404 Management Annual Report on Internal Control over
Financial Reporting.

28

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, service its debt and other financial obligations and pay dividends to Telkom’s
shareholders. 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.

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 R8.2 billion as of March 31, 2007,

compared to negative consolidated working capital of approximately R3.0 billion as of March 31, 2006
and approximately R2.3 billion as of March 31, 2005 and Vodacom had negative working capital of
approximately R7.4 billion as of March 31, 2007, compared to negative working capital of
approximately R5.2 billion as of March 31, 2006 and approximately R2.8 billion as of March 31, 2005.
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 and with new borrowings and
borrowings available under existing credit facilities. We had R8.7 billion available under existing credit
facilities as of March 31, 2007. 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 and equipment, 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, packet radio services, 3G technologies, WiMAX Passive Optical Networks,
ADSL2+ and Synchronous High bit rate Digital Subscriber Lines, 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. In addition, changes in technology could make our existing equipment obsolete and we
may not be able to obtain replacement equipment or parts or may be required to spend significant
capital to replace existing equipment, which may not be available on commercially acceptable terms
or at all. 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.

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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 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 times on our network and the network downtimes associated with such faults and network
fraud and payphone fraud have resulted in lost operating revenue and significant costs. Theft of cable
increased significantly in the 2007 financial year due to the increase in the price of copper. 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.

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.

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 38.9% of Telkom’s issued and 40.6% of

Telkom’s outstanding ordinary shares plus the class A ordinary share as of June 29, 2007. 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 29, 2007, the Public
Investment Corporation, an investment management company wholly owned by the South African
Government, held 15.2% of Telkom’s issued and 15.8% of Telkom’s outstanding ordinary shares,
which includes 6.4% of Telkom’s issued and 6.7% of Telkom’s outstanding ordinary 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.

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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 38.9% of Telkom’s issued and 40.6% of

Telkom’s outstanding ordinary shares as of June 29, 2007. The Government also holds significant
equity stakes in other industry participants, including Sentech, and has an indirect 30% equity interest
in Neotel. 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, 2007. The Government has, and in the future may, transfer its existing
business to Neotel or other operators, including value added network service providers. 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

governed by the Electronic Communications Act, which repealed the Telecommunications Act and
came into effect on July 19, 2006. While a new licensing 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 they are amended or replaced by new regulations made to fully implement
the provisions of the Electronic Communications Act. As a result, the regulatory environment is

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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 and limitations 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;

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

available to Neotel 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.

ICASA is the regulatory body that governs the South African communications market pursuant to

the Electronic Communications Act. It has been reported that ICASA may 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 is 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.

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.

Any payments to Telcordia Technologies Incorporated, or Telcordia, in the damages phase of
its arbitration proceedings against Telkom, Telkom will be required to fund cash flows or the
incurrence of debt, which could have a material adverse effect on its financial condition and
results of operations.

Telcordia instituted arbitration proceedings against Telkom in March 2001 seeking to recover

approximately US$130 million for monies outstanding and damages, plus costs and interest at a rate
of 15.5% per year, which was subsequently increased to US$172 million. The arbitration proceeding
relates 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, which was subsequently set aside by the South African High Court. On November 29, 2004,

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the South African Supreme Court of Appeals granted Telcordia leave to appeal. The South African
Supreme Court of Appeals set aside the South African High Court’s ruling, which was subsequently
appealed by Telkom to the South African Constitutional Court and was dismissed by the South African
Supreme Court of Appeal. As a result, the South African Supreme Court of Appeal’s judgment brought
to finality the dispute over the merits of Telcordia’s claim against Telkom and the parties are scheduled
to reconvene the arbitration solely for the purposes of determining the amount of damages to which
Telcordia is entitled. The arbitration proceedings are tentatively scheduled to reconvene in
September 2007.

Although Telkom is currently unable to predict the exact amount that it may eventually be required

to pay Telcordia, it has made provision for estimated liabilities in respect of the Telcordia claim in the
sum of US$70 million (R527 million), including interest but excluding legal fees. Telkom will be
required to fund any payments to Telcordia from cash flows or the incurrence of debt and the amount
of any damages above Telkom’s provision would increase Telkom’s liabilities and decrease its net
profit, which could have a material adverse effect on its financial condition, cash flows and results of
operations. See Item 8 “Financial information – Legal proceedings.”

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, which remain in effect, 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 64% of Telkom’s operating revenue in the year
ended March 31, 2007 was included in this basket. 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 on the pricing and provision of ADSL services were published by ICASA,
which would, among other things, have prohibited Telkom from charging a monthly rental for providing
ADSL service and limited Telkom to charging only an installation fee for such service. The final
regulations published by ICASA on August 17, 2006 did not contain any limitations on the pricing of
these services, but did impose quality of service obligations on Telkom for these services related to,
among other things:

• services to be provided within 30 days from application;

• the provision of uncapped local bandwidth;

• the guarantees of minimum speeds;

• the prohibition of port prioritization; and

• the prohibition of periodic resets.

These limitations on our customer tariffs limit our pricing flexibility and could reduce our net profit.

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.

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

South African Value Added Network Services Providers Association, the South African Internet Service
Providers Association and other VANS, 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 be fined a penalty of up to 10% of Telkom’s
annual turnover, excluding the turnover of subsidiaries and joint venture, for the financial year prior to
the dates of the complaints. 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 relating to certain discount plans that Telkom offers and
Omnilink, M-Web and Internet Solutions relating to the pricing of Telkom’s products and services. 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 consolidated 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 required to unbundle the local loop, or are unable to negotiate favorable terms and
conditions for the provision of interconnection services and facilities leasing services or
ICASA finds that we or Vodacom have significant market power or otherwise imposes
unfavorable terms and conditions on us, our business operations could be disrupted and our
net profit could decline.

Telkom is required to provide interconnection services to the mobile operators, Neotel 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 Neotel 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.
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. Telkom may also be required to lease or otherwise make its
telecommunications facilities available to Neotel beyond the first two years. The Electronic
Communications Act provides that ICASA may prescribe a framework for the unbundling of Telkom’s
local loop, which could significantly increase competition. The Minister of Communications published
policy decisions that the process of unbundling the local loop in South Africa should be urgently
implemented and completed by 2011. In addition, the Minister of Communications issued a policy
decision declaring November 1, 2007 as the date from which the exclusivity provisions in our SAT-3
agreements shall be declared null and void. The Minister of Communications also announced that she
intends to issue a policy direction to ICASA requiring it to prioritize and urgently prescribe a list of
essential facilities, ensuring that the facilities connected to the SAT-3/WASC/SAFE submarine cables
can be quickly accessed.

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

leasing. Pursuant to the Electronic Communications Act, licensees, including Telkom and Vodacom,
must, on request, interconnect with and lease electronic communications facilities to, any other
licensee, unless such request is unreasonable and must enter into interconnection agreements and
facilities leasing agreements for this purpose. Where the parties are unable to reach an agreement,

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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 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. The Electronic
Communications Act also empowers ICASA to impose pro-competitive conditions on operators found
to have significant market power in a market or market segment or market segments that have
ineffective competition, which may affect the manner in which interconnection is provided and facilities
are leased by such operators, and the charges thereof, including the provision of interconnection and
facilities at or near the long run incremental cost, or LRIC, of those services or facilities.

On January 29, 2007, ICASA published a consultation document for public comment and on

May 17, 2007 it held a public enquiry on its intention to define relevant call termination wholesale
markets. In its consultation document ICASA expressed the preliminary view that all providers of
telecommunications networks, including Telkom and Vodacom, have significant market power in their
call termination markets and that the appropriate price controls to be applied to the large operators,
MTN, Vodacom and Telkom, is the LRIC, calculated on the basis of relevant forward looking economic
costs of an efficient operator, including a reasonable cost of capital. On May 3, 2007, ICASA published
a consultation document for public comment on its intention to define relevant end to end leased lines
and other wholesale markets. In its consultation document ICASA defined the wholesale markets for
fixed-line local loop access, fixed-line narrowband exchange lines, call origination and call conveyance,
symmetric broadband originator services, trunk services for transmission within South Africa and
international leased lines. ICASA expressed the preliminary view that Telkom is deemed to have
significant market power in all these markets and the appropriate price controls to be applied is likely to
be the LRIC, calculated on the basis of relevant forward looking economic costs of an efficient operator,
including a reasonable cost of capital. Regulations are expected to follow in due course.

If we are required to unbundle the local loop, are unable to negotiate favorable terms and

conditions for the provisions of interconnection and facilities leasing or ICASA finds that we or
Vodacom have significant market power or otherwise imposes unfavorable terms and conditions on
us, our business operations could be disrupted and our net profit could decline.

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 mandates that fixed-line operators are 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 Neotel’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. In addition, the
Electronic Communication Act mandates 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 2007 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

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Neotel to implement both “block” and individual number portability and discussions on the
implementation of the required inter operator systems are under way with ICASA and Neotel. Telkom
will not be able to determine the time required to implement number portability until the functional
specification regulations are published. Mobile number portability was introduced on November 11,
2006. We have and 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

indirect 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 yet 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. To date, Telkom has not been
able to complete the implementation of all of these requirements, and Vodacom may not be able to
implement these requirements within the time period in which it is ultimately required to implement
them, which has not yet been determined. Furthermore, the implementation of RICA is expected to
have significant cost implications resulting from the 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 information, including billing information. Telkom was not able to completely
comply with all of these requirements by June 2006 and is in consultation with the Office for
Interception Centres and the Department of Communications to adopt a phased approach for
compliance. Telkom however anticipates full compliance for all major technologies, including its public
digital exchanges and internet services, in the 2007 calendar year. The directives for the
implementation of these requirements for private networks have not yet been finalized. 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.

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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. Telkom has applied for an extension of its exemption from these requirements
beyond November 2007. 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 Local Government: Municipal Property Rates
Act, 6 of 2004.

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

The commencement date for the Act was July 2, 2005. 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 policy 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.

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 R6.15 per $1.00 as of March 31, 2006. The value of the Rand as measured
against the Dollar was R7.29 per $1.00 as of March 30, 2007.

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.

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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 R8 million in the year ended March 31, 2005,
and a profit of R123 million in the year ended March 31, 2006 and R202 million in the year ended
March 31, 2007, 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 69% of our total Telkom employees and approximately

12.3% of Vodacom’s employees as of March 31, 2007. Less than 3% of Vodacom’s employees
participated in a strike action in July 2007 and picketed in March 2007 due to disagreements with
Vodacom’s requirement that the Communication Workers Union have representation of at least 30%
of Vodacom’s employees before qualifying for the right to be recognized and negotiate as a trade
union. 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. 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

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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 29, 2007, Government of the Republic of South Africa owned 38.9% of Telkom’s

issued and 40.6% of Telkom’s outstanding ordinary shares, plus the class A ordinary share, the Public
Investment Corporation owned 15.2% of Telkom’s issued and 15.8% of Telkom’s outstanding ordinary
shares, which includes 6.4% of Telkom’s issued and 6.7% of Telkom’s outstanding ordinary shares
acquired in the market, plus the class B ordinary share, and the Elephant Consortium owned 7.0% of
Telkom’s issued and 7.4% 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 5.5 million are the maximum number of shares already granted that will vest
to employees after March 31, 2007. 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.

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.

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”.

39

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.

The principal trading market for Telkom’s ordinary shares is the JSE. In addition, as of March 30,

2007, only 3.3% of the 225,526,185 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.

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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.

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
Posts 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. 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.

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.

Recent developments

Senior management

In April 2007, Papi Molotsane, Telkom’s prior chief executive officer, left the employment of Telkom

and Telkom is currently searching for a new chief executive officer. In March 2007, Telkom’s chief
technical officer and chief sales and marketing officer resigned from Telkom. The board has embarked
on a thorough search process to recruit a chief executive officer with telecommunications experience
and large corporate experience.

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, Neotel. Neotel
was licensed on December 9, 2005 and commercially launched on August 31, 2006 and commenced
providing services in the beginning of the 2007 calendar year to large corporations and other
licensees. Neotel has indicated that it will commence providing services to residential customers in the
2007 calendar year. The Government has created an infrastructure company, Infraco, which is
expected to provide inter-city bandwidth at cost price to Neotel, and later to the rest of the industry,
which will further compete with our communications network.

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Underserviced areas licenses

A process to issue additional licenses to small business operators to provide telecommunications

services in underserviced areas with a teledensity of less than 5%, commenced in 2005 and is
continuing. The Minister of Communications has identified 27 of these underserviced areas. ICASA
has issued licenses to successful bidders in seven of them and the Minister has issued invitations to
apply for licenses in 14 additional areas. In August 2006 ICASA recommended to the Minister that
licenses be granted to successful applicants in 13 of these areas. It is expected that further licenses
will be issued in the 2007 calendar year.

Electronic Communications Act

The Electronic Communications Act, No. 36 of 2005 came into effect on July 19, 2006. The

Electronic Communications Act aims to supplement or replace 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 layered 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 mandates that fixed-line operators are 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. These provisions are retained in the Electronics
Communications Act. Regulations were 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.

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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 Neotel’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. To date, Neotel has not requested carrier pre-
selection. 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 detail is available. ICASA has not yet
defined 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.

Number portability

The Telecommunications Act mandates 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. These provisions are retained in the Electronic Communications Act.
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 2007 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 Neotel to implement both “block” and individual
number portability and discussions on the implementation of the required inter-operator systems are
under way with ICASA and Neotel. Telkom will not be able to determine the time required to
implement number portability until the functional specification regulations are determined. After several
delays, phase one of mobile number portability was launched on November 11, 2006.
Phase 2, which was implemented during April 2007, includes multi-line porting, secure file transfer
protocol access to third parties and operational software upgrades on the central reference data base.
From launch until the end of March 2007 there have been 49,794 successful ports. Cell C registered
a net gain of 14,057 subscribers, Vodacom a net loss of 6,018 subscribers and MTN a net loss of
8,039 subscribers.

Telkom’s price control regulation

Draft regulations on the pricing and provision of ADSL services were published by ICASA which

would, among other things, have prohibited Telkom from charging a monthly rental for providing ADSL
service and limited Telkom to charging only an installation fee for such service. The final regulations
published by ICASA on August 17, 2006 did not contain any additional limitations on the pricing of
these services beyond those combined in the basket of price controlled services, but did impose
quality of service obligations on Telkom for these services. 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”.

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Business Connexion offer

On April 4, 2006, Telkom announced it had made 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 had offered to acquire the outstanding options in BCX on the same
terms and conditions as the offer for the shares. On June 28, 2007, the South African Competition
Tribunal prohibited the proposed merger.

Acquisition of Africa Online

On February 23, 2007, Telkom acquired 100% of the issued share capital of Africa Online from

African Lakes Corporation for a total cost of R150 million. Africa Online is an internet service provider
active in Cote d’Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and
Zimbabwe. Africa Online’s strategy will focus on brand development, creation and development of
customer channels, improvement of network systems, human resources development and an
expansion drive targeting other African countries.

Acquisition of 75% stake in Multi-Links

On April 19, 2007, Telkom acquired 75% of Multi-Links Telecommunications Limited, or Multi-Links

in Nigeria, for US$280 million, or R1,985 million. Multi-Links is a private telecommunications operator
with a Unified Access License allowing fixed, mobile, data, long distance and international
telecommunications services focused primarily on corporate clients in Nigeria. Multi-Links strategy will
focus on brand awareness and promotional campaigns to increase the revenue of fixed-wireless and
mobile customers and will seek to offer easy to understand high value bundles, differentiated on voice
quality and service. Broadband internet with internet service provider services will target high value
bundles. High quality internet protocol next generation network services are planned to be deployed in
Lagos to attract high end corporate users and carrier class wholesale products and services are
planned to be introduced by establishing an earth station to provide international connectivity. The
remaining 25% of Multi-Links is owned by Kenston Investment Limited, an investment company based
in the Isle of Man in the United Kingdom.

Telkom Media

Telkom recently launched Telkom Media (Proprietary) Limited, a private company that intends to

have a 30% black economic empowerment shareholding, in addition to the Telkom BEE component,
which on August 31, 2006 applied to ICASA for a commercial satellite and cable subscription
broadcast license. From May 28 to June 12, 2007 ICASA held public hearings into the applications by
18 applicants for a satellite and cable subscription broadcast license. At the hearings ICASA stated
that they would make an announcement on the issuing of licenses by the end of November 2007. We
cannot assure you that we will obtain a license from ICASA or be able to launch commercial
operations.

Partners in the black economic empowerment entity are expected to be Videovision

Entertainment, MSG Afrika Media and WDB Investment Holdings (Proprietary) Limited. This
shareholding combines a wealth of electronic media expertise. Telkom Media aims to offer two media-
and entertainment services: satellite pay-TV and cable TV, or internet protocol TV.

EASSy consortium

On March 9, 2007 the Eastern Africa Submarine System, or EASSy, supply contract was signed

by the 23-member EASSy consortium with Alcatel-Lucent who will lay the first ever optical submarine
cable network landing in East Africa. Telkom agreed to invest approximately US$18.9 million and will
have an ownership interest in the EASSy cable system of approximately 8%. In addition, Telkom
agreed, in a joint purchase agreement with Vodacom, to invest US$1.5 million for an approximate

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10% equity stake in a special purpose vehicle that was established to coordinate the participation of
smaller operators in the region. The EASSy cable will connect to South Africa at the same landing
point as the SAFE cable in Mtunzini, north of Durban. Telkom will seek to provide network operations
center and administrator services to the EASSy consortium. Telkom also expects to be in a position to
sell onward connectivity to Europe, America and Asia to East African operators using the EASSy
cable. Telkom’s primary use for the EASSy will be to establish and improve its East African fiber
connectivity and also to use EASSy as an alternative global diverse route out of South Africa.

The 9,900 km high performance fibre optic cable is being deployed to link eight countries from

Sudan to South Africa, via Somalia, Kenya, Tanzania, Madagascar and Mozambique. Landings are
planned for Port Sudan, Sudan; Djibouti; Mogadishu, Somalia; Mombasa, Kenya; Dar Es Salaam,
Tanzania; Tollary, Madagascar; Maputo, Mozambique; and Mtunzini, South Africa.

Based on Alcatel-Lucent’s submarine and terrestrial optical solutions, EASSy will connect the

eastern African seaboard as well as landlocked countries, to the rest of the world. It will also provide
connectivity across the continent to support the increase in local traffic from existing and new
broadband services. EASSy is expected to provide Telkom the opportunity to expand its footprint
further into Africa, creating further opportunities for access to future potential markets. In delivering a
regional capacity of up to 320 Gbps, EASSy complements and increases Telkom’s capacity, especially
with regard to taking the 2010 World Cup to the rest of the world. By complementing existing
undersea networks, EASSy is being designed to provide continuity of service in times of natural
disasters and to alleviate congestion during periods of peak traffic.

By interconnecting with Sea-Me-WE 3, Sea-Me-We 4 and SAT-3/SAFE, the EASSy undersea

cable will also serve as a supporting infrastructure for these networks. Landlocked states such as
Ethiopia, Botswana, Rwanda, Burundi, Uganda, Zambia and Zimbabwe will also be able to access the
EASSy cable. The EASSy project is scheduled for completion by the end of the 2008 calendar year.

Vodacom’s acquisitions

Service provider acquisitions

On August 30, 2006 Vodacom purchased an additional 19% shareholding in Smartphone SP

(Proprietary) Limited, or Smartphone, for R333.9 million with goodwill amounting to R313.2 million.,
increasing its shareholding from 51% to 70%, while Smartphone purchased an additional 2.25%
shareholding in Smartcom (Proprietary) Limited, or Smartcom, for R9.1 million on September 13,
2006, increasing its shareholding from 85.75% to 88% with goodwill amounting to R8.2 million.

Vodacom acquired an additional 49% in Cointel on October 4, 2006 for R147.0 million to increase

its shareholding to 100%. The net goodwill arising on the acquisition amounted to R90.9 million.
Vodacom subsequently sold its entire shareholding in Cointel to Smartphone resulting in the
realization of R38.0 million of the goodwill created by the original purchase. Cointel’s core business is
providing value added and m-commerce services to the telecommunications industry.

Vodacom acquired the cellular business of Africell Cellular Services (Pty) Limited, or Africell, an

exclusive Vodacom dealer in South Africa for R80 million, effective October 1, 2006. The net goodwill
on this business combination amounted to R43.7 million.

As of March 31, 2007, 84.2% of Vodacom’s contract customer base and 99.4% of its prepaid

customer base in South Africa was managed by exclusive service providers or controlled directly by
Vodacom.

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Wireless Business Solutions

Vodacom acquired a 10% shareholding in WBS Holdings (Proprietary) Limited, or WBSH, also

known as iBurst, for R80.8 million, including capitalized costs, effective January 31, 2007. iBurst
supplies customers with continued high speed connectivity through broad band internet and email
services. On the same date WBSH also granted Vodacom a call option to subscribe to such number
of additional shares as will result in Vodacom beneficially owning 25.5% of the total issued ordinary
capital of WBSH after the exercise of the option. This call option can be exercised by Vodacom at any
time until September 14, 2007, provided that certain conditions are satisfied on the date of exercise.
Competition Commission and ICASA approval is also required before the call option can be exercised.

On March 30, 2007 Vodacom entered into an infrastructure agreement with Wireless Business

Solutions (Proprietary) Limited, or WBS, whereby WBS appointed Vodacom to design and construct a
WiMAX network for use by WBS.

Vodacom’s acquisitions and dispositions outside of South Africa

Vodacom Congo acquired the internet service provider business of InterConnect s.p.r.l in the

Democratic Republic of the Congo for R21.2 million, effective November 1, 2006. The net goodwill
arising from this business combination amounted to R12.6 million.

As of March 31, 2007, Vodacom owned 98% of Vodacom Mozambique, and the remaining 2%

was held by a local consortium named Empresa Moçambicana de Telecommunicações S.A.R.L, or
EMOTEL. Effective April 1, 2007, Vodacom International Limited sold an 8% stake in Vodacom
Mozambique to local investors with 5% being purchased by Intelec Holdings Limitada and EMOTEL
acquiring an additional 3%.

National Porting Company (Proprietary) Limited

Effective September 20, 2006, Vodacom, MTN and Cell C each acquired a 33.3% stake in

National Porting Company (Proprietary) Limited, which was formed to provide the services necessary
for the three mobile operators to offer mobile number portability as required by ICASA pursuant to the
Telecommunications Act. Each mobile operator acquired 100 shares of National Porting Company for
R1 each, and made a shareholder loan to National Porting Company of R6 million. Mobile number
portability was officially launched on November 11, 2006.

Vodacom Ventures (Proprietary) Limited

Vodacom Ventures (Proprietary) Limited was formed for the purpose of generating innovative

telecommunications products and services for Vodacom by investing in companies. In the 2007
financial year, Vodacom Ventures purchased a 10% equity stake in G-Mobile Holdings Limited,
a Wi-Fi corporation, and a 26% equity stake in Gogga Tracking Solutions (Proprietary) Limited,
a company which services the lower end of the contract market. Vodacom Ventures has an
irrevocable call option to subscribe for such number of further shares of G-Mobile Holdings as will
result in Vodacom Ventures holding and beneficially owning, in aggregate together with its initial stake,
26% of the total issued share capital of G-Mobile Holding Limited after the exercise of the option.
Vodacom Ventures also has a call option to purchase such number of shares in Gogga Tracking
Solutions totaling 23% of the issued share capital of the company on the date upon which the option
is exercised. The option will lapse after 36 months following the month in which certain performance
conditions are satisfied. If this option is exercised, Vodacom will hold 49% of the issued share capital
of Gogga Tracking Solutions (Proprietary) Limited.

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Vodacom’s BEE equity deal

Vodacom is in the process of finalizing a R7.5 billion BEE equity deal whereby both the BEE

partner and employees will have the opportunity to share in the success of the Vodacom going
forward. The deal is anticipated to make a significant contribution to the well being of Vodacom South
Africa and its employees.

Vodacom’s change in South African prepaid customer base

Vodacom’s South Africa operations define active customers as customers with a SIM card that

have revenue generating activity in the three months leading up to the reporting date. Up to June 15,
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 changed its definition of active customers to exclude calls forwarded to voicemail from

the definition of revenue activity effective June 15, 2006. Vodacom subsequently changed its definition
of revenue generating activity back to include calls forwarded to voicemail effective September 1,
2006. 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 mail message by a customer is classified as a revenue generating activity.

Vodacom deleted approximately 3 million customers during the period of this rule change. As a

result of the rule change, prepaid churn rates and ARPU increased during the 2007 financial year.

Vodacom Converged Solutions

During the 2007 year, Vodacom created Vodacom Converged Solutions, which is intended to

become a significant supplier of converged information, communications and technology services
across the entire market, including the bundling of products across previously separate markets into a
one-stop-shop for the customer. It further involves the expansion of the existing network to provide
both fiber and wireless solutions as may be required.

Vodacom agreement with MultiChoice

On May 8, 2007 Vodacom formalized entry into the broadcasting and multimedia market by

announcing that it had secured an exclusive pay TV agency agreement with MultiChoice. With DSTV
Select, Vodacom and non-Vodacom customers have a choice between two DSTV Select bouquets,
each offering a variety of the latest entertainment, news, sport, movies, documentaries and music
channels.

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 R51.6 billion ($7.1 billion), profit for the year attributable to
the equity holders of Telkom of R8.7 billion ($1.2 billion) and cash flow from operating activities of
R9.4 billion ($1.3 billion) in the year ended March 31, 2007 and we had total assets of R59.2 billion
($8.1 billion) and equity attributable to the equity holders of Telkom of R31.7 billion ($4.4 billion) as of
March 31, 2007. As of March 31, 2007, we had approximately 4.6 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

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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, wireless data and other internet services through our TDS Directory Operations,

Swiftnet and newly acquired Africa Online 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, 2007 based on total estimated customers. Vodacom had
30.2 million customers as of March 31, 2007, of which 23.0 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 R41.1 billion
($5.6 billion), net profit attributable to equity shareholders of R6.3 billion ($870 million) and cash
flow from operating activities of R4.9 billion ($666 million) in the year ended March 31, 2007 and
total assets of R28.5 billion ($3.9 billion) and equity attributable to equity holders of Vodacom of
R9.4 billion ($1.3 billion) as of March 31, 2007.

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. Key to maintaining our leading
market position is our continued focus on developing innovative product offerings in anticipation of
client needs, efficiency improvements, deployment of key technologies and the successful
implementation of our business strategy.

We have undertaken the following actions to ensure we retain our position:

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

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

•   organized our sales and marketing force into more specialized divisions to focus on the

different customer reports in South Africa;

•   entered into long term contracts with a number of our larger corporate and business customers

through volume discount plans;

•   developed well established distribution channels such as TelkomDirect, Vodashop distribution

channels and improved our online distribution channel, which offers fully automated purchasing
and provisioning of TelkomInternet via the telkomsa.net website; and

•   improved the value proposal to our customers by launching new bundled packages and

enhancing existing packages such as Telkom Closer and SupremeCall.

48

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, 2007, 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;

•   entered into a supply contract for the development of the EASSy submarine cable system,

which will link eight countries from Sudan to South Africa, connecting the Eastern African
seaboard as well as landlocked countries, to the rest of the world and providing connectivity
across the continent to support the increase in local traffic for existing and new broadband
services;

•   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, WiFi and

WiMAX;

•   evolved our intelligent network service platform capabilities to meet customer demand by

installing an open services platform that will provide value added services across Telkom’s
voice network;

• 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; and

• 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. We are
currently making use of satellites in 15 orbital slots for servicing with and from or to South
Africa. Our satellite capabilities and capacity ensure redundancy in our network and will enable
us to maximize opportunities with Telkom Media and internet service provider services through
Africa Online.

49

We are an integrated communications service provider offering bundled voice, data,
broadband and internet services and mobile services through Vodacom 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, broadband
services and internet services and mobile services through Vodacom. We have undertaken the
following actions to strengthen our data communications service capabilities and improve our
integrated communications service offerings:

•   successfully launched ADSL in August 2002, ISDN in 1995, VPN Supreme in 2003 and WiFi in

2005 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/Ericsson, Alcatel-Lucent, Siemens, Tellabs, Cisco
Systems, Hughes Network Systems, Gilat and Sun Microsystems to provide fully integrated
communications solutions over our core fixed-line network and satellite capacity 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;

•   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; and

•   we are able to offer our customers advanced mobile solutions, including voice and data,

through Vodacom.

We have a highly qualified 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 in the communications industry 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 60% of senior management vacancies from within the company, utilizing the existing
skills and potential of its current employee base. The board has embarked on a thorough search
process to recruit a chief executive officer with telecommunications experience and large corporate
experience.

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

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

market share of approximately 58% as of March 31, 2007 based on total estimated customers.
Vodacom has an extensive network that covers approximately 97.9% of South Africa’s population
based on the last official census conducted in 2001 and approximately 71.2% of the total land surface
area of South Africa as of March 31, 2007. Vodacom has a broad distribution network consisting of
Vodacom owned shops and sales forces and independent dealers, franchises, national chains and

50

Vodacom Direct shops as well as an extensive informal distribution channel servicing primarily the
emerging market. Vodacom continues to enjoy success through its data initiating, with data revenue
contributing 8.1% in the 2007 financial year. Vodacom is expanding its data offering through media
and multimedia initiating.

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

Vodacom is continuing to pursue future growth through selected mobile expansion initiatives in

other 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, low
penetration and 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 Telkom.

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 Telkom. 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, BlackBerry

®

and Vodafone Simply. 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, we are continuing to focus on customers and employees, while continuing to balance
the needs of all stakeholders.

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

• Enhancing customer satisfaction through customer centricity;

• Retaining revenue and generating long term growth, including expansion in Africa;

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

growth through prudent cost management;

• Engaging Telkom’s employees to maintain our competitive advantage;

• Repositioning Telkom stakeholder management to create healthy relationships with all

stakeholders; and

51

• Capitalizing on the growing mobile communications and internet service provider markets in

South Africa and other African markets.

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. A customer centricity office was
established in May 2006 to oversee the development of a customer centric culture across the entire
organization. Telkom’s strategy in this area is to:

•   develop a customer centric culture that permeates the entire organization;

•   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 integrated customer management;

and

•   closer align rewards and recognition programs to customer centricity.

Retaining revenue and generating growth, including expansion in Africa

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

offerings in its rapidly transforming markets in order to supplement diminishing voice 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:

•   grow data and converged internet protocol services throughout South Africa and the African

continent;

•   seek to increase DSL penetration to 15% – 20% of total fixed access lines by the 2011 financial

year, by focusing on price, content, speed and channels to market and offering best in class
prices for entry-level broadband packages to encourage new entrants into the market;

•   grow annuity income by increasing sales of bundled product and service packages;

•   develop new fixed-mobile products;

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

and

•   grow selected wholesale markets.

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 three areas:

•   pursuing information technology acquisition opportunities; and

•   entering the broadcasting environment, through Telkom Media, which has applied for a

commercial satellite broadcasting license; and

•   capitalize on fixed-mobile conveyance opportunities.

Telkom is also seeking new value enhancing opportunities outside South Africa primarily on the

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

•   fixed/mobile;

•   internet service provider services;

•   data and broadband services; and

•   value added network service provider services.

52

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.

Telkom has recently expanded its footprint on the African continent by acquiring Africa Online, an

internet service provider active in Cote d’Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania,
Uganda, Zambia and Zimbabwe. In addition, Telkom recently acquired a 75% interest in Multi-Links in
Nigeria. Multi-Links is a private telecommunications operator with a Unified Access License allowing
fixed, mobile, data, long distance and international telecommunications services focused primarily on
corporate clients in Nigeria. We will seek to leverage from these investments and will continue to
search for new opportunities to extend our presence in Africa.

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

Telkom is in the process of establishing the capability and capacity in its network, operating

support systems, information technology and employee skills to develop its next generation network.
This is expected to facilitate broadband and internet protocol based services in support of Telkom’s
growth strategy, while at the same time enabling future cost savings. Telkom is adopting an
evolutionary approach through incremental roll out of a next generation network capability and will
gradually and selectively be evolving from its legacy networks. Telkom’s objectives and goals for 2010
are to:

•   have selectively migrated converged voice, data and video products to an internet protocol

based next generation network, enabling Telkom to provide a new range of services and
products as a means of generating incremental revenues;

•   have progressed with the consolidation of its network to create opportunities for cost savings;

and

•   assists clients in migrating to Telkom’s next generation network.

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;

•   selectively migrate high revenue and converged services and products towards a network with

reduced network infrastructure, thereby minimizing long-term capital expenditure on legacy
network infrastructure and opportunities for operating expenditure savings; and

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

Engaging Telkom’s people to maintain our competitive advantage

Telkom is continuing to develop 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;

•   transforming towards a customer centric corporate culture; and

•   retaining top talent.

53

Repositioning Telkom stakeholder management to create healthy relationships with all
stakeholders

Telkom is seeking to effectively manage stakeholder relationships, particularly with ICASA, as they

are critical to future pricing levels. Telkom’s strategic objective and goals for the 2011 financial year
are to:

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

emphasis on regulatory risk.

Capitalize on the growing mobile communications and internet service provider markets in
South Africa and other African markets

Telkom is urgently re-evaluating its mobile strategy and investigating opportunities with mobile

partners to provide an integrated and consolidated service provider model across the fixed and mobile
value chain, with integration capabilities into the managed hosting environment. There can be no
assurance that Telkom’s current mobile strategy will change or that Telkom will be successful in
pursuing any new mobile opportunities. 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. 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 strategies, capital expenditures and
operating expenses. Vodacom also aims to grow and consolidate its current business, seek out
new business opportunities in South Africa and gear up to provide total converged solutions to
corporate customers. During previous years Vodacom has sought to streamline its relationships
with its customers by increasing direct ownership of service providers. On August 30, 2006
Vodacom purchased an additional 19% shareholding in Smartphone, increasing its
shareholding from 51% to 70%, while Smartphone purchased an additional 2.25% shareholding
in Smartcom on September 13, 2006, increasing its shareholding to 88%. On October 4, 2006,
Vodacom acquired an additional 49% in Cointel, increasing its shareholding to 100%. Vodacom
subsequently sold its entire shareholding in Cointel to Smartphone. Effective October 1, 2006,
Vodacom acquired the cellular business of Africell, an exclusive Vodacom dealer in South
Africa. As of March 31, 2007, 84.2% of Vodacom’s contract customer base and 99.4% of its
prepaid customer base in South Africa was managed by exclusive service providers or
controlled directly by Vodacom.

• 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, BlackBerry

®

and

Vodafone Simply. Vodacom also launched Vodafone World and Vodafone Passport, which is
Vodacom’s new roaming price structure. Vodacom also acquired a 10% shareholding in WBSH
effective January 31, 2007 and was granted a call option to purchase such number of
additional shares as will result in Vodacom beneficially owning 25.5% of the total issued
ordinary capital of WBSH, until September 14, 2007. In connection with its agreements with
WBSH, also known as iBurst, Vodacom markets iBurst’s wireless internet broadband service.

54

•   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 telecommunications licenses or operators in other African markets in the
future 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 39.2% in the year ended
March 31, 2007 to R4.1 billion and 30.8% in the year ended March 31, 2006 to R3.0 billion
from R2.3 billion in the year ended March 31, 2005, 50% of which is included in the Telkom
Group’s revenue. As a result, Vodacom’s revenue from other African countries increased from
8.7% of Vodacom’s total revenue in the 2006 financial year to 10.1% of Vodacom’s total
revenue in the 2007 financial year.

Telkom is also seeking to execute its Pan African hubbing strategy through its investments in

Multi-Links in the west of Africa and Africa Online.

Telkom business model

Telkom is developing a flexible business model to respond to changing regulatory, competitive and

expansion requirements in order to enable the company to execute its strategy in the best possible
manner. We are actively monitoring developments around the globe both on competition and
regulatory matters and these developments will form part of the inputs into the development of the
business model.

The model is designed to:

•   Get closer to Telkom’s customer with market-driven solutions;

•   Protect Telkom’s existing revenue base;

•   Extend Telkom’s penetration into its existing market; and

•   Expand Telkom’s business into new markets and territories.

Telkom will face significant pressures in the medium term and the maturity of the industry is

expected to lead to price and margin pressure. The trends of substitution and customers preferring
solutions rather than standalone products will further place pressure on Telkom’s strategies and
structures. To address this, Telkom will seek to capitalize on the following basic elements of its
integrated business model:

•   Form focused business units around distinct market segments and value propositions to

provide clients with responsive, competitive offerings;

•   Create lean and strategically focused corporate centers, providing shared services, as

appropriate;

•   Strengthen alliances and partnerships with best-in-class external service providers to leverage

scale, access expertise, augment capability and increase flexibility and utilize turnkey capital
projects; and

•   Develop connective rules and tools that measure, inform, and motivate organizational elements

to work together in executing the company’s strategy.

55

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 and transiting traffic from South African mobile

operators, as well as 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 TDS Directory Operations subsidiary, wireless data services,

through our Swiftnet subsidiary and internet services outside South Africa, through our newly
acquired Africa Online 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
rate ISDN line includes two access channels and each primary rate ISDN line includes 30 access
channels. Each ISDN line transmits signals at speeds of 64 kbps 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. In the 2007 financial year, we introduced
Waya Waya, on trial until the end of October 2007, which is our most affordable fixed-line offer yet.
Existing customers are required to pay R120 in advance to cover line rental for a year, thereby
ensuring that our customers stay connected.

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. Value added voice services such as
our CallAnswer voicemail service are also bundled with value added calling plans such as Telkom
Closer to further enhance the value to our customer.

56

We provide payphone services throughout South Africa. As of March 31, 2007, we operated

approximately 151,830 public payphones and approximately 6,129 private payphones, of which
approximately 40% were coin operated and combination payphones and the remainder were card
operated payphones.

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,

2006/2005

2007/2006

2005

2006

2007

% change

% change

(in thousands, except percentages)

Postpaid PSTN

(1)

3,006

2,996

2,971

(0.3)

(0.8)

Business

1,386

1,412

1,426

1.9

1.0

Residential

1,620

1,584

1,545

(2.2)

(2.5)

Prepaid PSTN

887

854

795

(3.7)

(6.9)

ISDN channels

664

693

718

4.4

3.6

Payphones

(2)

169

165

158

(2.4)

(4.2)

Total fixed access lines

(3)

4,726

4,708

4,642

(0.4)

(1.4)

(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, prepaid lines, ADSL lines and public and
private payphones, but excluding internal lines in service. Each analog PSTN line includes one access channel, each
basic rate ISDN line includes two access channels and each primary rate 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.

As of March 31,

2006/2005

2007/2006

2005

2006

2007

% change

% change

(in thousands, except percentages)

Opening balance

4,680

4,726

4,708

1.0

(0.4)

Net line growth

46

(18)

(66)

n/a

(266.7)

Connections

675

615

572

(8.9)

(7.0)

Disconnections

(629)

(633)

(638)

0.6

0.8

Closing balance

4,726

4,708

4,642

(0.4)

(1.4)

Churn (%)

13.4

13.4

13.6

0.0

1.5

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.

In the 2007 financial year Telkom continued to focus on customer retention through discounted

offers, relaxation of credit management policies and targeted marketing campaigns, including Project
Reconnect, a marketing campaign targeted at customers changing locations; the re-launch of
PD Connect, a marketing and tracking service for property developers; and the implementation of
specialized sales teams for gated communities. Telkom continues to focus on offering value for
money, by launching and continuously enhancing packages such as PC bundles and Telkom Closer,
including the following:

57

Telkom Closer 1

Includes line rental, Call Answer, a minimum charge at a flat rate for calls during
off peak time up to one hour, and a discounted per record rate for local and long-
distance calls subject to a minimum charge.

Telkom Closer 2

Includes line rental, Call Answer, unlimited free calls for calls during off peak time
up to one hour, and a discounted per record rate for local and long-distance calls
subject to a minimum charge.

Telkom Closer 3

Includes line rental, Call Answer, 1,000 inclusive free peak time minutes, unlimited
free calls for calls during off peak time up to one hour, and a discounted per
record rate for local and long-distance calls subject to a minimum charge.

Telkom Closer 4

All the benefits of Telkom Closer 3 bundled with DSL 384.

Telkom Closer 5

All the benefits of Telkom Closer 3 bundled with DSL 1024.

Telkom Closer plans 1 to 3 have an option to purchase 150 or 75 local internet hours during

Callmore time.

Despite these campaigns, Telkom’s fixed-line base declined by 1.4% in the 2007 financial year.

The decrease in the number of subscriber lines in the 2007 financial year was mainly in the lower
revenue generating areas such as prepaid PSTN lines and residential postpaid PSTN lines, partially
offset by an increase in ISDN channels and business postpaid PSTN lines. The higher revenue
generating areas, such as corporate and business lines, showed a positive growth of 2.8% in the
2007 financial year. The decrease in the number of residential postpaid PSTN lines in the 2007
financial year was primarily as a result of customer migration to mobile and higher bandwidth products
such as ADSL and lower connection, while the decrease in prepaid PSTN lines was primarily as a
result of customer migration to mobile services and our residential postpaid PSTN services. The
increase in ISDN channels and ADSL services was primarily driven by increased demand for higher
bandwidth and functionality. This, together with the alignment of the residential and business DSL
product and the upgrading of DSL 192 to DSL 384, without any additional cost to the customer, has
added to the positive growth in ADSL services in the 2007 financial year.

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. Despite these
campaigns, 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 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.

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

58

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 50 km from origination. Long distance traffic
services are for calls made to national destinations greater than 50 km from origination. We provide
international outgoing 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.

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,

2006/2005

2007/2006

2005

2006

2007

% change

% change

(in thousands, except percentages)

Lo

cal

(1)

19,314

18,253

16,655

(5.5)

(8.8)

Long distance

(1)

4,453

4,446

4,250

(0.2)

(4.4)

Fixed-to-mobile

3,911

4,064

4,103

3.9

1.0

International outgoing

415

515

558

24.1

8.3

International voice over internet protocol

89

83

38

(6.7)

(54.2)

Total traffic

28,182

27,361

25,604

(2.9)

(6.4)

(1)

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

Traffic was adversely affected in both the 2007 and 2006 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 prepaid and
residential postpaid PSTN lines and increased competition in our payphone business. The decrease in
international voice over internet protocol traffic in the 2007 financial year is primarily due to relocation
of the international call center business by one of our customers outside South Africa.

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 0800, ShareCall 0860 and HomeFree, emergency services and directory
enquiry services. We expect that we will be providing interconnection services to Neotel during the
2007 calendar year and will also be required to provide interconnection services 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.

59

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,

2006/2005

2007/2006

2005

2006

2007

% change

% change

(in thousands, except percentages)

Domestic mobile interconnection traffic

2,206

2,299

2,419

4.2

5.2

International interconnection traffic

1,318

1,355

1,321

2.8

(2.5)

Total

3,524

3,654

3,740

3.7

2.3

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, 2007 and 2006 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. International interconnection traffic decreased in the 2007 financial year due to a
decrease in international switch 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.

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 since the 2005 financial year and we expect that competition may increase pressure
on prices in the future.

60

Large numbers of leased lines are provided to the mobile operators at negotiated wholesale rates

for the build out of their networks. 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 occurring in this area of the business. Telkom is currently in the process of negotiating
amendments to its broadband fixed link leasing agreements to include speeds of 622 Mbps and
2.5 Gbps with formalized service level agreements and a term and volume discount structure.

Recognizing the increasing threat of competition in the provision of leased lines to the mobile

operators, Telkom introduced further discounting structures in the 2007 financial year in order to
improve the attractiveness of Telkom’s product offerings to this rapidly growing market. Fixed link
leasing agreements were also entered into with some of the smaller operators, including VANS and
USALS, as well as Neotel.

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 15 KHz

Analogue video

70 MHz

Digital

2 Mbps to 155 Mbps

Telkom Wholesale launched a new wholesale service, offering Resell ADSL on April 10, 2007 to

value added network service licensees and internet service providers. Resell ADSL enables wholesale
customers to resell ADSL access to their customers. The main advantage of this service is that the
wholesale customer is the single point of contact for new ADSL access orders and first level ADSL
service assurance. The service in provisionally available to those customers who have an active,
broadband friendly Telkom analogue telephone service. Telkom Resell ADSL offers the following
service options:

• Resell ADSL up to 384 Kbps

• Resell ADSL up to 512 Kbps

• Resell ADSL up to 4096 Kbps

The service is provided with a self-install option only and service providers are able to provide

their own modems.

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. In an attempt to simplify our DSL offering and to increase value to the
customer we have aligned the residential and business DSL product offerings and upgraded all
DSL 192 customers to DSL 384 without any additional cost to the customer. The following table
indicates our product offerings as of March 31, 2007:

DSL                       DSL

DSL

384

512

1024

Downstream speed

Up to

384 Kbps

512 Kbps

4096 Kbps

Upstream speed

Up to

128 Kbps

256 Kbps

384 Kbps

61

In April 2007, Telkom launched Do Broadband, which bundles ADSL access and a TelkomInternet

account at discounted rates. We have also launched DSL Self-install as an alternative to the usual
installation process involving a visit from a Telkom technician. Apart from the convenience of Self-
install, it enables customers to save R437.50 in installation fees. We intend to continue to offer ADSL
packages, including a free modem, with 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 asynchronous transfer mode based services include ATM Express and Megaline Plus. ATM

Express provides digital transmission services for wide area networks at speeds from 2 Mbps up to
155 Mbps. 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 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 product is an 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 have launched Telkom Global VPN which enables
converged services globally.

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.

62

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,

2006/2005

2007/2006

2005

2006

2007

% change

% change

(in thousands, except percentages)

Terrestrial based

6,425

9,492

12,905

47.7

36.0

Satellite-based

5,536

7,395

8,974

33.6

21.4

Total managed network sites

11,961

16,887

21,879

41.2

29.6

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 those 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
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. We also
expanded our global portfolio with the launch of our own Global VPN during the last quarter of the
2007 financial year.

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 services, exclusive content through our TelkomInternet web site and 24 hour
technical support services.

Telkom offers 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.

63

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,

2006/2005

2007/2006

2005

2006

2007

% change

% change

Wholesale

Internet leased lines-equivalent 64 kbps

13,470

16,832

19,247

25.0

14.3

Dial-up ports

15,375

12,889

11,462

(16.2)

(11.1)

Retail

Internet dial-up subscribers                                            202,410

228,930

210,453

13.1

(8.1)

Internet ADSL subscribers

22,870

53,997

92,140

136.1

70.6

Internet satellite subscribers

1,427

1,981

2,420

38.8

22.2

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.

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 TDS Directory Operations, the largest directory publisher in

South Africa providing white and yellow pages directory services and electronic white pages. In the
year ended March 31, 2007, TDS Directory Operations published approximately 7.7 million white and
yellow directories. TDS Directory Operations also provides electronic yellow pages and value added
content through full color advertisements. TDS Directory Operations 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. Swiftnet is in violation of its
license that requires it to have at least 30% of its shares held by black economic empowerment
individuals or entities. ICASA has required Swiftnet to remedy the breach of its license, which expired
on August 24, 2006. On February 14, 2007 Telkom announced that it had entered into an agreement
to sell a 30% stake in Swiftnet to the Radio Surveillance Consortium, or RSC, a group of

64

empowerment investors, for R55 million following a competitive sale process run by an independent
adviser. The transaction would not require any financial support or facilitation from Telkom. The
transaction received Competition Commission approval on May 28, 2007. The transaction is still
subject to ICASA approval.

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 50 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. 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 and in response to increased competition.

Regulations made under the Telecommunications Communications Act, which remain in effect,

impose a price cap 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 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
66% of Telkom’s operating revenue in the year ended March 31, 2006 was included in this basket
compared to approximately 64% of Telkom’s operating revenue in the year ended March 31, 2007.
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 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 on the pricing and provision of ADSL services were published by ICASA,
which would, among other things, have prohibited Telkom from charging a monthly rental for providing
ADSL service and limited Telkom to charging only an installation fee for such service. The final
regulations published by ICASA on August 17, 2006 did not contain any limitations on the pricing of
these services, but did impose quality of service obligations on Telkom for these services related to,
among other things:

• services to be provided within 30 days from application;

• the provision of uncapped local bandwidth;

• the guarantees of minimum speeds;

• the prohibition of port prioritization; and

• the prohibition of periodic resets.

Telkom is currently not in full compliance with these requirements and has informed ICASA

accordingly.

65

ICASA approved a 0.2% increase in the overall tariffs for services in the basket effective January

1, 2005, a 3.0% reduction in the overall tariffs for services in the basket effective September 1, 2005
and a 2.1% reduction in the overall tariffs for services in the basket effective August 1, 2006. On June
13, 2007, Telkom filed with ICASA proposed average price reductions on its regulated basket of
products and services of 1.2%, effective August 1, 2007. As a result, if approved by ICASA, from
August 1, 2007, the following price changes will be effective:

• ADSL rental

18.2% average decrease

• Local call charges – Standard time

No change

• Local call charges – Callmore time

4.1% average increase

• Long distance call charges

10% decrease

• International call charges

9.0% average decrease

• Data products

11.9% average decrease

• Subscription: analog line rental

12.0% increase

• ISDN rental

12.0% increase

• Worldcall local

15.0% decrease

• Worldcall long distance

41.3% decrease

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.

66

The following tables show our subscriptions and connections tariffs as of January 1, 2005,

September 1, 2005 and August 1, 2006 and our proposed tariffs as of August 1, 2007 based on our
tariff filing with ICASA in June 2007.

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

As of August 1, 2007

PSTN

PSTN

ISDN2

ISDN30

Postpaid

Prepaid

Basic

Primary

(ZAR, including value-added tax)

Business

Installation

383.37

n/a

537.72

28,957.94

Monthly rental

148.68

n/a

258.15

4,460.50

Residential

Installation

383.37

221.30

537.72

n/a

Monthly rental

111.90

57.25

186.50

n/a

67

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, 2005,

September 1, 2005, August 1, 2006 and our proposed tariffs as of August 1, 2007 based on our tariff
filing with ICASA in June 2007.

As of

As of

As of

As of

January 1,

September 1,

August 1,

August 1,

2005

2005

2006

2007

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 – 50 km)
for first unit

(3)

0.59

0.59

0.59

0.59

0.59

0.59

0.59

0.59

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

(3)

0.40

0.16

0.38

0.16

0.38

0.16

0.38

0.17

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

(4)

0.89

0.89

0.80

0.80

0.72

0.72

0.65

0.65

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

(4)

0.89

0.45

0.80

0.40

0.72

0.36

0.65

0.33

Fixed-to-mobile call rate per minute

(5)

1.89

1.17

1.89

1.17

1.89

1.17

1.89

1.17

Prepaid services (residential only)

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

(6)

0.59

0.59

0.59

0.59

0.62

0.62

0.62

0.62

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

(6)

0.46

0.18

0.43

0.18

0.45

0.19

0.46

0.21

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

(7)

0.89

0.89

0.80

0.80

0.84

0.84

0.76

0.76

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

(7)

1.06

0.53

0.95

0.48

1.00

0.50

0.90

0.45

Fixed-to-mobile call rate per minute

(5)

1.89

1.17

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-mobile
calls.

(3)

The first unit for peak calls is 94 seconds (January 1, 2005: 89 seconds) and for off peak calls with effect from August 1,
2007 is 209 seconds (January 1, 2005, September 1, 2005 and August 1, 2006: 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.

68

(6)

The first unit for peak calls with effect from August 1, 2007 is 81 seconds (September 1, 2005 and August 1, 2006:
83 seconds) (January 1, 2005: 78 seconds) and for off peak calls with effect from August 1, 2007 is 181 seconds
(January 1, 2005, September 1, 2005 and August 1, 2006: 194.5 seconds).

(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, 2005, September 1, 2005 and August 1, 2006 and our
proposed tariffs as of August 1, 2007 based on our tariff filing with ICASA in June 2007 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,

September 1,

August 1,

August 1,

2005

2005

2006

2007

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

1.70

1.50

1.70

1.50

1.40

1.30

0.95

0.85

Zimbabwe

1.66

1.30

1.66

1.30

1.60

1.30

1.40

1.15

Mozambique

2.70

2.50

2.70

2.50

2.50

2.50

1.40

1.15

Namibia

1.66

1.30

1.66

1.30

1.30

1.30

1.40

1.15

Botswana

1.66

1.30

1.66

1.30

1.64

1.28

1.40

1.15

Lesotho

1.66

1.35

1.66

1.35

1.66

1.46

1.85

1.62

United States

1.70

1.50

1.70

1.50

1.20

0.99

0.95

0.85

Malawi

1.80

1.55

1.80

1.55

1.77

1.52

1.40

1.15

Swaziland

1.66

1.30

1.66

1.30

1.66

1.30

1.40

1.15

Pakistan

2.70

2.40

2.70

2.40

2.00

2.00

1.80

1.70

(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 wholesale rate for international calls.
In order to better compete for outgoing international traffic originated by the mobile operators, Telkom
replaced its discounted retail charging model for such traffic with a wholesale charging model with
Vodacom in April 2006 and with MTN and Cell C in August 2006.

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.

The following table sets forth our fixed-to-mobile retail tariffs, including our termination rates paid

to mobile operators and our retention rates, and our mobile-to-fixed tariffs as of January 1, 2005,

69

September 1, 2005, January 1, 2006 and January 1, 2007. 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

January 1,

January 1,

January 1,

2005

2006

2007

Peak Off peak   Peak Off peak   Peak Off peak

rates

(1)

rates

(2)

rates

(1)

rates

(2)

rates

(1)

rates

(2)

(ZAR, including value-added tax)

Fixed-to-mobile retail rate

1.89

1.17

1.89

1.17

1.89

1.17

Termination rate paid to mobile operators

1.43

0.88

1.43

0.88

1.43

0.88

Retention rate

0.46

0.29

0.46

0.29

0.46

0.29

Mobile-to-fixed retail rate
Termination rate paid to Telkom

0.31

0.17

0.33

0.18

0.33

0.18

(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.

Neotel was licensed on December 9, 2005 and commercially launched on August 31, 2006 and

commenced providing services in the beginning of the 2007 calendar year to large corporations and
other licensees. Neotel has indicated that it will commence providing services to residential customers
during the 2007 calendar year. The following table sets forth our retail tariffs applicable to calls to
Neotel, is effective from May 23, 2007, including our termination rates to be paid to Neotel and our
retention rates, and our interconnection tariffs which will be applied between Telkom and Neotel.
Telkom’s retail tariff for such calls will be billed on a per second basis with a minimum charge of
72 cents. The interconnection fees payable between Telkom and Neotel are pseudo-distance based
rates coupled to the national numbering plan regulations, consisting of a lower within billing zone, or
WBZ, rate, and a higher beyond billing zone, or BBZ, rate. If a call is handed over to the other
network in the same billing zone as that in which it terminates, then the WBZ rate is applicable. If it is
handed over in a billing zone other than that in which it terminates, then the BBZ rate is applicable.

As of

May 23,

2007

Peak

Off peak

rates

(1)

rates

(2)

(ZAR, including value-added tax)

Telkom to Neotel retail rate

0.65

0.65

WBZ termination rate paid to Neotel

0.23

0.23

Retention rate

0.42

0.42

Telkom to Neotel retail rate

0.65

0.65

BBZ termination rate paid to Neotel

0.33

0.33

Retention rate

0.32

0.32

Neotel to Telkom calls

Termination rate paid to Telkom (WBZ)

0.26

0.14

Termination rate paid to Telkom (BBZ)

0.38

0.22

(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.

Various interconnection agreements have also been signed with smaller operators such as VANS

and USALs.

70

The following table sets forth our Telkom-to-USAL retail tariffs effective from May 23, 2007,

including our termination rates paid to the USALs and our retention rates, and our USAL-to-Telkom
tariffs applied between Telkom and the USALs. Telkom’s fixed-to USAL retail tariffs for mobile USAL
calls are billed for the first 60 seconds which is the minimum charge applicable for the call, and in
30 second increments thereafter. Telkom’s fixed-to-USAL retail tariffs for calls within the USALs’
service area are billed on a per second basis with a minimum charge of 72 cents. Termination rates
paid to the USALs are paid on a per second basis.

As of

May 23,

2007

Peak

Off peak

rates

(1)

rates

(2)

(ZAR, including value-added tax)

Fixed-to-USAL retail rate (Calls to mobile USAL numbers)

1.89

1.17

Termination rate paid to USAL

1.43

0.88

Retention rate

0.46

0.29

Fixed-to-USAL retail rate (Calls to fixed USAL numbers)

0.83

0.43

Termination rate paid to USAL

0.33

0.18

Retention rate

0.50

0.25

USAL-to-Telkom calls
Termination rate paid to Telkom

0.33

0.18

(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.

The following table sets forth our retail tariffs applicable to calls to VANS effective from May 23,

2007, including the termination rates paid to the VANS and our retention rates, and our VANS-to-
Telkom tariffs applied between Telkom and the VANS. Telkom’s retail charges for calls to VANS are
billed on a per second basis with a minimum charge of 72 cents. The interconnection fees payable to
Telkom by the VANS are distance based rates as given below.

As of

May 23,

2007

Peak

Off peak

rates

(1)

rates

(2)

(ZAR, including value-added tax)

Telkom-to-VAN retail rate
Termination rate paid to VANS

(3)

N/A

N/A

Retention rate

0.50

0.50

VANS-to-Telkom calls (Local)
Termination rate paid to Telkom

0.32

0.16

VANS-to-Telkom calls (Long distance)
Termination rate paid to Telkom

0.50

0.25

(1)

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

(2)

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

(3)

Telkom’s fixed-to-VANS retail rate varies based on the termination rates charged by the various VANS to Telkom.

An interconnection agreement was signed between Telkom and Sentech on June 1, 2007 which

provides for the termination by Telkom of calls brought into the country by Sentech pursuant to its
international telecommunication gateway service license. Pursuant to this agreement, Telkom charges
Sentech the same termination rates as it charges Neotel described above. As Sentech’s license
allows it to provide a carrier of carriers service to other operators, it does not have end-users within
the country, and the interconnection agreement therefore does not provide for the termination of calls

71

on Sentech’s network. It does however provide for either operator to transit international traffic via the
other if they so require. It is expected that physical interconnection will be established with Sentech
during the third quarter of the 2007 calendar year.

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,
2005, September 1, 2005 and August 1, 2006 and our proposed tariffs as of August 1, 2007 based on
our tariff filing with ICASA in June 2007. Subscription to ADSL service also requires the subscription to
a PSTN postpaid line.

As of

As of

As of

As of

January 1,

September 1,

August 1,

August 1,

2005

2005

2006

2007

(ZAR, including value-added tax)

ADSL installation charges

HomeDSL 192/384/512/1024

(1)

404

404

437.50

490.00

BusinessDSL 512/1024

(1)

404

404

437.50

490.00

ADSL access rental charges

HomeDSL 192

329

270

245

n/a

HomeDSL 384

449

359

245

152

HomeDSL 512

680

477

362

326

BusinessDSL 512

800

477

362

326

HomeDSL 1024/BusinessDSL 1024

(1)

n/a

680

516

413

Diginet (64 Kbps)

2,236

2,214

2,160

2,039

Diginet Plus (512 Kbps)

6,165

5,245

5,067

4,658

ATM Express

2 Mbps – Bronze

13,828

11,953

10,827

9,747

2 Mbps – Silver

18,046

15,418

14,120

12,711

34 Mbps – Silver

104,572

89,613

81,059

72,955

140 Mbps – Silver

345,591

296,246

255,460

229,908

(1)

HomeDSL 1024 and BusinessDSL 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 68.7% of our total fixed-line operating revenue, excluding directories and
other revenue, in the year ended March 31, 2007 and approximately 38.0% of our total fixed access
lines as of March 31, 2007.

72

Global and corporate

Global and corporate customers comprise over 330 of South Africa’s largest financial, retail,

manufacturing and mining companies with domestic and international operations. Global and
corporate customers accounted for approximately 17.5% of our total fixed-line operating revenue,
excluding directories and other revenue, in the year ended March 31, 2007 and approximately 9.5% of
our total fixed access lines as of March 31, 2007. 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.

Business and government

Business and government customers comprise approximately 283,000 large and medium

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, 2007 and
approximately 4.3% of our total fixed access lines as of March 31, 2007. 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, 2007, we had approximately 136 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 2007, 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 expansion of Neotel’s
operations and the further liberalization of the South African telecommunications industry, although we
believe that with the advent of the Electronic Communications Act, competition in this sector will
increase and there will be downward pressure on prices. Products sold to wholesale customers
primarily include national 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 South Africa. 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.

Mass markets

Mass markets comprises small business customers and residential customers, including both

prepaid and postpaid residential customers using PSTN, ISDN and ADSL services. Small business
customers comprise approximately 290,000 accounts.

73

Mass market customers accounted for approximately 29.7% of our total fixed-line revenue, excluding

directories and other revenue, in the year ended March 31, 2007 and approximately 58.6% of our total
fixed access lines as of March 31, 2007. Residential customers accounted for approximately 51.1% of
our total fixed access lines as of March 31, 2007. Prepaid residential customers accounted for
approximately 17.1% of our total fixed access lines as of March 31, 2007, compared to approximately
18.1% of our total fixed access lines as of March 31, 2006. Small business customers accounted for
approximately 7.5% of our total fixed access lines as of March 31, 2007.

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
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 1.6% of our total fixed-line revenue, excluding directories and other revenue, in the year
ended March 31, 2007 and approximately 3.4% of our total fixed access lines as of March 31, 2007.

We seek to provide easy access to our services through the effective placement of our phones

and phonecard outlets in high traffic areas, while cutting costs by removing non-profitable pay phones.
Our key focus area is the premier market, which includes municipalities, prisons, gas stations,
shopping malls, airports, 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 regional sales force and 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 and improved processes in an effort
to grow and improve public telephony revenues and create a customer relations center through a call
center. An income management center, which is responsible for coin collections, and banking and a
dedicated fault handling center for the maintenance of payphone equipment was established.

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

74

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. The Telkom.co.za website logged an average of
1.2 million page impressions per month.

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.

The following table sets forth information regarding Telkom’s service delivery measurements

during the periods indicated.

Year ended March 31,

2005

2006

2007

Residential voice

% cleared in 24 hours

46%

47%

50%

Faults per 1,000 lines

441

470

485

% installed in 5 days

51%

49%

81%

Business voice

% cleared in 24 hours

62%

61%

66%

Faults per 1,000 lines

287

300

328

% installed in 5 days

68%

63%

83%

Data subrate

% cleared in 24 hours

97%

92%

84%

Faults per 1,000 lines

756

801

870

% installed in 10 days

75%

40%

41%

ADSL business

% cleared in 24 hours

79%

54%

33%

Faults per 1,000 lines

505

480

575

% installed in 20 days

84%

56%

76%

75

During the 2007 financial year, we took action to improve appointment management, resulting in

the improvement in residential and business voice orders installed in five days.

The ADSL installed base grew by 78% during the 2007 financial year. This growth resulted in an

increase in the number of reported faults and impacted on the time taken to clear faults. This growth
also impacted on data subrate services as they share ADSL resources. The increase of approximately
20% in network failures during the 2007 financial year, contributed to the increase subrate faults per
1000 lines. Network failures consist of cable breaks, cable theft and failures on other core network
elements.

The decline in residential and business voice performance in the 2006 financial year 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.

We expect to continue to change the method in which we measure performance to align with

changes in the information communication technology industry that focus more on broadband and
data services and also to support Telkom’s customer centricity drive.

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,

2003

2004

2005

2006

2007

Digitalization (percentage of lines)

99.8

99.9

99.9

99.9

99.9

ATM switches

197

189

202

212

228

Digital exchange units

4,292

4,321

4,339

4,427

4,448

Internet Protocol Routers

24

32

70

76

79

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, 2007, 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

76

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 which are geographically diverse 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 and Neotel 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.

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 544 rings
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.
In the 2007 financial year, 370 sites were installed, 315 sites commissioned and 75 sites were
integrated. We are continuing to upgrade our wave division-multiplexing network to cater for larger
capacities.

Metro Ethernet

In the 2007 financial year, we began deploying Metro Ethernet, a next generation network

technology that provides cost effective, high speed, fiber based connectivity in metropolitan areas.
In addition to increased bandwidth capacity, the technology also offers features required for next
generation services such as bandwidth on demand and internet protocol TV, or IPTV.

The new network will be used to support and enhance existing customers’ services such as

broadband access via ADSL and WiMAX technologies. New corporate and service provider wholesale
services are expected to be developed that draw directly from the new feature set offered by Metro
Ethernet.

Metro Ethernet is currently being rolled out in the metropolitan areas of the Western Cape,

Northern Gauteng (Pretoria) and Gauteng Central (Greater Johannesburg).

Access network

Access for our PSTN and data networks is primarily via copper. Telkom is still deploying additional

access network infrastructure to enable the provisioning of ISDN and xDSL services on demand. Fiber
in the loop, or FTTx, with optical fiber distributed multiplexors and cross connects are also provided to
mobile operators, corporate and large businesses, office parks and shopping centers. Point-to-point
radio systems are also provided for non-fibered areas such as rural areas and for redundancy in our

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core network. In addition, Telkom is focusing on the rehabilitation of its existing copper and fiber
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
appropriate wireless local loop (point to multipoint) 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, 2007, we had 228 switches in our asynchronous
transfer mode network. The present available bandwidth between the core switches on our
asynchronous transfer mode network is 183 STM-1s or 27.4 Gbps, while the available bandwidth
between the access switches, metropolitan switches and core switches is 502 STM-1s or 75.2 Gbps.
Access to our asynchronous transfer mode network is primarily provided via fiber and synchronous
digital hierarchy.

Public broadband internet protocol network

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

consisting of eight core sites, 28 edge sites and 65 access locations, including over 27,990 modems
with an estimated dial-up base of greater than 500,000 customers, including Telkom and other internet
service providers as of March 31, 2007.

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

multi protocol label switching, or MPLS, deployed in the network. 10,995 layer three virtual private
network or VPN endpoints have been deployed.

Telkom currently has a total bandwidth of 2.4 Gbits to a total of six international points of presence

located in Amsterdam, two in London, New York, Ashburn, Washington D.C. and Hong Kong. Internet
protocol transit bandwidth from the six international points of presence to global tier 1 service
providers amounts to 3.4 Gbits.

Broadband services

Telkom’s Broadband services comprise xDSL through copper as a wireline access and WiMAX as

wireless access. We plan on introducing fiber in the near future.

We introduced ADSL as a new wireline 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 86.8% of our customer base and consists
of 2,237 digital subscriber line access multiplexers, serving approximately 255,633 customers as of
March 31, 2007, an increase from 78.1% of our customer base and 1,075 digital subscriber line
access multiplexers, serving approximately 143,509 customers as of March 31, 2006, and 58,278
customers as of March 31, 2005. This network is managed from our national network operations
center.

Voice over internet protocol network

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

of voice over internet protocol services.

Our current 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, Tanzania and Madagascar, with plans to expand to the Far East. The network can terminate
69 media gateways, or approximately 32,700 voice circuits. The media gateways compress the
traditional voice channels of 64 Kbps to 8 Kbps channels thus enabling us to reduce the cost of
international calls, while maintaining the perceived voice quality of a 64 Kbps call.

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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
restaurants, hotel groups, major shopping malls and some sites on national routes. At March 31,
2007, Telkom had 75 hotspots.

WiMAX

Telkom has concluded proof of concept and first office application testing of fixed (IEEE 802.

16-2004) WiMAX technology. This technology is standards based broadband wireless access
technology that provides throughput connectivity in a point-to-multipoint configuration. The technology
is designed to enable Telkom to more cost effectively provide services in non-copper based
infrastructure.

Services that have been successfully tested to date include internet access, which was

commercially launched in May 2007. 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.

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. We are currently making use of satellites in 15 orbital slots for services within and from or to
South Africa. 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, Crowthorne in Gauteng, Malvern in Durban, Chelsea in Port
Elizabeth and Klipheuwel in Cape Town. Currently we have satellite voice and data connectivity to
locations not reachable via undersea cable.

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
capacity. Consistent with our strategy of increasing international carrier traffic on our network, we have
invested approximately $95 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, Asia and Africa. We have the
right to approximately 24% of the capacity on the SAFE and SAT-3/WASC submarine cable systems,
making us the largest capacity owner in these cable systems out of the 35 telecommunications
operators who have invested over $700 million in these systems. The length of the SAFE cable is
approximately 13,100 km and the SAT-3/WASC is approximately 14,300 km.

In addition, on March 9, 2007 the Eastern Africa Submarine System, or EASSy, supply contract

was signed by the 23-member EASSy consortium with Alcatel-Lucent who will lay the first ever optical
submarine cable network landing in East Africa. Telkom agreed to invest approximately
US$18.9 million and will have an ownership interest in the EASSy cable system of approximately 8%.
In addition, Telkom agreed, in a joint purchase agreement with Vodacom, to invest US$1.5 million for

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an approximate 10% equity stake in a special purpose vehicle that was established to coordinate the
participation of smaller operators in the region. The EASSy cable will connect to South Africa at the
same landing point as the SAFE cable in Mtunzini, north of Durban. Telkom will seek to provide
network operations center and administrator services to the EASSy consortium. Telkom also expects
to be in a position to sell onward connectivity to Europe, America and Asia to East African operators
using the EASSy cable. Telkom’s primary use for the EASSy cable will be to establish and improve its
East African fiber connectivity and also to use EASSy as an alternative global diverse route out of
South Africa.

The 9,900 km high performance fibre optic cable is being deployed to link eight countries from

Sudan to South Africa, via Somalia, Kenya, Tanzania, Madagascar and Mozambique. Landings are
planned for Port Sudan, Sudan; Djibouti; Mogadishu, Somalia; Mombasa, Kenya; Dar Es Salaam,
Tanzania; Tollary, Madagascar; Maputo, Mozambique; and Mtunzini, South Africa.

Based on Alcatel-Lucent’s submarine and terrestrial optical solutions, EASSy will connect the

eastern African seaboard as well as landlocked countries, to the rest of the world. It will also provide
connectivity across the continent to support the increase in local traffic from existing and new
broadband services. EASSy is expected to provide Telkom the opportunity to expand its footprint
further into Africa, creating further opportunities for access to future potential markets. In delivering a
regional capacity of up to 320 Gbit/s, EASSy complements and increases Telkom’s capacity,
especially with regard to taking the 2010 World Cup to the rest of the world. By complementing
existing undersea networks, EASSy is being designed to provide continuity of service in times of
natural disasters and to alleviate congestion during periods of peak traffic.

By interconnecting with Sea-Me-WE 3, Sea-Me-We 4 and SAT-3/SAFE, the EASSy undersea

cable will also serve as a supporting infrastructure for these networks. Landlocked states such as
Ethiopia, Botswana, Rwanda, Burundi, Uganda, Zambia and Zimbabwe will also be able to access the
EASSy cable. The EASSy project is scheduled for completion by the end of the 2008 calendar year.

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 Telkom’s business. Telkom’s operations support
systems permit Telkom to make timely and informed business decisions and respond to our
customers’ needs with tailored solutions. Telkom has dedicated significant resources to the design and
implementation of 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.

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Telkom’s national business solution 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 46 out of our
55 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.

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 communications 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 utilization. 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 commenced during the 2007 financial year and is planned for completion
in the 2008 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 an optional
single bill for customers’ voice and data services or products. The implementation of this
solution for Telkom’s customers with non-voice related products and services was successfully
implemented during the 2007 financial year. The implementation for voice related products and
services is targeted to commence during the 2008 financial year for completion in the 2009
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 of this solution for Telkom’s customers with non-voice related
products and services was successfully implemented during the 2007 financial year.
The implementation for voice related products and services is targeted to commence during the
2008 financial year for completion in the 2009 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 implementation of this
solution for Telkom’s customers with non-voice related products and services was successfully
implemented during the 2007 financial year. The implementation for voice related products and
services is targeted to commence during the 2008 financial year for completion in the 2009
financial year.

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•   Enterprise Portal – the vision for Telkom’s Portal, www.telkom.co.za, is to become the single

point of entry for customers doing business with Telkom via the Internet. In addition to being the
single point of entry, the website aims to become the preferred channel to do business with
Telkom. Customer benefits of interacting with Telkom via the Portal are convenience, cost-
effectiveness and shorter turn-around on assurance, fulfilment and enquiries. The new and
energized Telkom Portal was successfully implemented during the 2007 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 2007 financial year
with active surveillance now being performed on 19 technologies and the next phase is planned
to be completed in the 2008 financial year.

•   Enterprise asset management platform – a system for holistic lifecycle management of all

financial, human resources and procurement processes. Various enhancements were
successfully implemented during the 2007 financial year, including projects focusing on
employee centricity and the shortening of internal processes to support customer centricity and
overall efficiency of the company.

•   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 was a
comprehensive scoping exercise that was launched in the 2007 financial year. The second
phase will entail a program of various projects dealing with the implementation of solutions
specifically designed to support next generation products and services.

Competition

Competition in the South African fixed-line communications market is intense and is increasing as

a result of the Electronic Communications Act and determinations issued by the Minister of
Communications.

We expect that the new licensing framework included in the Electronic Communications Act will

result in the market becoming more horizontally layered 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, pursuant to the Electronic Communications Act and determinations
issued by the Minister of Communications:

•   mobile cellular operators are permitted to obtain fixed telecommunications links from parties

other than Telkom;

•   VANS operators and private network operators are permitted to resell the telecommunications

facilities that they obtain from Telkom;

•   VANS operators are 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.

See “Regulation and License Requirements”.

We compete primarily on the basis of customer service, quality, 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.

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Mobile competition

Telkom currently competes 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 announced in June 2006 that it entered into a joint venture with Virgin Mobile,
which we expect will increase competition. 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. 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. ICASA has begun a review process of mobile termination rates aimed at reducing high mobile
interconnect charges. It is expected that this process will have a reducing effect on our mobile
interconnection revenue towards the end of the 2007 calendar year.

Data competition

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 the Electronic Communications Act, which came into effect
on July 19, 2006.

VANS providers such as Internet Solutions are our main competitors in the data market. They

provide competitive internet protocol virtual private networks and internet service provider services to
the business segment. Consumer orientated internet service providers such as MWeb are our main
competitors in the consumer internet market.

In addition, our data services have faced increased competition from iBurst, a competitor to

Telkom in the wireless area that offers competing broadband services, and, to a lesser extent,
Sentech, which owns and operates satellite transmission systems, a packaged, always-on, bi-
directional broadband service via satellite and a wireless high-speed internet service offering.
Similarly, the mobile operators’ 3G, HSDPA and EDGE networks also enable customers to browse the
internet via mobile broadband services, which provide increased competition for our data services.
The mobile data providers have reduced prices significantly creating price competition in our data
markets. We believe that VANS operators and internet service providers will increasingly move into
the corporate and voice services market, while telecommunications service providers try to expand
into the managed data network and international traffic markets. We expect that alliances will be
forged between VANS operators, telecommunications service providers and content providers to
concentrate on the delivery of converged services within a few years. Domestically, expansion into
new markets by VANS and mobile companies will take place, while development of new products and
services will intensify the competition. We expect competition to further increase as a result of
consolidation in the market, with competitors growing through mergers, acquisitions and alliance-
forming activity. 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.

Competition in the data market is expected to increase as a result of the VANS providers’ ability to

deliver complex managed data solutions and integrated information communications technology
solutions, as well as expected future alliances between the VANS and fixed and mobile operators.

As competition increases in the South African market, South African telecommunication service

providers, including Telkom, are expected to increasingly look to other developing markets for new
revenue streams, particularly in sub-Saharan Africa. Internationally, Telkom’s new Africa Online
business already competes with Internet Solutions and MTN Network Solutions. In addition, Verizon is
already present in a number of other African markets.

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Fixed-line voice competition

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

provide public switched telecommunications services to Neotel 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. Neotel
was licensed on December 9, 2005 and commercially launched on August 31, 2006 and commenced
providing services in the beginning of the 2007 calendar year to large corporations and other
licensees. Neotel has indicated that it will begin providing services to residential customers in the
2007 calendar year. The Government has created an infrastructure company, Infraco, which is
expected to provide inter-city bandwidth at cost price to Neotel, and later to the rest of the industry,
which will further compete with our communications network.

A process to issue additional licenses to small business operators to provide telecommunications

services in underserviced areas with a teledensity of less than 5% commenced in 2005 and is
continuing. The Minister of Communications has identified 27 of these underserviced areas. ICASA
has issued licenses to successful bidders in seven of them and the Minister has issued invitations to
apply for licenses in 14 additional areas. In August 2006 ICASA recommended to the Minister that
licenses be granted to successful applicants in 13 of these areas. It is expected that further licenses
will be issued in the 2007 calendar year.

Telkom’s fixed-line voice business is expected to be further impacted by continuing developments

of voice over internet protocol and by the rollout of limited mobility services. Wireless operator iBurst
has started to offer portable voice services over their wireless internet services. Additionally, voice
over internet protocol and other operators with international gateway licenses are expected to create
increased competition for Telkom’s fixed-line voice business in carrying international traffic in and out
of South Africa.

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

enhance competition in our fixed-line voice business and increase our churn rates. As competition
intensifies, the main challenges our fixed-line voice business faces are continuing to improve
customer loyalty through improved services and products 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.

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, 2007, our top twenty
suppliers accounted for approximately 66% of all purchases and our main supplier was Total Facilities
Management Company (Pty) Limited, or TFMC, which accounted for approximately 11% of all
expenditure. During the year ended March 31, 2007, Telkom directed R8.8 billion to black economic
empowerment suppliers, representing approximately 70% of Telkom’s total procurement spending,
compared to R6.4 billion and R5.2 billion in the years ended March 31, 2006 and 2005, respectively.

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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, 2007 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.

South Africa

Vodacom had approximately 23.0 million customers in South Africa as of March 31, 2007. As of

March 31, 2007, Vodacom’s 6,865 base stations were capable of reaching approximately 97.9% of the
country’s population based on the last official census conducted in 2001 and approximately 71.2% of
the total land surface of the country. The estimated penetration rate for mobile communications in
South Africa has increased to approximately 84% as of March 31, 2007.

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 1,800 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 entered into an alliance with Vodafone,
pursuant to which Vodacom is able to market Vodafone branded products and services.

Recent significant products launched include data, voice and SMS bundles for prepaid, Top Up

and contract customers. Vodacom continued to launch and support Vodafone products such as
Vodafone Simply, welcome tones, extended live television to 22 channels and Vodafone live! release
7 with its simple, tabular, user friendly approach. A number of corporate and business products were
also launched, ranging from e-mail and enhanced voicemail to corporate access points which
enhance the security of mobile customers using a 3G/HSDPA data card remotely. Vodacom
Converged Solutions was formed in the 2007 financial year to provide converged information,
communications and technology services across the entire market, including the bundling of products
across previously separate markets into a one-stop shop for customers. It is also expected to include
the expansion of Vodacom’s existing network to provide both fiber and wireless solutions, when
available. On May 8, 2007 Vodacom formalized entry into the broadcasting and multimedia market by
announcing that it had secured an exclusive pay TV agency agreement with MultiChoice. With DSTV
Select, Vodacom and non-Vodacom customers have a choice between two DSTV Select bouquets,
each offering a variety of the latest entertainment, news, sport, movies, documentaries and music
channels.

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Vodacom introduced 3G with high-speed downlink access, or HSDPA during the 2006 financial

year, giving its customers access to global high speed broadband communications. 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, have become

available on top of the range handsets such as HTC, Nokia and Sony Ericsson. 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.

Prepaid services

As of March 31, 2007, approximately 86.5% 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, 2007, approximately 85.3% 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 two-year airtime window regardless of activity. Vodacom launched a Big Bonus voucher in July
2006 which has a face value of R899 and gives the customer R900 of airtime whereby the customer
receives R75 of airtime credit every 30 days over a 12 month period. 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.

86

Contract subscription services

As of March 31, 2007, approximately 13.1% of Vodacom’s South African customers were contract

customers. Contract subscription is typically for an initial 24-month contract. The initial uptake on the
month to month contracts launched during the 2007 financial year has been slower than expected.
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: consumer packages, such as Weekend Everyday, and business packages,
such as Business Call. Additional packages such as Shared Talk 1500 were launched in the 2007
financial year to address the small and medium sized enterprises, or SME market. 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 Family Top Up
package has proven highly successful and has contributed to the growth in contract customers. As of
March 31, 2007, 30.0% of Vodacom’s contract customers were Top Up customers compared to 27.6%
as of March 31, 2006 and 19.8% as of March 31, 2005. Subsequent to the success of Family Top Up,
Vodacom introduced Top Up 75 as an entry level Top Up package on November 7, 2006.

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.

Community services

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 95,113 community service phones as of March 31, 2007, 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 7 times Vodacom’s average total South African ARPUs in the year ended March 31, 2007.
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. Through Vodacom’s 10% investment in iBurst, a competitor to

87

Telkom in the wireless area, Vodacom now supplies customers with continued high speed connectivity
through broadband internet and email services. 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 was the key contributor to the revenue increase to
Vodacom’s R3.1 billion, R1.9 billion and R1.2 billion of data revenue in South Africa in the years
ended March 31, 2007, 2006 and 2005, respectively while data initiatives such as Vodafone Mobile
Connect Cards, BlackBerry

®

, Vodafone live! and Mobile TV , showed the highest growth year on year.

Vodacom transmitted approximately 4.5 billion short messaging services over its network in the year
ended March 31, 2007, up from approximately 3.5 billion and 2.4 billion in the years ended March 31,
2006 and 2005, 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, 2007, Vodacom
had 733,043 3G handsets active on its network compared to 179,576 as of March 31, 2006, and had
sold 138,863 Vodafone Mobile Connect Cards, compared to 37,798 as of March 31, 2006. Significant
data price reductions during the 2007 financial year were introduced to further establish Vodacom as a
serious contender in the data connectivity space and offered a viable alternative to fixed-line while
increasing mobile data adoption. 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

of March 31, 2007 Vodacom had 23,328 BlackBerry

®

users registered on its network.

There was an increase in the usage of GPRS during the 2007 financial year, with the number of

GPRS users increasing to approximately 2.8 million at March 31, 2007 from approximately 1.4 million
at March 31, 2006 and approximately 0.6 million at March 31, 2005. 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, 2007 there were 898,527 users. On December 1, 2005 Vodafone Release 7 was launched with
welcome tones and Mobile TV as major new services. By March 31, 2007 there were 22 TV channels
available on Vodafone live! with 33,482 users.

A focus area in the 2007 financial year has been to enhance self service, both through the

Vodacom4me portal and the *111# service. These offer customers the ability to automatically set up
their own phone for data and multimedia messaging services, to check billing and bundle information
real-time and apply for, and change value-added services if required.

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, 2007, 165 WASPs
had applied for connectivity to the Vodacom network.

88

Premium rated SMS content is still focused on competitions, information and alert services.

Average monthly volumes have grown to 15.8 million premium rated SMSs in the 2007 financial year.
Vodacom also provides premium rated MMS and interactive voice response, or IVR, as well as the
Vodacom online billing service, which has been increasing. This enables the content provider, or
WASP, to issue Vodacom billing tickets, enabling Vodacom to collect subscription services on their
behalf. WASP services are provided by Vodacom, as well as Cointel. Revenues from WASP services
increased by 38% in the current financial year as the number of services and bearers have increased.

Data revenue contributed 8.1% of Vodacom’s total revenue in the year ended March 31, 2007, up

from 6.0% in the year ended March 31, 2006 and 4.9% in the year ended March 31, 2005. 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.

In addition, Vodacom launched the Adult Content Management System, a mobile system that

enables parents to prevent their children from receiving mature content. Vodacom has adopted a
conservative approach which prohibits the delivery of undesirable content and limits all users to a
level of content similar to that which is freely available at newsagents. Children are further protected
from not only visually unsuitable material, but also from chat rooms and unsuitable websites.

On May 8, 2007 Vodacom formalized entry into the broadcasting and multimedia market by

announcing that it had secured an exclusive pay TV agency agreement with MultiChoice. MultiChoice
provides direct-to-home satellite services. With DStv Select, the direct-to-home digital satellite
services operated under the brand name DStv, Vodacom and non-Vodacom customers have a choice
between two DStv Select bouquets, each offering a variety of the latest entertainment, news, sports,
movies, documentaries and music channels.

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 2007 financial year amounted to approximately 4.6 million units, a year-on-year growth of
approximately 21.1% and 58.3% for the 2007 and 2006 financial years, respectively. Vodacom’s state
of the art warehouse in Midrand handled an average of 2,287 orders per day, up by 7.4% from the
prior year figure of 2,130 orders per day. Approximately 98.3% 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 and 5 mega pixel cameras now available on high end
phones. HSDPA handsets became available to 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
32% of Vodacom’s total sales in the 2007 financial year compared to 17% for the 2006 financial year.
3G handset prices also declined significantly in the 2007 financial year making 3G handsets now
more affordable. HSDPA card sales increased significantly in the 2007 financial year, accounting for
approximately 4% of total sales for the year. Vodacom provides laptop or desktop computers to
customers who enter into certain contract agreement. These services are expected to continue to be
successful in the coming year.

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.

89

Interconnection services

Vodacom has interconnection agreements with national mobile operators, MTN and Cell C, as

well as with Telkom, Neotel and carrier-of-carriers licensee, Sentech. In addition, Vodacom has an
interconnection agreement in place with nine VANS operators.

Roaming services

Vodacom has national roaming agreements in place with national mobile network operator Cell C,

which is terminable fifteen years after commencement on or after November 14, 2016, as well as with
USALs. Amatole Bokone, iTel, BTel, Karabotel and Kingdom Communications, which are terminable
three years after commencement. These agreements unilaterally enable the customers of Cell C and
the USALs to make use of Vodacom’s network to originate and terminate calls as well as to access
other telecommunication services. In addition to allowing the USALs customers to roam on Vodacom’s
network, Vodacom provides the USALs with certain ancillary services such as SIM card provisioning,
recharge facilities and customer care.

To enable Vodacom to provide its customers with telecommunication services while outside of

South Africa and to provide services to customers of foreign networks operators whilst outside South
Africa, Vodacom has international roaming agreements with 386 foreign mobile network operators in
180 countries as of March 31, 2007. Of these, 147 allow for GPRS roaming, 46 allow for 3G roaming,
three allow for HSDPA roaming and 31 allow for prepaid roaming. Objectives for the 2007 and 2006
financial year will focus on increasing the footprint for Vodafone Passport, prepaid and GPRS
networks as well as maintaining reductions in the inter-operator tariffs charged to Vodacom by other
networks.

Customers

Vodacom has experienced substantial growth in its mobile customer base since its inception in

1994. As of March 31, 2007, there were an estimated 40 million mobile customers in South Africa,
which represents an estimated penetration rate of 84.2% of the population. As of March 31, 2007,
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.

90

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,

2006/2005

2007/2006

2005

2006

2007

% change

% change

Customers (thousands) (at period end)

(1)

12,838

19,162

23,004

49.3

20.1

Contract

1,872

2,362

3,013

26.2

27.6

Prepaid

10,941

16,770

19,896

53.3

18.6

Community services

25

30

95

20.0

216.7

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

(2)

7.9

8.7

10.7

10.1

23.0

Contract

1.5

2.4

3.1

60.0

29.2

Prepaid

9.0

9.6

11.8

6.7

22.9

Gross connections (thousands)

6,180

9,140

10,859

47.9

18.8

Contract

(3)

434

506

666

16.6

31.6

Prepaid

(3)

5,742

8,618

10,124

50.1

17.5

Community services

4

16

69

300.0

331.3

Churn (%)

(4)

27.1

17.7

33.8

(34.7)

91.0

Contract

9.1

10.0

9.7

9.9

(3.0)

Prepaid

30.3

18.8

37.5

(38.0)

99.5

(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. Up to June 15, 2006, calls forwarded to voicemail were regarded as revenue generating activity and
such SIM cards were classified as active customers. Because a large number of SIM cards have calls forwarded to
voicemail as their only revenue generating activity and a majority of such messages are never retrieved by the customer,
resulting in estimated ARPUs of less than R1 per month, Vodacom changed its definition of active customers to exclude
calls forwarded to voicemail from the definition of revenue generating activity effective June 15, 2006. Vodacom
subsequently changed its definition of revenue generating activity back to include calls forwarded to voicemail effective
September 1, 2006. Vodacom deleted approximately 3 million customers during the period of this rule change. As a result
of the rule change, prepaid churn rates and ARPUs increased during the 2007 financial year.

(3)

Gross connections have been restated in the 2006 and 2005 financial years due to a change in Vodacom’s reporting
policy. Conversions between categories have now been excluded from gross connections. Based on the previous policy,
contract connections would have been 610 thousand in the 2005 financial year and 702 thousand in the 2006 financial
year and prepaid connections would have been 5,566 thousand in the 2005 financial year and 8,422 thousand in the
2006 financial year.

(4)

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.

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

91

“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 and the mobility it offers customers. 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 2007 and 2006 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
17.5% to approximately 10.1 million in the 2007 financial year compared to approximately 8.4 million
in the 2006 financial year. Contract gross connections increased 31.6% to approximately 666,000 in
the 2007 financial year compared to approximately 506,000 in the 2006 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, 2007, 30.0% of Vodacom’s contract customers were Top Up
customers, compared to 27.6% as of March 31, 2006.

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 is seeking to lower its contract churn
rate and retain 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.

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,

2006/2005

2007/2006

2005

2006

2007

% change

% change

Total traffic (millions of minutes)

14,218

17,066

20,383

20.0

19.4

Outgoing

(1)

9,231

11,354

13,638

23.0

20.1

Incoming (interconnection)

4,987

5,712

6,745

14.5

18.1

(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 financial year.

92

Growth in traffic in the 2007 financial year was mainly due to the 20.1% growth in the total

customer base in South Africa from 19.2 million customers as of March 31, 2006 to 23.0 million
customers as of March 31, 2007. Also evident was a marked change in customer calling patterns, with
total mobile to mobile traffic increasing by 23.9% while total mobile-to-fixed and fixed-to-mobile traffic
increasing by 2.9%. Growth in traffic in the 2006 financial year was mainly due to a 49.3% growth in
the customer base from 12.8 million customers as of March 31, 2005 to 19.2 million customers as of
March 31, 2006.

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 consumers 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, 2007 for a family top up

package, a consumer 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 was 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
the destination country of the call. Vodacom South Africa’s most recent annual tariff amendments were
lodged on September 19, 2006 and approved by ICASA on September 29, 2006. The amendments
resulted in an average tariff decrease on packages affected of 1.8%, which was effective November 1,
2006.

93

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

2.20

2.70

1.76

2.85

Mobile-to-fixed off peak calls

0.97

0.95

0.95

1.12

Mobile-to-mobile peak calls-own network

1.80

1.80

1.76

2.85

Mobile-to-mobile “Happy Hours” – own network

1.49

1.49

1.49

1.49

Mobile-to-mobile off peak calls – own network

0.97

0.95

0.95

1.12

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

depending

or 25.20

on zone

Depending

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

depending

or 25.20

on zone

Depending

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, 2007, “Family Top Up” customers accounted for 30.0% 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, 2007, “Weekend Everyday” customers accounted for 20.9% 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, 2007, “Business Call” customers accounted for 3.5% of Vodacom’s total contract customers.

(4)

Tariff for “4U”, Calls are charged per second. As of March 31, 2007. “4U” customers accounted for 85.3% of Vodacom’s
total prepaid customers.

94

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.

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. On March 1, 2004,
Vodacom purchased 51% of Smartphone SP (Proprietary) Limited, or Smartphone, acquiring an
additional 2.5 million prepaid customers. On April 16, 2004, Smartphone purchased an 85.75% equity
stake in Smartcom (Proprietary) Limited, or Smartphone, for R77.2 million, acquiring an additional
40,000 contract customers. The net goodwill arising on this business combination amounted to
R8.9 million. On August 30, 2006, Vodacom purchased an additional 19% shareholding in
Smartphone for R333.9 million, increasing its shareholding from 51% to 70% with goodwill amounting
to R313.2 million, while Smartphone purchased an additional 2.25% shareholding in Smartcom for
R9.1 million on September 13, 2006, increasing its shareholding from 85.75% to 88% with goodwill
amounting to R8.2 million. 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.

The net goodwill arising on this acquisition amounted to R35.9 million. Vodacom acquired an
additional 49% in Cointel on October 4, 2006 for R147.0 million to increase its shareholding to 100%
with goodwill amounting to R90.9 million. Cointel’s core business is providing value added and
m-commerce services to the telecommunications industry. Vodacom subsequently sold its entire
shareholding in Cointel to Smartphone resulting in the realization of R38 million of the goodwill
created by the original purchase.

Vodacom acquired the cellular business of Africell Cellular Services (Pty) Limited, or Africell, an

exclusive Vodacom dealer in South Africa for R80 million, effective October 1, 2006. The net goodwill
arising on this business combination amounted to R43.7 million.

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, 2007.

As of March 31, 2007, 84.2% of Vodacom’s contract customer base and 99.4% 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 2007and 2006 financial years.

95

As of March 31, 2007, Vodacom’s distribution network consisted of:

•   Vodaworld – A unique one stop mobile telecommunications mall, showcasing the latest

technology in cellular hardware;

•   Dealers and franchises – 945 company and independently owned mobile dealer and franchise

outlets, which include Vodashops, Vodacares, Vodacom 4U, Chatz and Cellshack shops;

•   National chains – 13,800 retail outlets;
•   Vodacom Direct – Vodacom’s call center based selling division;
•   Business 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 comprising street vendors serving underserviced areas; and
• Service provider distribution – Consisting of direct sales, corporate dealers and franchise stores

such as Smartcall, Smartcom, Nashua and Autopage.

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 areas for the 2007 financial year have
been on expanding capacity in its call centers and customer retention following the implementation of
mobile number portability. Approximately 76.5% of customer queries in the 2007 financial year were
handled by the interactive voice response system and more than 79.6% 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 planning to establish more walk-in centers in
other parts of the country. Five centers are currently active, and two more are planned in the Gauteng
province. As data services became more popular, all of these centers were upgraded to assist
customers with queries of a technical nature and in the case of the Vodaworld center, a dedicated
data centre was created where customers receive personalized attention in resolving their highly
technical data related queries.

96

Customer care is 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 has also been established and has experienced significant growth. The outsourcing of
Vodacom’s directory inquiries and basic prepaid calls, continued successfully in the 2007 financial
year and is likely to be expanded in the coming year.

The growth of the customer base has necessitated recruitment of an additional 915 customer care

staff. 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, as this call center went live during July 2006. Specialization of call centers has been
very successful. A data call center was established to focus on the support of GPRS and 3G HSDPA
products. For the first time staff have been trained on both telecommunications and information
technology skills and customer feedback has been positive. A highly specialized dedicated support
desk was also established and is providing successful first tier and second tier support, combined with
valuable statistical analysis of customers’ reasons for porting their mobile numbers.

Vodacom 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 recent years customer relationship management has become a key strategic focus
area and an important philosophy in Vodacom. The current year saw the expansion of call centers,
increased focus on efficiency and increased 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. During the 2007 financial year a
Vodacom credit card was introduced whereby Vodacom contract customers are given discounts on
travel, leisure, security, education and cellular products. The prepaid loyalty program remained
popular as more than one million Vodacom prepaid customers were able to exchange their talking
points earned when recharging for rewards such us free SMS bundles, call discounts and free cell
phones. This program has proved to be extremely popular among our high end prepaid customers
while the YeboMillionares program continues to be a favorite with Vodacom’s emerging market
customers.

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,
2007 the Vodacare infrastructure consisted of 35 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
75,000 repairs per month, this dedicated customer service support infrastructure differentiates
Vodacom’s service from that of its competitors. Vodacom has a 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.

97

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 based on total estimated

customers on the African continent using and deploying digital GSM technology within the
GSM900/1800 MHz frequency band.

In South Africa, the network’s core 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,

2005

2006

2007

Macro base transceiver stations

4,518

4,873

5,231

Micro base transceiver stations

1,508

1,528

1,634

Total

6,026

6,401

6,865

The Vodacom network’s UMTS 3G infrastructure as of March 31, 2007 consisted of 22 radio

network controllers, 2,119 UMTS base transceiver stations (Node B), 9,606 UMTS transceivers and
HSDPA functionality across the 3G network.

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, 2007, Vodacom’s transmission network was comprised of 19,931 E1 links and

385 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 300 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, 2007, Vodacom
had a call retention rate of 99.6% and a call success rate of 99.3% in South Africa.

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As of March 31, 2007, approximately 31% of Vodacom’s base stations were 3G enabled and

Vodacom had installed dual band (GSM900/GSM1800MHz) base transceiver stations in 2,225 locations,
comprising 19,018 GSM1800 MHz transceivers. In addition, all base transceiver stations in
metropolitan areas have been upgraded with dual band antennas and feeder cables to accommodate
GSM1800 MHz equipment, while Vodacom continues to deploy GSM1800 MHz 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.

In the 2007 financial year Vodacom replaced its entire legacy Siemens Nixdorf platforms with

Fujitsu Siemens servers in its Siemens intelligent network and changed the architecture, operating
system, database and application environments supported on these systems.

In parallel to this, the prepaid data billing architecture was changed in order to provide the

necessary data billing flexibility required for new services such as prepaid data bundles and
differential charging for on – and off – network data traffic.

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.

Adult content management was introduced in the 2007 financial year, providing the possibility to

introduce multiple levels of content management and filtering for various levels of customer profiles
and access.

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 2007 financial year Vodacom
increased its capital spending in this area and expects to further increase its capital spending in this
area in the 2008 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 announced in June 2006 that it entered
into a joint venture with Virgin Mobile. As of March 31, 2007, 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 and Virgin Mobile held less than 1% of the estimated 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.

99

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 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 7.1 million as of
March 31, 2007 from approximately 4.4 million as of March 31, 2006 and approximately 2.6 million
as of March 31, 2005. Revenue from Vodacom’s operations outside of South Africa has grown to
R4,139 million in the year ended March 31, 2007 from R2,974 million in the year ended March 31,
2006 and R2,274 million in the year ended March 31, 2005. Our share of Vodacom’s operating
profit from other African operations was R261 million in the year ended March 31, 2007, compared
to R144 million in the year ended March 31, 2006 and an operating loss of R98 million in the year
ended March 31, 2005.

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.

100

Year ended March 31,

2006/2005

2007/2006

2005

2006

2007

% change

% change

Other African countries
Customers (thousands)
(at period end)

(1)

2,645

4,358

7,146

64.8

64.0

Lesotho

147

206

279

40.1

35.4

Tanzania

1,201

2,091

3,247

74.1

55.3

Democratic Republic of the Congo

1,032

1,571

2,632

52.2

67.5

Mozambique

265

490

988

84.9

101.6

Churn (%)

(2)

Lesotho

17.3

22.3

19.0

28.9

(14.8)

Tanzania

29.6

28.5

35.6

(3.7)

24.9

Democratic Republic of the Congo

23.1

28.1

30.4

21.6

8.2

Mozambique

11.3

32.2

41.7

185.0

29.5

Gross connections (thousands)

Lesotho

70

98

119

40.0

21.4

Tanzania

746

1,353

2,092

81.4

54.6

Democratic Republic of the Congo

565

892

1,688

57.9

89.2

Mozambique

225

342

797

52.0

133.0

Penetration (%) (at period end)

(3)

Lesotho

7.4

12.9

17.2

74.3

33.3

Tanzania

5.1

9.2

15.8

80.4

71.7

Democratic Republic of the Congo

3.5

5.5

8.9

57.1

61.8

Mozambique

4.2

8.4

14.3

100.0

70.2

ARPU

(4)

Lesotho (ZAR)

92

78

75

(15.2)

(3.8)

Tanzania (ZAR)

81

67

52

(17.3)

(22.4)

Democratic Republic of the Congo (ZAR)

98

86

77

(12.2)

(10.5)

Mozambique (ZAR)

52

36

28

(30.8)

(22.2)

Number of employees (at period end)

(5)

1,074

1,154

1,522

7.4

31.9

Lesotho

63

67

63

6.3

(6.0)

Tanzania

350

438

527

25.1

20.3

Democratic Republic of the Congo

538

479

745

(11.0)

55.5

Mozambique

123

170

187

38.2

(10.0)

(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)

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 nine 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 66 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 capital expenditures
were R184 million, R225 million and R210 million in the 2007, 2006 and 2005 financial years,
respectively. The continued investment is an indication of the company’s drive to expand and optimize
the existing infrastructure in order to provide the widest coverage and superior network quality and
service levels to its customer base.

Vodacom Lesotho offers a variety of prepaid and contract products to customers. Vodacom

Lesotho’s prepaid plans are consistently the most popular packages and accounted for 97.5% of
Vodacom Lesotho’s total customers as of March 31, 2007, compared to 97.1% as of March 31, 2006
and 96.6% as of March 31, 2005. The current prepaid offering is known as Mocha-o-chele. Vodacom
Lesotho’s SuperTalk50 and SuperTalk100 contract products offer bundled minutes and a subsidized
handset. These packages have been extended in the 2007 year to include the SuperTalk250 and
SuperTalk500 for high end business users. SuperTalk contract products offer bundled minutes and
subsidized handsets. 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 nine Vodashops, eight Super Dealers and four retail groups and
Vodacom products can be purchased from various outlets in Lesotho. Customers are serviced through
a walk-in customer care center or via a customer care call center. Churn decreased in the 2007
financial year due to better service to customers, better network quality and wider coverage, improved
call centre service and more affordable tariffs in real terms. Growth is fuelled by new coverage and
increased distribution, complimented by the strong Vodacom brand.

Econet-Ezicell remains the only direct mobile GSM competitor in Lesotho, with Vodacom Lesotho

still maintaining superior coverage and infrastructure. Vodacom Lesotho had implemented
seven additional sites during the 2007 financial year. Vodacom Lesotho has increased its international
roaming agreements to exceed that of Econet Ezicell. This will remain a priority in the 2008 financial
year, with the core focus of retaining and expanding its estimated 80% market share as of
March 31, 2007.

The headcount for Vodacom Lesotho decreased to 63 employees as of March 31, 2007,

compared to 67 employees as of March 31, 2006 and 63 employees as of March 31, 2005.
The decrease was as a result of staffing and operational changes and recruitment is currently in
process for most of the existing vacancies. The number of customers per employee improved by
44.0% from 3,075 customers per employee as of March 31, 2006 to 4,429 customers per employee
as of March 31, 2007. As from April 1, 2007 a new managing director, Godfrey Mbingo, has been
appointed to Vodacom Lesotho.

The regulatory environment in Lesotho continues to prove challenging. The regulatory authorities

in Lesotho issued a Communications Sector Liberalization Framework in January 2007. In terms of
this framework, there is to be no limit on the number of participants in any service. All existing network
operators will be allowed to operate international gateways and voice and data services are to be fully

102

liberalized. Further international gateway licenses will be allowed to specified classes of internet
service providers. Implementation of this framework is already in process as invitations to apply for
the gateway licenses have been issued. Vodacom Lesotho has applied for an international gateway
license.

Through World Bank secured financing, the regulatory authorities in Lesotho commissioned a

study on interconnect and tariff rationalization in 2006. The objective of the study was to recommend
the appropriate level of tariff regulation based on cost models for interconnection and retail rates.
The findings of the study were published in January 2007. The consultants recommended a reduction
in the mobile termination rates and an increase in the fixed termination rates. After review of these
recommendations the network operators agreed on new interconnect rates that incorporated some
recommendations of the study and have requested regulatory ratification for the new rates. Lesotho
regulatory authorities however rejected the suggested rates and recommended their own rates. The
issue is under dispute and negotiations are currently under discussion. It is the network operators’
interpretation that, in terms of Lesotho law, the Lesotho regulatory authorities may only impose
interconnect rates if the operators fail to agree on the rates or if the suggested rates fail to comply
with the principles of interconnection. The regulatory authorities are also disputing this interpretation of
the network operators. The study further recommended that the current tariff approval process for
mobile services, which is strictly controlled by the Lesotho regulatory authorities, be relaxed to allow
for price reductions in order to stimulate competition.

Changes in the operating environment during the 2006 financial year included 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 decision taken by the Government of Lesotho in prior years to extend Telecom
Lesotho’s fixed-line exclusivity rights for an additional twelve month period was discontinued by the
Communications Sector Liberalization Framework issued in January 2007.

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. The roll-out of Vodacom Tanzania’s 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 capital expenditures were R2.7 billion, R1.5 billion
and R1.4 billion in the 2007, 2006 and 2005 financial years, respectively. Network coverage expanded
to approximately 20% of the land surface of Tanzania and approximately 54% of the population as of
March 31, 2007, compared to approximately 15% of the land surface and approximately 45% of the
population as of March 31, 2006 and approximately 12% of the land surface and approximately 43%
of the population as of March 31, 2005.

In 2007, Vodacom Tanzania commercially launched its 3G/HSDPA and GPRS data product

offering, which together with the expected commercial launch of WiMAX in the 2008 financial year, is
anticipated to enhance data revenues. The 3G/HSDPA data product initially covered Dar es Salaam
while the GPRS network had national coverage. Core data revenues continued to be from SMS in the
2007 financial year, supported by Vodatariffa, a premium rated SMS-based information service.

103

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, 2007,
approximately 3.2 million of Vodacom Tanzania’s customers were utilizing this service, compared to
approximately 2.0 million as of March 31, 2006 and approximately 980,000 as of March 31, 2005.
Vodacom Tanzania currently offers international roaming on 242 networks in 124 countries.

The Vodacom Tanzania market profile was 99.3% prepaid as of March 31, 2007, compared to

99.5% prepaid as of March 31, 2006 and 99.3% prepaid as of March 31, 2005, and this is not
expected to change significantly in the near future. Vodacom Tanzania had a churn rate of 35.6% in
the 2007 financial year, 28.5% in the 2006 financial year and 29.6% in the 2005 financial year due to
the high levels of competition in Tanzania.

There were three other mobile operators licensed in Tanzania, Zantel, Tigo and Celtel Tanzania.

Mobitel was re-launched as Tigo during the 2007 financial year, and two further operators, Tanzanian
Telecommunications Company Limited, or TTCL, and Benson on Line, or BOL, both locally controlled
companies, were granted mobile licenses and launched code division multiple access, or CDMA,
mobile networks in the 2007 financial year. Further licenses have been applied for, but none have
been granted to date.

Zantel, which had historically operated exclusively on the island of Zanzibar, moved onto the

mainland during the 2006 financial year and enhanced its coverage by entering into a national
roaming agreement with Vodacom Tanzania, effective from July 31, 2005 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. Tigo is controlled by
Millicom International Cellular S.A. There was no national prepaid tariff reduction during the 2006
financial year, however, international 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 2005 financial
year.

During the 2007 financial year, Celtel launched a roaming product (“One Network” concept) over

all its networks in the East African region, namely Tanzania, Uganda and Kenya. This product will
allow all of Celtel’s prepaid customers to roam on these networks at the tariff of the host network.
In the 2007 financial year, Vodacom Tanzania, in co-operation with Safaricom in Kenya and MTN in
Uganda, launched its Kama Kawaida product which allows roaming at home tariffs on these preferred
roaming partner networks.

Vodacom Tanzania’s estimated market share was approximately 55% as of March 31, 2007,

compared to approximately 58% as of March 31, 2006 and approximately 59% as of March 31, 2005.
Vodacom estimates that Celtel had a market share of approximately 28%, 27% and 26%, Mobitel, or
Tigo had a market share of approximately 12%, 11% and 11%, and Zantel had a market share of
approximately 5%, 4% and 4% as of March 31, 2007, 2006 and 2005, respectively, based on the total
estimated mobile market.

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Vodacom Tanzania had a total headcount of 527 employees as of March 31, 2007, compared to

438 employees as of March 31, 2006 and 350 as of March 31, 2005. Included in employees as of
March 31, 2007 and 2006 are nine and 10 secondees, respectively, who are employed out of
Vodacom International Limited. Effective April 1, 2007, a new managing director, Dietlof Maré, was
appointed the managing director, replacing Romeo Khumalo, who served as managing director for a
period of two years.

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.

A new Telecommunications Act was introduced, effective February 23, 2005. This ended the fixed-

line monopoly of TTCL, 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 TTCL. Vodacom Tanzania is currently
regulated by the Tanzanian Communications Regulatory Authority, or TCRA, under the Tanzania
Communications Act, 1993, as well as the Tanzania Regulatory Authority Act, 2003. Under these
communication acts, the TCRA adopted a new set of communications regulations in September 2005
which introduced the converged licensing framework referred to as the unified licensing framework,
which is service and technology neutral. In February 2006 Vodacom applied to the TCRA to convert
its old license into the new licensing framework.

The negotiation of the terms and conditions of migration of Vodacom’s existing license to the new

regulatory framework was finalized during the year. Vodacom Tanzania was granted new licenses on
July 26, 2006 in connection with the migration to a new regulatory framework. These licenses were for
national and international network facilities, network services application services and radio frequency
spectrum resource usage. All licenses, with the exception of the application services license, run for a
fixed term of 25 years. The application services license is for an initial term of five years for national
and 10 years for international, which is automatically renewable with no additional obligations up to a
period of 25 years. The microwave frequency usage license covers GSM at 900 MHz and 1800 MHz
and broadband frequencies for WiMAX and 3G/UMTS.

In February 2006, the Tanzanian Communications and Regulatory Authority, or TCRA, 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. The
TCRA has commenced consultation with the various operators and stakeholders to establish the
interconnection rate post December 31, 2007.

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 12 years remaining on its license.

During the year ended March 31, 2004, 51% of Vodacom Congo was proportionally consolidated

in Vodacom’s consolidated financial statements. Effective April 1, 2004, Vodacom Congo was being
fully consolidated as a subsidiary in Vodacom’s consolidated financial statements after certain clauses
granting the minority shareholders participating rights were removed from the shareholders
agreement.

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Vodacom Congo is currently performing well under challenging circumstances. The local currency

depreciated 17% against the US Dollar in the 2007 financial year, after appreciating 13.0% against the
US Dollar over the 2006 financial year, and depreciating 32.9% in the 2005 financial year. Improved
affordability during the 2006 financial year, and the increase in spending power as a result of a
positive economic outlook during 2007, 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 to 8.9% as of March 31, 2007. ARPU was affected negatively as lower end users
constituted a large part of the growth. Despite aggressive competition for market share, Vodacom
Congo 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 in the 2006 financial year continued to contribute
during the 2007 financial year to the success in customer growth and improved profitability. During the
2007 year Vodacom Congo continued to concentrate on increasing capacity within its network.

Congo’s first presidential and parliamentary elections took place on July 30, 2006, after an official

postponement was announced in June 2005. The relative peaceful outcome of the election is hoped
to 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 238 towns and consisted of 470 base stations and four mobile service switching
centers as of March 31, 2007, compared to 184 towns, 373 base stations and four mobile service
switching centers as of March 31, 2006 and 130 towns, 289 base stations and four mobile service
switching centers as of March 31, 2005. Network capacity in the main centers has also been
upgraded to maintain quality and service. Vodacom Congo covered approximately 32% of the
geographical area of the Democratic Republic of the Congo and approximately 68% of the population
as of March 31, 2007, compared to approximately 30% of the geographical area and approximately
67% of the population as of March 31, 2006 and approximately 26% of the geographical area and
approximately 65% of the population as of March 31, 2005.

Vodacom Congo is financing its roll-out in the Democratic Republic of the Congo with a

combination of external and Shareholder medium term funding. Vodacom Congo’s capital expenditure
was R2.9 billion, R2.0 billion and R1.8 billion in the 2007, 2006 and 2005 financial years, respectively.

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 Top Up options and the introduction of the corporate
PABX product. The prepaid and public phone products are aimed at the broad 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. Vodacom
Congo acquired the business of an internet service provider named InterConnect s.p.r.l in the
Democratic Republic of the Congo for R21.2 million, effective November 1, 2007. The acquisition
enables Vodacom Congo to offer additional products and services such as data and voice bundled
packages to new and existing customers.

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 40% of all voucher sales on Vodacom Congo’s network in the 2007 financial year

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compared to 30% in the 2006 financial year. In the 2007 financial year Vodacom Congo introduced a
US$1 Vodago voucher as well as a secured electronic distribution system, or SEDS, which provides
secure printed vouchers with extended distribution. SEDS was introduced to compliment the
Electronic Voucher Distribution system with enhanced voucher security and operating system
capacity.

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 70,000 calls per day as of March 31, 2007. Vodacom Congo has been successful in
establishing international roaming agreements with 378 operators in 165 countries.

Vodacom Congo’s customer base consisted of 98.3%, 97.9% and 97.9% prepaid customers as of

March 31, 2007, 2006 and 2005, respectively. 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 47% as of March 31, 2007, compared to 48% as of
March 31, 2006 and 47% as of March 31, 2005 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 as well
as smaller rural towns. SAIT re-launched its network under the brand name Tigo in the 2007 financial
year. This effort consisted of re-branding Tigo through aggressive TV, sponsorships and outdoor
media activity. During the 2006 year Celtel and Tigo have embarked on an aggressive pricing
campaign and further coverage roll-out. Tigo continued this trend during the 2007 financial year, while
Celtel focused on coverage roll out. Celtel had an estimated market share of approximately 39% as of
March 31, 2007, compared to approximately 44% as of March 31, 2006 and 46% as of March 31,
2005 based on the total estimated mobile market. The other two competitors in the Democratic
Republic of the Congo, Tigo and Congo Chine Telecom, had estimated market shares of
approximately 5% and 9%, respectively, as of March 31, 2007.

Vodacom Congo had 745, 479 and 538 employees as of March 31, 2007, 2006 and 2005,

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. A bursary scheme was implemented, aimed at
targeting and developing students, and a retention scheme was implemented, aimed at retaining key
employees. Effective May 25, 2007, Mervyn Visagie was appointed as new managing director.

During the 2007 year Vodacom Congo continued with its social responsibility drive by

rehabilitating 20 schools throughout the Democratic Republic of the Congo.

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 modeling;

• 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.

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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 owned 98% of VM (S.A.R.L.), trading as Vodacom
Mozambique and the remaining 2% was held by a local consortium named EMOTEL. Effective April 1,
2007, Vodacom International Limited (Mauritius) sold an 8% stake in Vodacom Mozambique to local
investors, with 5% being purchased by Intelec Holdings Limitada and EMOTEL acquiring an additional
3%. 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 December 2018.

Vodacom Mozambique’s infrastructure consisted of two mobile services switching center, four

base station controllers and 180 base transceiver stations as of March 31, 2007. The network had a
capacity of 1.5 million customers as of March 31, 2007, with an increase to a capacity of 2.5 million
planned for 2008. Vodacom Mozambique’s capital expenditure was R816 million, R605 million and
R696 million in the 2007, 2006 and 2005 financial years, respectively. The South African Rand
equivalent expenditure was lower in the 2006 year due to the devaluation of the Mozambique Meticals
against all major currencies. GPRS / Enhanced Data for GSM Evolution, or EDGE, has been available
since the end of June 2006 for contract and prepaid customers. EDGE is a data service that provides
a faster version of GSM wireless service. In tandem with the launch of GPRS and MMS, Vodacom
Mozambique also launched VodaMail, a free e-mail service available to all contract customers.

Since prepaid continues to be the bulk of the business in Mozambique, a range of new innovative

services were launched during the 2007 financial year to enhance the overall value proposition of
Bazza Bazza, a prepaid product. These services include Bazza Bonus, a high-spend airtime reward
scheme that rewards customers daily with free airtime based on the previous day’s spend. As a
further measure to reward customers, 60+ was launched in August 2006, which rewards customers
with free SMSs for long duration calls. Finally in February 2007 Bazza uau! was launched which
introduced a third prepaid tariff plan with the benefit of rewarding customers for receiving calls.

Other services launched in the 2007 financial year include SMS bundles for contract customers,

electronic invoicing, an unstructured supplementary service data, or USSD, based self-care menu,
premium rated SMS and interactive voice response, or IVR, based competitions, and content based
services through third party wireless application service providers, or WASPs.

Vodacom Mozambique offers customers contract and prepaid plans and continued to roll out

public phones in the 2007 year. Prepaid packages accounted for 99.0%, 98.5% and 98.5% of gross
connections in the 2007, 2006 and 2005 financial years, respectively. Contract products are mainly
aimed at the corporate and business market, while 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.

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 due to the introduction in the 2006 financial year of growth
incentive and stretch target parameters included in the commercial incentive models offered to
distribution partners, resulting in an increase in the subscriber base during the 2007 financial year.

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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 35% as of March 31, 2007, compared to approximately 30% as of March 31,
2006 and 33% as of March 31, 2005 based on the total estimated mobile market. mCel continues to
be an aggressive competitor and is expected to continue to be a formidable opponent in the future
given its greater financial and market power. As of February 2006, mCel had soft-launched its GPRS
offering to contract customers in the Maputo area and started with its full GPRS offering in May 2006.
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, as well as the construction of an entirely new
school in Maputo that opened in May 2007 and the donation of books and encyclopedias to more than
40 schools nationally.

Vodacom Mozambique was accepted as a partner to the “Made in Mozambique” initiative in the

2007 financial year that is being propagated by the Ministry of Industry and Commerce. This venture
is designed to promote local industry and export initiatives.

Vodacom Mozambique employed 187, 170 and 123 people as of March 31, 2007, 2006 and 2005,

respectively. 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$2.5 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 was released in February 2007. The tender has not yet been awarded. After
careful study and analysis of the bid by Vodacom Mozambique management, it was decided not to
participate in the bid. Vodacom is well into year four in terms of its license obligations for infrastructure
roll-out.

During October 2006, the Ministry of Communications published a Telecommunications Sector

Strategy. This is the result of a project launched in prior periods to prepare a competition policy for
Mozambique. The project was 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 was a member of the ministerial task force that assisted in the development of the
policy. The strategy was prepared in anticipation of the end of TDM’s exclusivity in December 2007,
and to prepare for convergence in the sector. The agenda of the Instituto Naçional das Comunicaçoes
de Moçambique, or INCM, for 2007, released in December 2006 includes:

• preparation of service quality regulations;

• introduction of number portability (the INCM has already invited bids from consultants to

investigate the introduction of portability);

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• preparation of regulations governing the allocation of spectrum and service numbers;

• preparation of legislation ending TDM’s exclusivity;

• preparation of convergence legislation;

• preparation of an interconnection cost model; and

• the re-issue of licenses to conform to new convergence legislation.

All operators have been informed by the 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. To date, no new licenses
have been issued. However, Vodacom Mozambique applied to expand its international gateway rights
and to lease transmission capacity to entities other than licensed telecommunication network
operators, such as internet service providers and satellite companies, during the end of the 2006
calendar year but to date no formal response has been received from the INCM.

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. In February 2007, the INCM appointed a consultant to
facilitate the introduction of cost based interconnection. This was part of the out of court settlement
Vodacom Mozambique reached with the INCM, TDM and mCel in August 2006, whereby Vodacom
Mozambique agreed to waive the court interdict against the INCM’s unlawful reduction of
interconnection rates, subject to the introduction of long run average incremental cost based
interconnection as required by law.

Vodacom Mozambique believes that the transmission fees charged by TDM are unacceptably

high. Vodacom Mozambique has requested the INCM to intervene after numerous meetings held with
TDM to reduce their transmission prices failed to deliver any acceptable result.

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 assesses 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, 2007, 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 2007 and 2005 financial
years. 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, the participation of black economic
empowerment partners and quality.

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Vodacom spent approximately 71% of its eligible procurement expenditure with BEE companies

during the year ended March 31, 2007, compared to 66% during the year ended March 31, 2006 and
75% during the year ended March 31, 2005.

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 and 3G network,
and Lucent-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”.

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 has been 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.

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 issues are now addressed 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, 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 they are amended or replaced by new
regulations 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 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 regulation. 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.

ICASA

In 2000, the Independent Communications Authority of South Africa Act, 13 of 2000, created

ICASA, a regulatory body for the telecommunications and broadcasting industries. ICASA serves as
the primary regulatory and licensing authority for the South African communications industry. Upon its
establishment, ICASA inherited a legacy of regulatory problems from its predecessors. It has been
reported that ICASA may 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.

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.

Policy directions

Under the Electronic Communications Act, the Minister of Communications may make policies

and, subject to a one month public comment period, 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.

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Regulations

Under the Electronic Communications Act, 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.

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 Electronic Communications Act,
and other relevant laws such as the South African Constitution.

The Electronic Communications 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. In addition, 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 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. A draft regulation providing the
framework for the granting of licenses was published by ICASA for comment on March 7, 2007. In
addition, the Minister of Communications has announced that she intends to issue a policy direction to
ICASA to consider whether VANS licensees should be authorized to provide services as well as
provide and operate facilities/networks. ICASA would have to issue network service licenses for such
networks. 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.

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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 is required to 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. ICASA has started a process of converting our licenses to the new
licensing framework. The process of converting our radio spectrum licenses started in October 2006,
but has not yet been finalized. A draft regulation providing the framework to convert our PSTS and
VANS licenses was published by ICASA for comment on March 7, 2007. Public pronouncements by
ICASA indicate that they plan to complete the process of converting all existing licenses by July 2008.
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 has issued draft regulations in respect of the subsidization of mobile handsets, the
framework for converting existing licenses in terms of the Electronic Communications Act, and the
framework for issuing new licenses in terms of the Electronic Communications Act. These draft
proposals have all been published for public comment, but no hearings on the public comments have
yet been held by ICASA and no final regulations have been made yet.

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, Neotel, 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. Neotel was licensed on December 9, 2005 and commercially launched
on August 31, 2006 and commenced providing services in the beginning of the 2007 calendar year to
large corporation and other licensees. Neotel has indicated that it will begin providing services to
residential customers in the 2007 calendar year.

Underserviced areas

A process to issue additional licenses to small business operators to provide telecommunications

services in underserviced areas with a teledensity of less than 5% commenced in 2005 and is
continuing. The Minister of Communications has identified 27 of these underserviced areas. ICASA
has issued licenses to successful bidders in seven of them and the Minister has issued invitations to
apply for licenses in 14 additional areas. In August 2006 ICASA recommended to the Minister that
licenses be granted to successful applicants in 13 of these areas. It is expected that further licenses
will be issued in the 2007 calendar year.

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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 interconnection is provided
and facilities are leased 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 long run
incremental cost, or LRIC, of those services or facilities, and our operating revenue and net profit
could decline. On January 2007 ICASA published a consultation document for public comment and on
May 17, 2007 it held a public enquiry on its intention to define relevant call termination wholesale
markets. In its consultation document ICASA expressed the preliminary view that all providers of
telecommunications networks, including Telkom and Vodacom, have significant market power in their
call termination markets and that the appropriate price controls to be applied to the large operators,
MTN, Vodacom and Telkom, is the LRIC calculated on the basis of relevant forward looking economic
costs of an efficient operator, including a reasonable cost of capital. Regulations are expected to
follow in due course. On May 3, 2007 ICASA published a consultation document for public comment,
on its intention to define relevant end to end leased lines and other wholesale markets. In its
consultation document ICASA defined the wholesale markets for fixed-line local loop access, fixed-line
narrowband exchange lines, call origination and call conveyance, symmetric broadband originator
services, trunk services for transmission within South Africa and international leased lines. ICASA
expressed the preliminary view that Telkom is deemed to have significant market power in all these
markets and that the appropriate price control to be applied is likely to be the LRIC, calculated on the
basis of relevant forward looking economic costs of an efficient operator, including a reasonable cost
of capital. No public hearings have yet been held on this consultation. Regulations are expected to
follow in due course. 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
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,
established as provided in the amendments to the ICASA Act described above, 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.

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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.

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. An interconnection
agreement has also been concluded between Telkom and Neotel and filed with ICASA on March 6,
2007. Interconnection agreements have also been concluded between Telkom, the USALs and those
VANs licensees to whom ICASA has granted access to subscriber numbers. An interconnection
agreement has also recently been signed with Sentech, which is expected to come into operation
during the third quarter of the 2007 calendar year.

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. 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. ICASA may require
that essential communications facilities be supplied at a cost based price, likely to be the CRIC of that
facility. The Minister of Communications has issued a policy decision declaring November 1, 2007 as
the date from which the exclusivity provisions in our SAT-3 agreements shall be declared null and
void. The Minister of Communications also announced that she intends to issue a policy direction to
ICASA requiring it to prioritize and urgently prescribe a list of essential facilities, ensuring that the
facilities connected to the SAT-3/WASC/SAFE submarine cables can be accessed soon.

On May 3, 2007, ICASA published a consultation document for public comment on its intention to

define relevant end to end leased lines and other wholesale markets. In its consultation document
ICASA defined the wholesale markets for fixed-line local loop access, fixed-line narrowband exchange
lines, call origination and call conveyance, symmetric broadband originator services, trunk services for
transmission within South Africa and international leased lines. ICASA expressed the preliminary view
that Telkom is deemed to have significant market power in all these markets and the appropriate price

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controls to be applied is likely to be the LRIC, calculated on the basis of relevant forward looking
economic costs on an efficient operator, including a reasonable cost of capital. Regulations are
expected to follow in due course.

In addition, the Telecommunications Act required us to allow Neotel 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, Neotel 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. A fixed link facilities leasing agreement which provides for leasing
by Neotel of 2 Mbps leased lines has been concluded between Telkom and Neotel and filed with
ICASA on September 12, 2006. Further agreements for the leasing by Neotel of other facilities are
expected to be negotiated as required. 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. As described below, we may also be required to lease or otherwise make our
telecommunications facilities available to Neotel beyond the first two years of its license pursuant to
the Electronic Communications Act.

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 Neotel, The Electronic Communications
Act provides that ICASA may prescribe a framework for the unbundling of Telkom’s local loop.

On May 23, 2007, the Local Loop Unbundling Committee set up by the Minister of

Communications to develop appropriate policies for the unbundling of the local loop in South Africa
submitted its report to the Minister of Communications recommending, among other things:

•   three forms of local loop unbundling to be considered, full unbundling of the metallic loop, line

sharing and wholesale bitstream access; and

•   the regulatory process, with full industry participation should commence as soon as possible

and be completed in 2011.

The Minister of Communications has published policy decisions that the process of unbundling the

local loop in South Africa should be urgently implemented and completed by 2011. The Minister of
Communications further requested ICASA to make use of the report of the Local Loop Unbundling
Committee and its recommendations.

Tariffs

Regulations made under the Telecommunications Act, which remain in effect, 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 66% of Telkom’s
operating revenue in the year ended March 31, 2006 was included in this basket compared to
approximately 64% of Telkom’s operating revenue in the year ended March 31, 2007. 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

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increased by more than 5% above inflation except where specific approval has been received from
ICASA. Draft Regulations on the pricing and provision of ADSL services were published by ICASA
which would, among other things, have prohibited Telkom from charging a monthly rental for providing
ADSL service and limited Telkom to charging only an installation fee for such service. The final
regulations published by ICASA on August 17, 2006 did not contain any additional limitations on the
pricing of these services beyond those combined in the basket of price controlled services, but did
impose quality of service obligations on Telkom for these services related to, among other things:

• services to be provided within 30 days from application;

• the provision of uncapped local bandwidth;

• the guarantees of minimum speeds;

• the prohibition of past prioritization; and

• the prohibition of periodic resets.

Telkom is currently not in full compliance with these requirements and has informed ICASA

accordingly.

ICASA approved a 0.2% increase in the overall tariffs for services in the basket effective

January 1, 2005, a 3.0% reduction in the overall tariffs for services in the basket effective September
1, 2005 and a 2.1% reduction in the overall tariffs for services in the basket effective August 1, 2006.
On June 13, 2007 Telkom filed with ICASA proposed average price reductions on its regulated basket
of products and services of 1.2%, effective August 1, 2007. See “Fixed-line communications – fees
and tariffs”.

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 September 19, 2006 and approved by ICASA on September 29, 2006.
The amendments resulted in an average tariff decrease on packages affected of 1.7%, which was
effective November 1, 2006. In 2005, Vodacom South Africa’s annual tariff filing resulted in an
average tariff decrease of 4.9% effective October 1, 2005.

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 convert existing licenses to the new
licensing framework contained in the Electronic Communications Act. It is possible that as a result of
the conversion process 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.

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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 was set at 0.2% of the prior year’s annual turnover derived from
the provision of telecommunications service that it is licensed to provide. Telkom paid R61.2 million in
July 2006 for this contribution pursuant to its license. Vodacom’s contribution to the USF is on the
same basis as Telkom. Vodacom paid R54.6 million in the 2007 financial year for this contribution
pursuant to its license.

New social obligations were imposed with Vodacom’s new 1800MHz license and third generation

spectrum license or 3G. The 1800 MHz frequency spectrum band obligations require Vodacom to
provide a minimum of 2,500,000 sim card packages with certain privileges to designated individuals
within five years; a minimum of 125,000 handsets within five years; and a minimum airtime window
period of 12 months for these sim cards. The 3G radio spectrum band obligations require Vodacom to
provide: internet access to no less than 140 institutions for persons with disabilities within three years;
internet access to no less than 5,000 public schools within eight years; and a minimum
of 1,400 handsets within three years. Vodacom’s plan with respect to the remaining implementation of
its 1800 MHz obligation is still pending ICASA’s approval. 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 in respect of 1800 MHz and 3G were submitted to ICASA in August
2005. Vodacom proposed that airtime used on the SIM cards be charged at a uniform rate to be
agreed between all three mobile operators and the internet usage rates be at a 50% discounted rate,
as provided for in the Telecommunications Act. The implementation plan for 3G rollout in the Gauteng
province was approved by ICASA on February 15, 2007 and Vodacom is in the process of rolling out
internet connectivity to the approved schools in Gauteng.

Vodacom has been funding the training of community services telephone operators since the

2005 financial year. The focus during the 2005 and 2006 financial years, was on growth management,
financial management and marketing. The focus during the 2007 financial year was on basic business
skills, growth management, financial management and marketing. 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 Electronic Communications 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. After negotiations with ICASA,
Telkom submitted its regulatory financial statements based on the historical cost of the company on
September 30, 2004, and submitted its current cost regulatory financial statements to ICASA on
September 30, 2005 and its current cost regulatory financial statements with reports indicating the
long run incremental cost for the 2006 financial year 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

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on an historical cost 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. ICASA has as yet not approved the procedures manuals for the current cost
accounting or the procedures manual for the long run incremental cost.

Carrier pre-selection

The Telecommunications Act mandates that fixed-line operators are 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. These provisions are retained in the Electronic
Communications Act. Regulations were 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 Neotel’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. To date, Neotel has not requested carrier pre-selection. 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 detail is available. ICASA has not yet defined 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 mandates 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. These provisions are retained in the Electronic Communications Act.
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 2007 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, has not yet been
published. Telkom has received a request from Neotel to implement both block and individual number
portability and discussions on the implementation of the required inter operator systems are under
way with ICASA and Neotel. Telkom will not be able to determine the time required to implement
number portability until the functional specification regulations are determined. After several delays
mobile number portability phase one was launched on November 11, 2006. Phase 2, which was
implemented during April 2007, includes multi-line porting, secure file transfer protocol access to third
parties and operational software upgrades on the central reference data base. From launch until end
March 2007 there have been 49,794 successful ports. Cell C registered a net gain of 14,057 subscribers,
Vodacom a net loss of 6,018 subscribers and MTN a net loss of 8,039 subscribers.

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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.

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;

•   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
was not amended to include fixed-mobile services. No similar provision is contained in the Electronic
Communications Act.

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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.

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 convert existing licenses to the new licensing framework

contained in the Electronic Communications Act. It is possible as a result of the conversion process,
quality of service targets will again be imposed on us with penalties if targets are not met.

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.

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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.

Under the Telecommunications Act each of Vodacom, MTN, Telkom and Neotel 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.

Swiftnet is in violation of its license that requires it to have at least 30% of its shares held by

black economic empowerment individuals or entities. ICASA has required Swiftnet to remedy the
breach of its license, which expired on August 24, 2006. On February 14, 2007 Telkom announced
that it had entered into an agreement to sell a 30% stake in Swiftnet to the Radio Surveillance
Consortium, a group of empowerment investors, for R55 million following a competitive sale process
run by an independent adviser. The transaction would not require any financial support or facilitation
from Telkom. The transaction received Competition Commission approval on May 28, 2007. The
transaction is still subject to ICASA approval.

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.

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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
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 two assignments of 10 MHz in the
890.2/935.2 MHz and 900.0/945.0 MHz radio frequency spectrum bands, respectively, 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 two assignments of 1 MHz of GSM900 MHz radio frequency
spectrum band 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 1800 MHz frequency spectrum on payment of fees as determined
by the Minister of Communications. Vodacom was awarded a permanent 1800 MHz license on
October 29, 2004 comprising two assignments of 10 MHz and a 3G spectrum license on
November 30, 2004, comprising two assignments of 15 MHz radio frequency spectrum. The license
fee for the 1800 MHz and 3G spectrum license is a R5 million access fee each per annum and

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R100,000 per MHz pair. Vodacom has to date been allocated a total of 40 million numbers, including
the full 072, 076, 082 and 079 number ranges. ICASA has indicated that in the future the interleaving
principle will be used in allocating numbers. This means that each operator will not be granted the full
block of numbers in the relevant range, but will share these numbers with other operators.

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 is 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 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,

which have not been repealed by ICASA 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.

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Other regulatory issues

We are subject to the provisions of the Competition Act, 89 of 1998, which, together with the

Electronic Communications Act regulates anti-competitive behavior in the communications industry in
South Africa. Under the provision of these two Acts, we may not act anti-competitively or unfairly
discriminate against any person. Activities within the communications and broadcasting sectors are
regulated primarily by ICASA, but with concurrent jurisdiction of the Competition Commission on
competition-related matters. Although the concurrent jurisdiction of ICASA and the Competition
Commission in the information communications technology sector is coordinated via a memorandum
of agreement between the two bodies, there remain concerns around clear jurisdictional
responsibilities on certain issues.

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
provisions of the Electronic Communications Act in respect of the liberalization of the South African
telecommunications industry.

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

indirect 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. To date Telkom has not been
able to complete the implementation of all of these requirements and Vodacom may not be able to
implement these requirements within the time period in which it is ultimately required to implement
them, which has not yet been determined. Furthermore, the implementation of RICA is expected to
have significant cost implications resulting from the 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 information, including billing information. Telkom was not able to completely
comply with all of the requirements by June 2006 and in consultation with the Office of the
Interception Centre and the Department of Communication to adopt a phased approach for
compliance. Telkom however anticipates full compliance for all major technologies, including its public
digital exchanges and Internet services, in the 2007 calendar year. The directives for the
implementation of these requirements for private networks have not yet been finalized. Systems to
facilitate subscriber registration have been developed, tested and made available to the relevant
customer touch points by Vodacom ahead of the promulgation of the governing legislation. 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.

126

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.

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 published finalized codes of good practice, and 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, which deals with the items addressed in the codes of good
practice above. 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. The final set of genetic codes of good practice has
been gazetted in February 2007. The process of converting the ICT charter into codes of good
practice for the ICT sector is almost complete and proposed ICT codes are expected to be submitted
to the Minister of Communications in July 2007 for approval. Before the ICT codes are finally
approved they will be gazetted for public comment for a period of two months.

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.

The Electronic Communications Act provides that ICASA must specify the percentage of equity

ownership to be held in applicants for individual licenses by persons from historically disadvantaged
groups. The percentage may not be less than 30% or such higher percentage as may be prescribed
by ICASA.

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ORGANIZATIONAL STRUCTURE

Our group operational structure is as follows:

On April 19, 2007, Telkom has acquired 75% of Multi-Links Telecommunications Limited,

or Multi-Links, in Nigeria, for US$280 million. Multi-Links is a private telecommunications operator
with a Unified Access License allowing fixed, mobile, data, long distance and international
telecommunications services focused primarily on corporate clients in Nigeria. Multi-Links will focus on
brand awareness and promotional campaigns to increase the revenue of fixed-wireless and mobile
customers and will offer easy to understand high value bundles, differentiated on voice quality and
service. Broadband internet with ISP services will target high value bundles and high quality IP NGN
services are planned to be deployed in Lagos to attract high end corporate users and carrier class
wholesale products and services are planned to be introduced by establishing an earth station to
provide international connectivity.

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 TDS
Directory Operations subsidiary; wireless data services through our wholly owned Swiftnet subsidiary,
and Internet services in Africa through our newly acquired wholly owned Africa Online subsidiary. Our
mobile segment consists of our 50% interest in Vodacom, our joint venture.

Fixed-Line

Mobile

Telkom SA Limited

TDS Directory Operations

(Pty) Limited

Swiftnet (Pty)

Limited

Africa Online Limited

Telkom Media

(Proprietary) Limited

Vodacom Group

(Pty) Limited

50.0%

64.9%

100.0%

100.0%

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, 2007. 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, 2007. 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, 2007 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, 2007, 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, 136 customer service branches, including Telkom Direct
shops, 263 customer service centers, three information technology centers and one network
management center as of March 31, 2007.

Details of the principal immovable property leased and owned by our fixed-line business as of

March 31, 2007 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,

R5,501,506

Jan 31, 2019

Retirement Fund

South Africa

Office

Leased

Bridgeport/Lanor

Telkom

195 Nelson Mandela

R843,587

Jun 30, 2009

Joint Venture

Drive, Bloemfontein,
South Africa

Information

Leased

Telkom

Telkom

21 Teddington Street,

R1,185,329

Jan 31, 2019

technology center

Retirement Fund

Tygerberg, Bellville,
South Africa

Equipment related

Leased

Telkom

Telkom

178 Vermeulen Street,

R476,916

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

129

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, 2007 was
R161 million. The management agreement terminates on March 31, 2011.

Mobile

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 6,865 base transceiver stations, 325 base station controllers, 45 mobile
switching centers, including VLRs and gateways, a network management center and customer service
centers as of March 31, 2007. The number of mobile switching centers have decreased due to the
implementation of new equipment with increased capacity per unit when compared to the replaced
equipment. The total area of all of Vodacom’s properties, excluding its network and retail outlets, was
approximately 206,705 square meters as of March 31, 2007, consisting of approximately
173,446 square meters of owned properties and approximately 33,259 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 consolidated 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 consolidated financial statements of the Telkom Group
and Vodacom and a reconciliation to US GAAP of net income and shareholders’ equity, see note 46
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, 2007 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, 2007.

Change in accounting policy

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

changes to the basis of preparation:

•   the adoption of revised IAS21 and IAS39 and the adoption of new IFRIC4, which are applicable

for financial years beginning on or after January 1, 2006; and

•   the adoption of new IFRIC7, which is applicable for financial periods beginning on or after

March 1, 2006.

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 that ended prior to
the year ended March 31, 2007. 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.

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, wireless data services and other internet services through our subsidiaries, TDS Directory
Operations (Pty) Limited, Swiftnet (Pty) Limited and newly acquired Africa Online, respectively.

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;

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•   directory, wireless data and other internet services outside South Africa through our TDS

Directory Operations, Swiftnet and newly acquired Africa Online 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, we are continuing to 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 long term growth, including expansion in Africa;

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

growth through prudent cost management;

•   Engaging Telkom’s employees to maintain our competitive advantage;

•   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 residential public switched telecommunications services in

South Africa. Neotel, which was granted an additional license to provide public switched
telecommunications services in South Africa on December 9, 2005 and was commercially launched
on August 31, 2006 and commenced providing services in the beginning of the 2007 calendar year to
large corporations and other licensees. Neotel 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. Neotel has indicated that it will
begin providing services to residential customers in the 2007 calendar year. The Government has
created an infrastructure company, Infraco, which is expected to provide inter-city bandwidth at cost
price to Neotel, and later to the rest of the industry, which will further compete with our
communications network. A process to issue additional licenses to small business operators to provide
telecommunications services in underserviced areas with a teledensity of less than 5%, commenced
in 2005 and is continuing. 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 the Minister has issued invitations to apply for
licenses in the 14 additional areas. In August 2006 ICASA recommended to the Minister that licenses
be granted to successful applicants in 13 of these areas. It is expected that further licenses will be
issued in the 2007 calendar year.

Telkom currently competes 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

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Limited and Cell C announced in June 2006 that it entered into a joint venture with Virgin Mobile,
which we expect will increase competition. 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. 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. ICASA has begun a review process of mobile termination rates aimed at reducing high mobile
interconnect charges. It is expected that this process will have a reducing effect on our mobile
interconnection revenue towards the end of the 2007 calendar year.

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 the Electronic Communications Act, which 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 layered 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.

VANS providers such as Internet Solutions are our main competitors in the data market. They

provide competitive internet protocol virtual private networks and internet service provider services to
the business segment. Consumer orientated internet service providers such as MWeb are our main
competitors in the consumer Internet market.

In addition, our data services have faced increased competition from iBurst, a competitor to

Telkom in the wireless area that offers competing broadband services, and, to a lesser extent,
Sentech, which owns and operates satellite transmission systems, a packaged, always-on,
bi-directional broadband service via satellite and a wireless high-speed internet service offering.
Similarly, the mobile operators’ 3G, HSDPA and EDGE networks also enable customers to browse the
internet via mobile broadband services, which provide increased competition for our data services.
The mobile data providers have reduced prices significantly creating price competition in our data
markets.

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

to improve customer loyalty through improved services and products 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 rates to increase” and Item 4. “Information
on the Company – Regulation and License Requirements”.

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

133

due to mobility. Although the fixed-line penetration rate in South Africa was only 9.8% and 10.0% as of
March 31, 2007 and March 31, 2006, respectively, due to the diverse rural geography and
demographic factors in South Africa, we do not expect South Africa’s fixed-line penetration rates to
increase in the near term. In the 2007 and 2006 financial years, our total fixed access lines decreased
primarily due to a decrease in the number of residential PSTN lines, partially offset by an increase in
ISDN channels and business postpaid PSTN lines. Residential postpaid PSTN lines were adversely
impacted by customer migration to mobile and higher bandwidth products such as ADSL and lower
connections, while the decrease in prepaid PSTN lines was primarily as a result of customer migration
to mobile services and our residential postpaid PSTN services. Similarly, traffic declined in both the
2007 and 2006 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 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 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 84% at March 31, 2007. As a result, Vodacom’s
South African revenue increased 24.1% and 19.1% in the 2006 and 2007 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 as well as
seeking new associate business opportunities in South Africa and gearing up to provide total
converged solutions to corporates. Vodacom’s previous focus of customer acquisition and selective
growth in other African countries still remain focus areas. 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 86.5% of Vodacom’s South African mobile customers were prepaid customers at March 31,
2007 and 93.2% of all gross connections were prepaid customers in the 2007 financial year. During
the 2007 financial year the growth in contract customers in South Africa exceeded the growth in
prepaid customers as a result of the migration of the South African middle class from prepaid to
contract services. The increasing number of prepaid users, who tend to have lower average usage,
together with the lower overall usage as the lower end of the market continues to be penetrated have
resulted in decreasing overall average revenue per customer. As a result, total South African ARPU
decreased to R125 per month in the 2007 financial year from R139 per month in the 2006 financial
year and R163 per month in the 2005 financial year. South African contract ARPU decreased to
R517 per month in the 2007 financial year from R572 per month in the 2006 financial year and
R624 per month in the 2005 financial year. South African prepaid ARPU decreased to R63 per month

134

in the 2007 financial year from R69 per month in the 2006 financial year and R78 per month in the
2005 financial year. In the 2007 and 2006 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 50 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. 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 and in response to increased competition.

Regulations made under the Telecommunications Act, which remain in effect, 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 and approximately 64% of Telkom’s operating
revenue in the year ended March 31, 2007. The reason for the decrease in the 2006 financial year
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 on the pricing and provision of ADSL
services were published by ICASA, which would, among other things, have prohibited Telkom from
charging a monthly rental for providing ADSL service and limited Telkom to charging only an
installation fee for such service. The final regulations published by ICASA on August 17, 2006 did not
contain any limitations on the pricing of these services, but did impose quality of service obligations on
Telkom for these services as related to, among other things:

• services to be provided within 30 days from application;

• the provision of encapped local bandwidth;

• the guarantees of minimum speeds;

• the prohibition of post prioritization; and

• the prohibition of periodic resets.

Telkom is currently not in full compliance with these requirements and has informed ICASA

accordingly.

ICASA approved a 0.2% increase in the overall tariffs for the services in the basket effective

January 1, 2005, a 3.0% reduction in the overall tariffs for services in the basket effective
September 1, 2005 and a 2.1% reduction in the overall tariffs for services in the basket effective
August 1, 2006. On June 13, 2007, Telkom filed with ICASA proposed average price reductions on its
regulated basket of products and services of 1.2%, effective August 1, 2007. As a result, if approved
by ICASA the following price changes will be effective August 1, 2007:

135

• ADSL rental

18.2% average decrease

• Local call charges – Standard time

No change

• Local call charges – Callmore time

4.1% average increase

• Long distance call charges

10% decrease

• International call charges

9.0% average decrease

• Data products

11.9% average decrease

• Subscription: analog line rental

12.0% increase

• ISDN rental

12.0% increase

• Worldcall local

15.0% decrease

• Worldcall long distance

41.3% decrease

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.

Acquisition of Africa Online

On February 23, 2007, Telkom acquired 100% of the issued share capital of Africa Online from

African Lakes Corporation for a total cost of R150 million. Africa Online is an internet service provider
active in Cote d’Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and
Zimbabwe. Africa Online’s strategy will focus on brand development, creation and development of
customer channels, improvement of network systems, human resources development and an
expansion drive targeting other African countries.

Vodacom’s acquisitions

Service provider 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 SP (Proprietary) Limited, or
Smartphone, acquiring an additional 2.5 million prepaid customers. On April 16, 2004, Smartphone
purchased an 85.75% equity stake in Smartcom (Proprietary) Limited, or Smartcom, for R77.2 million,
acquiring an additional 40,000 contract customers. On August 30, 2006, Vodacom purchased an
additional 19% shareholding in Smartphone for R333.9 million, with goodwill amounting to
R313.2 million, increasing its shareholding from 51% to 70%, while Smartphone purchased an
additional 2.25% shareholding in Smartcom for R9.1 million on September 13, 2006, increasing its
shareholding from 85.75% to 88% with goodwill amounting to R8.2 million.

136

Vodacom acquired an initial 51% stake in Cointel for approximately R84.3 million on August 1,

2005. Vodacom acquired an additional 49% in Cointel on October 4, 2006 for R147.0 million to
increase its shareholding to 100%. The net goodwill arising on this acquisition amounted to
R90.9 million. Cointel’s core business is providing value added and m-commerce services to the
telecommunications industry. Vodacom subsequently sold its entire shareholding in Cointel to
Smartphone resulting in the realization of R38.0 million of goodwill created by the original purchase.

Vodacom acquired the cellular business of Africell Cellular Services (Pty) Limited, or Africell, an

exclusive Vodacom dealer in South Africa for R80 million, effective October 1, 2006. The net goodwill
arising on this business combination amounted to R43.7 million.

As of March 31, 2007, 84.2% of Vodacom’s contract customer base and 99.4% of its prepaid

customer base in South Africa was managed by exclusive service providers or controlled directly by
Vodacom.

Wireless Business Solutions

Vodacom acquired a 10% shareholding in WBS Holdings (Proprietary) Limited, or WBSH, also

known as iBurst, for R80.8 million, including capitalized costs, effective January 31, 2007. iBurst
supplies customers with continued high speed connectivity through broadband internet and email
services. On the same date WBSH also granted Vodacom a call option to subscribe to such number
of additional shares as will result in Vodacom beneficially owning 25.5% of the total issued ordinary
capital of WBSH after the exercise of the option. This call option can be exercised by Vodacom at any
time until September 14, 2007, provided that certain conditions are satisfied on the date of exercise.
Competition Commission and ICASA approval is also required before the call option can be exercised.

On March 30, 2007 Vodacom entered into an infrastructure agreement with Wireless Business

Solutions (Proprietary) Limited, or WBS, whereby WBS appointed Vodacom to design and construct a
WiMAX network for use by WBS.

Vodacom’s acquisitions and dispositions outside of South Africa

Vodacom Congo acquired the internet service provider business of InterConnect s.p.r.l in the

Democratic Republic of the Congo for R21.2 million including capitalized costs, effective November 1,
2006. The net goodwill arising from this business combination amounted to R12.6 million.

National Porting Company (Proprietary) Limited

Effective September 20, 2006, Vodacom, MTN and Cell C each acquired a 33.3% stake in

National Porting Company (Proprietary) Limited, which was formed to provide the services necessary
for the three mobile operators to offer mobile number portability as required by ICASA pursuant to the
Telecommunications Act. Each mobile operator acquired 100 shares of National Porting Company for
R1 each, and made a shareholder loan to National Porting Company of R6 million. Mobile number
portability was officially launched on November 11, 2006.

Vodacom Ventures (Proprietary) Limited

Vodacom Ventures (Proprietary) Limited was formed for the purpose of generating innovative

telecommunications products and services for Vodacom by investing in companies. In the 2007
financial year, Vodacom Ventures purchased a 10% equity stake in G-Mobile Holdings Limited,
a Wi-Fi corporation, and a 26% equity stake in Gogga Tracking Solutions (Proprietary) Limited,
a company which services the lower end of the contract market. Vodacom Ventures has an
irrevocable call option to subscribe for such number of further shares of G-Mobile Holdings as will
result in Vodacom Ventures holding and beneficially owning, in aggregate together with its initial stake,
26% of the total issued share capital of G-Mobile Holding Limited after the exercise of the option.
Vodacom Ventures also has a call option to purchase such number of shares in Gogga Tracking

137

Solutions totaling 23% of the issued share capital of the company on the date upon which the option
is exercised. The option will lapse after 36 months following the month in which certain performance
conditions are satisfied. If this option is exercised Vodacom will hold 49% of the issued share capital
of Gogga Tracking Solutions (Proprietary) Limited.

Volatility of the Rand

The value of the Rand as measured against the US 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 31, 2002 to R6.15 per $1.00 as of March 31, 2006. The value of the Rand as measured
against the Dollar was R7.29 per $1.00 as of March 31, 2007. 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 R202 million in the 2007 financial year and R123 million in the 2006
financial year, and decreased our consolidated profit before tax by R8 million in the 2005 financial
year. 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. Theft
of cable increased significantly in the 2007 financial year due to the increase in the price of copper.
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 Neotel and the further liberalization of the South African communications market as a
result of the enactment of the Electronic Communications Act, we have shifted our capital expenditure
focus as we seek to evolve our fixed-line network to an internet protocol-based next generation
network. As a result, we expect that our fixed-line capital expenditures in the 2008 financial year will
be spent primarily in the following areas:

• Maintaining 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

138

• supporting our business solution and e-business product growth.

• 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;

• 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 2008 financial year

is budgeted to be approximately R11.2 billion, of which approximately R7.0 billion is budgeted to be
spent in our fixed-line segment and approximately R4.2 billion is budgeted to be spent in our mobile
segment, which is our 50% share of Vodacom’s budgeted capital expenditure of approximately
R8.4 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.

Fixed-line employee expenses increased 12.3% from R6.5 billion in the 2006 financial year to
R7.3 billion in the 2007 financial year primarily due to increased salaries and wages and related
benefits as a result of annual average salary increases of 7.0%, a 1.1% increase in the number of
employees in our fixed-line business, excluding subsidiaries, and increased payments to part time
staff and contractors to meet customer centricity objectives and the deployment of next generation
network objectives. The number of Telkom employees declined by approximately 31,236 positions
from March 31, 1997 through March 31, 2006 and increased by 289 positions in the year ended
March 31, 2007. At March 31, 2007, we had 25,864 Telkom employees. We spent R24 million,
R88 million and R961 million in the years ended March 31, 2007, 2006 and 2005, respectively, on a
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 had placed a 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. During the 2007
financial year, Telkom entered into a three-year long-term agreement on wages and benefits with the
recognized unions.

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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, TDS Directory Operations; wireless data services through our
wholly-owned subsidiary, Swiftnet; and internet services outside South Africa through our newly
acquired Africa Online subsidiary. Our mobile segment consists of our 50% interest in Vodacom.

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 TDS Directory Operations, Swiftnet and Africa Online subsidiaries in the Telkom
Group’s consolidated financial statements.

Year ended March 31, 2007 compared to year ended March 31, 2006 and year ended
March 31, 2005

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,

2005

2006

2007

2006/2005

2007/2006

ZAR

%

ZAR

%

ZAR

%

% change

% change

(in millions, except percentages)

Operating revenue

43,160

100.0

47,625

100.00

51,619

100.0

10.3

8.4

Fixed-line

31,457

72.9

32,749

68.8

33,295

64.5

4.1

1.7

Mobile

13,657

31.6

17,021

35.7

20,573

39.9

24.6

20.9

Intercompany eliminations

(1,954)

(4.5)

(2,145)

(4.5)

(2,249)

(4.4)

9.8

4.8

Other income

(1)

280

100.0

480

100.0

384

100.0

71.4

(20.0)

Fixed-line

255

91.1

430

89.6

342

89.1

68.6

(20.5)

Mobile

34

12.1

50

10.4

42

10.9

47.1

(16.0)

Intercompany eliminations

(9)

(3.2)

–

–

–

–

–

–

Operating expenses

32,179

100.0

33,428

100.0

37,533

100.0

3.9

12.3

Fixed-line

23,691

73.6

22,937

68.6

24,597

65.5

(3.2)

7.2

Mobile

10,451

32.5

12,636

37.8

15,185

40.5

20.9

20.2

Intercompany eliminations

(1,963)

(6.1)

(2,145)

(6.4)

(2,249)

(6.0)

9.3

4.8

Operating profit

(2)

11,261

100.0

14,677

100.0

14,470

100.0

30.3

(1.4)

Fixed-line

8,021

71.2

10,242

69.8

9,040

62.5

27.7

(11.7)

Mobile

3,240

28.8

4,435

30.2

5,430

37.5

36.9

22.4

Operating profit margin (%)

26.1

30.8

28.0

18.0

(9.1)

Fixed-line

25.5

31.3

27.2

22.7

(13.1)

Mobile

23.7

26.1

26.4

10.1

1.1

Profit for the year
attributable to equity
holders of Telkom

6,752

100.0

9,189

100.0

8,646

100.0

36.0

(5.9)

Profit margin (%)

15.6

19.3

16.7

23.7

(13.5)

EBITDA

(2) (3)

17,549

100.0

20,553

100.0

19,785

100.0

17.1

(3.7)

Fixed-line

12,753

72.7

14,646

71.3

12,663

64.0

14.8

(13.5)

Mobile

4,796

27.3

5,907

28.7

7,122

36.0

23.2

20.6

EBITDA margin (%)

40.7

43.2

38.3

6.1

(11.3)

(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 include our 50% share of Vodacom’s
impairment of R268 million in respect of assets in Mozambique in the 2005 financial year, 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 in Mozambique
and an impairment loss of R23 million in the 2007 financial year in respect of the assets in Mozambique due to a
decrease in the fair value of the assets.

140

(3)

Total EBITDA and mobile EBITDA represent profit for the year, which includes profit on sale of investments 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 5 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 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,

2005

2006

2007

ZAR

ZAR

ZAR

(in millions)

Fixed-line
EBITDA

12,753

14,646

12,663

Depreciation, amortization, impairments and write-offs

(4,732)

(4,404)

(3,623)

Operating profit

8,021

10,242

9,040

Mobile
EBITDA

4,796

5,907

7,122

Depreciation, amortization and impairments

(1,556)

(1,472)

(1,692)

Operating profit

3,240

4,435

5,430

Operating revenue

Operating revenue increased in the years ended March 31, 2007 and 2006 due to increased

operating revenue in both our mobile and fixed-line segments. Vodacom’s operating revenue
increased in the 2007 financial year primarily due to increased data, interconnection and equipment
sales revenue as a result of strong customer growth. 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. The increase in fixed-line operating
revenue in the 2007 financial year was primarily due to continued growth in data revenue and higher
subscriptions and connections revenue partially offset by lower average traffic tariffs, lower local and
long distance traffic and lower interconnection revenue. 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. Fixed-line operating revenue accounted for 64.5%, 68.8% and 72.9% of our
consolidated operating revenue before intercompany eliminations in the years ended March 31, 2007,
2006 and 2005, respectively.

Other income

Other income includes profit on the disposal of investments, property, plant and equipment and

intangible assets. The decrease in fixed-line other income in the 2007 financial year was primarily due
to lower sales of assets and properties as well as a decrease in profit on disposal of investments,
which resulted from the reclassification of assets held by the Cell captive to an annuity policy that
qualifies as a plan asset. The profits and losses that would have previously been included in other
income are now treated as movements in the plan assets funding the post retirement medical aid
obligation. 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.

141

Operating expenses

Operating expenses increased in the year ended March 31, 2007 as a result of increased

operating expenses in both our mobile and fixed-line segments. Operating expenses increased in the
year ended March 31, 2006 as a result of increased operating expenses in our mobile segment,
partially offset by decreased operating expenses in our fixed-line segment. The increase in mobile
operating expenses in the 2007 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 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 impairment, higher employee costs as a result of
increased headcount, average 7.5% annual salary increases, an increase in the provision for bonus
schemes and an increase in the provision for long term incentives for executives and increased
operating leases. The increase in mobile operating 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 fixed-line operating expenses in the 2007 financial year was primarily attributable

to increased selling, general and administrative expenses, employee expenses, payments to other
operators, and services rendered, partially offset by lower depreciation, amortization, impairments and
write-offs as a result of an increase in the useful lives of certain assets. Selling, general and
administrative expenses increased primarily as a result of the provision raised for possible liabilities in
the Telcordia dispute, higher materials and maintenance expenses, increased marketing and
sponsorships, and increased costs of sales due to the reclassification of finance leases associated
with customer premises equipment in selling, general and administrative expenses, partially offset by
a provision for VAT that was reversed due to a revenue ruling from SARS. Employee expenses
increased due to higher salaries and wages as a result of average annual salary increases of 7.0%
and related benefits, an increase in the number of employees and increased payments to part time
employees and contractors. Payments to other network operators increased primarily due to higher
call volumes from our fixed-line network to the mobile networks and higher payments to international
network operators as a result of higher international outgoing volumes and a weaker exchange rate.
Services rendered increase in the year ended March 31, 2007 primarily due to increased payments to
consultants to explore local and international investment opportunities, customer centricity and higher
security and property management costs at TFMC. 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 non-recurrence of fees paid to Thintana

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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.

Operating profit

Operating profit decreased in the 2007 financial year due to decreased fixed-line operating profit

as a result of higher operating expenditure, partially offset by increased mobile operating profit.
Operating profit increased in the 2006 financial year due to increased fixed-line operating profit as a
result of higher revenue and a decline in operating expenses and increased mobile operating profit
primarily as a result of increased mobile operating revenue due to customer growth, partially offset by
increased operating expenses. As a result, the fixed-line operating profit margin increased from 25.5%
in the 2005 financial year to 31.3% in the 2006 financial year and decreased to 27.2% in the 2007
financial year and the mobile operating profit margin increased from 23.7% in the 2005 financial year
to 26.1% in the 2006 financial year and 26.4% in the 2007 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 decreased 40.8% to R235 million in the
2007 financial year and increased 13.4% to R397 million in the 2006 financial year from R350 million
in the 2005 financial year. The decrease in the 2007 financial year was primarily due to lower interest
received as a result of lower cash balances available for short term investments and increased
taxation payments.

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,

2005

2006

2007

2006/2005

2007/2006

ZAR

ZAR

ZAR

% change

% change

(in millions, except percentages)

Interest expense

1,686

1,346

1,327

(20.2)

(1.4)

Local loans

1,515

1,506

1,488

(0.6)

(1.2)

Foreign loans

281

9

-

(96.8)

-

Finance charges capitalized

(110)

(169)

(161)

(53.6)

(4.7)

Net fair value and exchange (gains) losses on
financial Instruments

8

(123)

(202)

n/a

(64.2)

Fair value (gains) on derivative instruments

(103)

(170)

(448)

(65.0)

163.5

Foreign exchange losses

111

47

246

(57.7)

423.4

Total finance charges

1,694

1,223

1,125

(27.8)

(8.0)

During the year ended March 31, 2007, finance charges decreased due to a slightly reduced

interest expense resulting from lower interest bearing debt levels, and an increase in the net fair value
and exchange gains due to currency movements and fair value adjustments of our consolidated
special purpose entity used to fund Telkom’s post retirement medical benefit obligation. Finance
charges decreased in the year ended March 31, 2006 due to reduced interest expense as a result of

143

lower interest bearing debt levels. In the 2006 financial year, the foreign exchange and fair value gain
was R123 million primarily due to currency movements and unrealized gains relating to investments
by our consolidated special purpose entity used to fund post retirement medical benefit obligations.

Taxation

Our consolidated tax expense increased 4.6% to R4,731 million in the year ended March 31, 2007

and 46.8% to R4,523 million in the year ended March 31, 2006 from R3,082 million in the year ended
March 31, 2005. The increase in the 2007 financial year was mainly due to the higher capital gains
tax liability created and higher non-deductable expenses in Telkom company and Vodacom. The
increase in the 2006 financial year was 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,

2005

2006

2007

2006/2005

2007/2006

ZAR

ZAR

ZAR

% change

% change

(percentages)

Effective tax rate
Telkom Group

31.1

32.7

34.9

5.1

6.7

Telkom Company

20.6

25.0

24.3

21.4

(2.8)

Vodacom

40.2

37.5

36.9

(6.7)

(1.6)

The increase in the Telkom Group effective tax rate in the 2007 financial year was mainly due to

higher capital gains tax and higher non-deductable expenses in Telkom company and Vodacom.

The lower effective tax rate for Telkom Company in the year ended March 31, 2007 was primarily

due to higher exempt income resulting mainly from dividends received primarily from Vodacom
partially offset by higher non-deductable expenses relating to the Telcordia dispute. The increase in
the effective tax rate for the Telkom Group and Telkom company 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 tax rate of Vodacom. The lower effective tax rate for Vodacom in
the 2007 financial year was mainly due to the utilization of the Vodacom Congo’s capital expenditure
allowances. 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.

Minority interests

Minority interests in the income of subsidiaries increased 46.0% to R203 million in the year ended

March 31, 2007 primarily due to the increase in profits generated by Smartphone, Vodacom Tanzania
and Cointel partially offset by the purchase of additional equity interests in Smartphone and Cointel.
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 17.0% increase in the profits at
our TDS Directory Operations subsidiary.

Profit for the year attributable to equity holders of Telkom

Profit for the year attributable to equity holders of Telkom decreased in the 2007 financial year

primarily due to decreased operating profit in our fixed-line segment, partially offset by increased
operating profit in our mobile segment. Lower investment income and higher taxation was partially
offset by an increase in net fair value and exchange gains. Profit for the year attributable to equity
holders of Telkom increased in the 2006 financial year 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.

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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, our wireless data services business, our directory
business and our newly acquired internet services business outside South Africa.

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,

2005

2006

2007

2006

2007/

2005

2006

ZAR

%

ZAR

%

ZAR

%

% change % change

(in millions, except percentages)

Subscriptions and connections

5,385

17.1

5,803

17.7

6,286

18.9

7.8

8.3

Traffic

17,760

56.5 17,563

53.6 16,738

50.3

(1.1)

(4.7)

Local

5,746

18.3

5,753

17.6

5,382

16.2

0.1

(6.4)

Long-distance

3,577

11.4

3,162

9.7

2,722

8.2

(11.6)

(13.9)

Fixed-to-mobile

7,302

23.2

7,647

23.3

7,646

23.0

4.7

–

International outgoing

1,135

3.6

1,001

3.0

988

2.9

(11.8)

(1.3)

Interconnection

1,546

4.9

1,654

5.1

1,638

4.9

7.0

(1.0)

Data

5,784

18.4

6,649

20.3

7,484

22.5

15.0

12.6

Directories and other services

982

3.1

1,080

3.3

1,149

3.4

10.0

6.4

Fixed-line operating revenue .

31,457

100.0   32,749

100.0  33,295

100.0

4.1

1.7

Fixed-line operating revenue increased in the 2007 financial year, primarily due to continued

growth in data services and higher subscriptions and connections revenue, partially offset by lower
average traffic tariffs, lower local and long distance traffic and lower interconnection revenue.
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.

Fixed-line operating revenue was adversely impacted in both the 2007 and 2006 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 lower connections, and a
decrease in the number of prepaid PSTN lines as a result of customer migration to mobile services
and our residential postpaid PSTN services and was positively impacted by our increase in ISDN
channels, ADSL services and business postpaid 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 prepaid and residential postpaid PSTN lines and increased competition in our payphones
business. As a result, traffic declined 6.3% and 2.9% in the 2007 and 2006 financial years. Revenue

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per fixed access line decreased 0.5% to R5,275 in the 2007 financial year from R5,304 in the 2006
financial year primarily due to the decline in traffic tariffs, lower local and long distance traffic volumes
and lower interconnection revenues, partially offset by higher subscriptions and connection tariffs.
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.

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,

2005

2006

2007

2006/2005

2007/2006

ZAR

ZAR

ZAR

% change

% change

Total subscriptions and connections revenue

(ZAR millions, except percentages)

5,385

5,803

6,286

7.8

8.3

Total subscription access lines (thousands,

except percentages)

(1)

4,567

4,551

4,490

(0.4)

(1.3)

Postpaid

PSTN

(2)

3,006

2,996

2,971

(0.3)

(0.8)

ISDN channels

664

693

718

4.4

3.6

Prepaid PSTN

887

854

795

(3.7)

(6.9)

Private payphones

10

8

6

(20.0)

(25.0)

(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 rate
ISDN line includes two access channels and each primary rate 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, 2007 and

2006 mainly due to increased tariffs as well as an increase in the number of ISDN and business
postpaid PSTN lines, partially offset by lower residential postpaid PSTN lines and prepaid PSTN lines.
The average monthly prices for subscriptions increased by 6.3% on January 1, 2005, 6.0% on
September 1, 2005 and 8.3% on August 1, 2006. In the 2007 financial year, revenue from the sale of
customer premises equipment increased as a result of the reclassification of the related leases
previously accounted for as operating leases to finance leases, resulting in the recognition of income
from the lease of customer premises equipment at the time of sale as opposed to over the life of the
contract. In addition, increased revenue was received from voice enhanced services, mainly as a
result of increased penetration. Revenue from the rental of customer premises equipment and voice
enhanced services increased in the 2006 financial year as a result of tariff increases and an increase
in the penetration of voice enhanced services.

The decrease in the number of residential postpaid PSTN lines in service in both the 2007 and

2006 financial years was primarily as a result of customer migration to mobile and higher bandwidth
products such as ADSL and lower connections. 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 both the 2007 and 2006 financial years was primarily due to continued

146

migration to mobile services and our residential postpaid PSTN services. In addition, we relaxed our
credit policies which led to fewer migrations of our postpaid customers to prepaid service in the 2007
and 2006 financial years.

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,

2005

2006

2007

2006/2005

2007/2006

ZAR

ZAR

ZAR

% change

% change

Local traffic (ZAR millions, except

percentages)

5,746

5,753

5,382

0.1

(6.4)

Local traffic (millions of minutes, except
percentages)

(1)

19,314

18,253

16,655

(5.5)

(8.6)

Long distance traffic revenue (ZAR millions,

except percentages)

3,577

3,162

2,722

(11.6)

(13.9)

Long distance traffic (millions of minutes,
except percentages)

(1)

4,453

4,446

4,250

(0.2)

(4.4)

Fixed-to-mobile traffic revenue (ZAR millions,

except percentages)

7,302

7,647

7,646

4.7

–

Fixed-to-mobile traffic (millions of minutes,
except percentages)

(1)

3,911

4,064

4,103

3.9

1.0

International outgoing traffic revenue

(ZAR millions, except percentages)

1,135

1,001

988

(11.8)

(1.3)

International outgoing traffic (millions of
minutes, except percentages)

(1)

415

515

558

24.1

8.3

International voice over internet protocol
(millions of minutes, except percentages)

(2)

89

83

38

(6.7)

(54.2)

Total traffic revenue (ZAR millions,

except percentages)

1

7,760

17,563

16,738

(1.1)

(4.7)

Total traffic (millions of minutes, except
percentages)

(1)

28,182

27,361

25,604

(2.9)

(6.4)

Average total monthly traffic minutes per average
Monthly access line (minutes)

(3)

496

482

456

(2.8)

(5.4)

(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 dial up 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 2007 financial year primarily due to lower average traffic tariffs and

lower local and long distance traffic partially offset by increased international outgoing and fixed-to-

147

mobile traffic. 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.

ICASA approved a 0.2% increase in the overall tariffs for services in the basket for which there is

a price cap effective January 1, 2005, a 3.0% reduction in the overall tariffs for services in the basket
effective September 1, 2005 and a 2.1% reduction in the overall tariffs for services in the basket
effective August 1, 2006. Traffic was adversely affected in both the 2007 and 2006 financial years by
the increasing substitution of calls placed using mobile services rather than our fixed-line service and
dialup traffic being substituted by our ADSL service, as well as the decrease in the number of prepaid
and 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 decreased in the 2007 financial year due to 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 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. We increased penetration of discount and calling plans to stimulate
usage in the 2007 and 2006 financial years and to counteract mobile substitution, which effectively
lowers the cost to the customer. 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). This price was
unchanged on August 1, 2006.

Long distance traffic revenue decreased in the 2007 financial year mainly due to a decrease in

average long distance tariffs, which was partially offset by increased long distance traffic. Long
distance traffic revenue decreased in the 2007 and 2006 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, a further 10% on September 1, 2005, and a further 10% on
August 1, 2006.

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 was flat in the
2007 financial year. Increased fixed-to-mobile traffic was partially offset by higher discounts offered to
customers in order to retain traffic on our network. 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 2007 and 2006 financial years was primarily due to our
CellSaver product, which offers discounts to larger customers on fixed-to-mobile calls.

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 2007 and 2006 financial years, international outgoing traffic revenue declined primarily as a result
of a decrease in the average international outgoing tariffs, partially offset by a significant increase in
international outgoing traffic primarily as a result of the reduced tariffs. The average tariffs to all
international destinations decreased by 28% on January 1, 2005 with rates of R1.70 per minute (VAT

148

inclusive) for major destinations like the United States, United Kingdom and Australia. The average
tariffs to all international destinations decreased by 11.1% on August 1, 2006.

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,

2006/2005

2007/2006

2005

2006

2007

% change

% change

Interconnection revenue (ZAR millions,

except percentages)

1,546

1,654

1,638

7.0

(1.0)

Domestic mobile interconnections
Interconnection revenue from domestic mobile

operators (ZAR millions, except percentages)

748

760

815

1.6

7.2

Domestic mobile interconnection traffic

(millions of minutes, except percentages)

(1)

2,206

2,299

2,419

4.2

5.2

International interconnection
Interconnection revenue from international

operators (ZAR millions, except percentages)

798

894

823

12.0

(7.9)

International interconnection traffic (millions of

minutes, except percentages)

(2)

1,318

1,355

1,321

2.8

(2.5)

(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 2007 and 2006 financial years mainly due to increased traffic from
domestic mobile operators and average tariff increases for call termination, partially offset by lower
average tariffs on mobile international outgoing calls. Domestic mobile interconnection traffic
increased in the years ended March 31, 2007 and 2006 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 R468 million in the year ended March 31, 2007, R464 million in the year
ended March 31, 2006 and R465 million in the year ended March 31, 2005. 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 Neotel in the future and the further liberalization of the South African telecommunications industry,
which may partially mitigate declines in revenue in other areas.

149

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 decreased in the year ended
March 31, 2007 primarily due to decreased settlement rates and volume discounts and decreased
switched hubbing traffic volumes, partially offset by increased international termination tariffs and the
weakening of the Rand against the SDR, the notional currency in which international rates are
determined. 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 were 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, volume discounts and a settlement preventing an illegal
operator from carrying international incoming traffic.

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. 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,

2006/2005

2007/2006

2005

2006

2007

% change

% change

Data services revenue (ZAR millions, except

percentages)

5,784

6,649

7,484

15.0

12.6

Leased lines and other data revenue

(1)

4,748

5,282

5,820

11.2

10.2

Leased line facilities revenues from mobile operators

1,036

1,367

1,664

31.9

21.7

Number of managed network sites (at period end)

11,961

16,887

21,879

41.2

29.6

Internet dial-up subscribers (at period end)                  202,410   228,930    210,453

13.1

(8.1)

Internet ADSL subscribers (at period end)

22,870

53,997

92,140

136.1

70.6

Internet satellite subscribers (at period end)

1,427

1,981

2,420

38.9

22.2

Total ADSL subscribers (at period end)

(2)

58,278    143,509    255,633

146.2

78.1

(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 523, 249 and 254 as of March 31, 2007, 2006 and 2005, respectively.

Our data services revenue increased in both the 2007 and 2006 financial years primarily due to

increased revenue from data connectivity service, including ADSL connectivity and SAIX, internet
access, and managed data networks, including VPN Supreme and increased revenue from leased
line facilities from mobile operators. These increases were partially offset by decreased tariffs for
leased line facilities to mobile operators and data connectivity services. Revenue from leased line
facilities from mobile operators increased in the years ended March 31, 2007 and 2006 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 R907 million, R845 million and R562 million in

revenue received by our fixed-line business from Vodacom in the years ended March 31, 2007, 2006
and 2005, respectively. Fifty percent of these amounts were attributable to our interest in Vodacom
and were eliminated from the Telkom Group’s revenue on consolidation.

150

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, TDS Directory Operations, and, to a substantially lesser
degree, wireless data services revenue from our subsidiary, Swiftnet, and other miscellaneous
revenue, including revenue from internet services outside South Africa from our newly acquired Africa
Online subsidiary and from the sale of materials. Revenue from directories and other services
increased in the years ended March 31, 2007 and 2006 primarily due to increases in directory
services revenue from TDS Directory Operations as a result of annual tariff increases, increased
marketing and online 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,

2005

2006

2007

% of

% of

% of

2006/2005 2007/2006

ZAR

revenue

ZAR

revenue

ZAR

revenue

% change % change

(in millions, except percentages)

Employee expenses

(1)

7,285

23.2

6,470

19.8

7,268

21.8

(11.2)

12.3

Payments to other network

operators

5,896

18.7

6,150

18.8

6,463

19.4

4.3

5.1

Selling, general and

administrative expenses

(2)

3,046

9.7

3,086

9.4

4,244

12.7

1.3

37.5

Services rendered

1,976

6.3

2,050

6.3

2,212

6.6

3.7

7.9

Operating leases

756

2.4

777

2.4

787

2.4

2.8

1.3

Depreciation, amortization,

impairments and write-offs.

4,732

15.0

4,404

13.4

3,623

10.9

(6.9)

(17.7)

Fixed-line operating

expenses

23,691

75.3

22,937

70.0

24,597

73.8

(3.2)

7.2

(1)

Employee expenses include workforce reduction expenses of R24 million, R88 million and R961 million in the years
ended March 31, 2007, 2006 and 2005, 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. In the year ended March 31, 2007 we recorded a provision of R527 million for probable liabilities related to
Telkom’s arbitration with Telcordia, excluding legal fees, of which R510 million is included in selling, general and
administrative expenses and R11 million for interest and R6 million for foreign exchange rate effect is included
in finance charges.

Fixed-line operating expenses increased in the 2007 financial year primarily due to increased

selling, general and administrative expenses, employee expenses, payments to other operators and
services rendered, partially offset by lower depreciation, amortization, impairments and write-offs.
Selling, general and administrative expenses increased primarily as a result of the provision raised for
probable liabilities in the Telcordia dispute, higher materials and maintenance expenses, increased
marketing and sponsorships and increased costs of sales due to the reclassification of finance leases
associated with customer premises equipment in selling, general and administrative expenses.

151

Employee expenses increased in the year ended March 31, 2007 primarily due to higher salaries

and wages as a result of average annual salary increases of 7.0% and related benefits, a 2.5%
increase in the number of fixed-line employees and increased payments to part time employees and
contractors. Payments to other network operators increased in the 2007 financial year primarily due to
higher call volumes from our fixed-line network to the mobile networks and higher payments to
international network operators as a result of higher international outgoing volumes and a weaker
exchange rate. Services rendered increased in the year ended March 31, 2007 primarily due to
increased payments to consultants to explore local and international investment opportunities,
customer centricity and higher security costs and property management costs at TFMC.

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 non-
recurrence 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.

Employee expenses. Employee expenses consist mainly of salaries and wages for employees,

including bonuses and other incentives, benefits and workforce reduction expenses.

The following table sets forth information related to our employee expenses for the periods

indicated.

Fixed-line employee expenses

Year ended March 31,

2006/2005

2007/2006

2005

2006

2007

% change

% change

(ZAR millions, except percentages and number of employees)

Salaries and wages

(1)

4,785

4,592

5,225

(4.0)

13.8

Benefits

(1)

2,110

2,410

2,715

14.2

12.7

Workforce reduction expenses

961

88

24

(90.8)

(72.7)

Employee related expenses capitalized

(571)

(620)

(696)

8.6

12.3

Employee expenses

7,285

6,470

7,268

(11.2)

12.3

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

(1)

29,544

26,156

26,797

(11.5)

2.5

(1)

Includes expenses and number of employees of our TDS Directory Operations and Swiftnet subsidiaries. The 2007
financial year also includes 308 employees from our Africa Online subsidiary acquired on February 27, 2007.

152

Employee expenses increased in the year ended March 31, 2007 primarily due to higher salaries

and wages as a result of average annual salary increases of 7.0% and related benefits, a 1.1%
increase in the number of fixed-line employees, excluding subsidiaries, and increased payments to
part time employees and contractors. 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.

Salaries and wages increased in the year ended March 31, 2007 primarily due to average annual

salary increases of 7.0% and a 1.1% increase in the number of fixed-line employees, excluding
subsidiaries, and increased payments to part time employees and contractors to meet customer
centricity objectives and the deployments of next generation network objectives. 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.

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 2007 financial year due to increases in salaries and wages,
higher pension fund contributions resulting from the movement of employees from the pension fund to
the retirement fund and the funding of the related deficit, increased post-retirement telephone benefits,
increased sales commissions, increased training and increased critical skills retention. 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.

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 years ended March 31, 2007 and 2006 due to the moratorium on voluntary severance packages
taken in the 2006 and 2007 financial years. Workforce reduction expenses in the 2007 financial year
included social planning expenses as part of Telkom’s workforce reduction program. An additional
13 employees in the 2007 financial year and 245 employees in the 2006 financial year left Telkom 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, 2007 and March 31, 2006 primarily due to increased capital
expenditures on projects during the year and, in the 2006 financial year, to a lesser degree, the higher
labor demand on many projects that are in the realization phase.

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.

153

Fixed-line payments to other network operators

Year ended March 31,

2005

2006

2007

2006/2005

2007/2006

ZAR

ZAR

ZAR

% change

% change

(in millions, except percentages)

Payments to mobile communications
network operators                                                                        5,059

5,231

5,435

3.4

3.9

Payments to international network operators

837

919

1,028

9.8

11.9

Payments to other network operators

5,896

6,150

6,463

4.3

5.1

Payments to other network operators increased in the 2007 and 2006 financial years primarily due to
higher call volumes from our fixed-line network to the mobile networks, resulting from discounts
offered on 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 average
international tariffs and a weaker exchange rate in the 2007 financial year. Payments to other network
operators include payments made by our fixed-line business to Vodacom, which were R2,954 million,
R2,855 million and R2,761 million in the years ended March 31, 2007, 2006 and 2005, 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, losses 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,

2005

2006

2007

2006/2005

2007/2006

ZAR

ZAR

ZAR

% change

% change

(in millions, except percentages)

Materials and maintenance

1,726

1,617

1,908

(6.3)

18.0

Marketing

360

413

642

14.7

55.4

Bad debts

196

187

141

(4.6)

(24.6)

Other

(1)

764

869

1,553

13.7

78.7

Selling, general and administrative expenses

(1)

3,046

3,086

4,244

1.3

37.5

(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. In the year ended March 31, 2007 we recorded a provision of R527 million for probable liabilities related to
Telkom’s arbitration with Telcordia, excluding legal fees, of which R510 million is included in selling, general and
administrative expenses and R11 million for interest and R6 million for foreign exchange rate effect is included in finance
charges.

Selling, general and administrative expenses increased in the year ended March 31, 2007

primarily due to the provision raised for probable liabilities in the Telcordia dispute, higher materials
and maintenance expenses, increased marketing and sponsorships and increased costs of sales due
to the reclassification of finance leases associated with customer premises equipment in selling,
general and administrative expenses. Selling, general and administrative expenses increased in the
year ended March 31, 2006 primarily due to increased other expenses resulting from higher costs of

154

sales and higher marketing costs, partially offset by lower materials and maintenance expenses and,
to a lesser extent, reduced bad debts.

Materials and maintenance expenses include stock write-offs, subcontractor payments and

consumables required to maintain our network. Materials and maintenance expenses increased in the
year ended March 31, 2007 primarily due to higher incidents of copper theft, increased operating
maintenance projects and a higher number of maintenance contracts as result of new technology
rollout. 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.

Marketing expenses increased in the years ended March 31, 2007 and March 31, 2006 primarily

due to increased sponsorships, higher market research costs and increased advertising and media
campaigns. We expect marketing expenses to continue to increase in the future in response to
increased competition, including from Neotel, and the further liberalization of the South African
communications industry generally, and the marketing of our packages.

Bad debt decreased in the years ended March 31, 2007 and March 31, 2006 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 0.4%, 0.6% and 0.6% in the 2007,
2006 and 2005 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, 2007 primarily due to the
provision raised for probable liabilities in the Telcordia dispute and increased costs of sales due to the
reclassification of finance leases associated with customer premises equipment in selling, general and
administrative expenses. Other expenses increased in the year ended March 31, 2006 primarily due
to higher cost of sales for PC bundles, managed data network sites, business solutions and PABX
products, as well as increased theft.

Services rendered. Services rendered include payments in respect of the management of our

properties, to 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 through November 2004 and external auditors. Security refers to
services to safeguard the network and contracts to ensure a safe work environment, such as guard
services.

The following table sets forth information relating to services rendered expenses for the periods

indicated.

Fixed-line services rendered

Year ended March 31,

2005

2006

2007

2006/2005

2007/2006

ZAR

ZAR

ZAR

% change

% change

(in millions, except percentages)

Property management

1,068

1,107

1,142

3.7

3.2

Consultants, security and other

908

943

1,070

3.9

13.5

Services rendered

1,976

2,050

2,212

3.7

7.9

Property management increased in the years ended March 31, 2007 and March 31, 2006

primarily as a result of increased salary, wages, maintenance, rates and taxes at TFMC, which are
passed through to us. Payments to consultants increased in the year ended March 31, 2007 primarily
due to increased payments to consultants to explore local and international investment opportunities,
customer centricity and higher security costs. Payments to consultants increased in the year ended
March 31, 2006 primarily due to regulatory and statutory compliance, collection agency commissions,

155

transport costs, HIV awareness costs and audit costs, partially offset by the non-recurrence of fees
paid to Thintana Communications following the termination of the strategic services agreement in
November 2004 and reduced short term insurance costs.

Operating leases. Operating leases include payments in respect of equipment, buildings and

vehicles. Operating leases was relatively flat in the year ended March 31, 2007. The marginal
increase was primarily due to a slight increase in payments for the vehicle fleet due to inflation and
interest rate increases that remained relatively flat at 9,694 vehicles at March 31, 2007 from
9,708 vehicles at March 31, 2006, partially offset by lower operating leases for buildings. 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.

Depreciation, amortization, impairments and write-offs. Depreciation, amortization, impairments

and write-offs decreased in the years ended March 31, 2007 and 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.

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, 2007 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. Customers in other African countries increased
significantly over the past three financial years to approximately 7.1 million as of March 31, 2007 from
approximately 4.4 million as of March 31, 2006 and approximately 2.6 million as of March 31, 2005.
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,

2005

2006

2007

2006/2005 2007/2006

ZAR

%

ZAR

%

ZAR

%

% change % change

(in millions, except percentages)

Operating revenue

13,657 100.0

17,021 100.0

20,573 100.0

24.6

20.9

South Africa 12,520

91.7

15,535

91.3

18,504

89.9

24.1

19.1

Other African countries

1,137

8.3

1,486

8.7

2,069

10.1

30.7

39.2

Operating profit

(1)

3,240 100.0

4,435 100.0

5,430 100.0

36.9

22.4

South Africa

3,338 103.0

4,291

96.8

5,170

95.2

28.6

20.5

Other African countries

(98)

(3.0)

144

3.2

260

4.8

n/a

80.6

EBITDA

(1)(2)

4,796 100.0

5,907 100.0

7,122 100.0

23.2

20.6

156

(1)

Mobile operating profit and mobile EBITDA include our 50% share of Vodacom’s impairment of R268 million in respect of
assets in Mozambique in the 2005 financial year, 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 in Mozambique and an impairment loss of R23 million in
the 2007 financial year in respect of the assets in Mozambique due to a decrease 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,
which includes profit on sale of investments, 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.

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, 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,

2005

2006

2007

2006/2005 2007/2006

ZAR

%

ZAR

%

ZAR

%

% change % change

(in millions, except percentages)

Airtime

8,096

59.3

10,043

59.0

11,854

57.6

24.0

18.0

Data

670

4.9

1,019

6.0

1,671

8.1

52.1

64.0

Interconnection

2,962

21.7

3,348

19.7

3,918

19.0

13.0

17.0

Equipment sales

1,344

9.8

1,993

11.7

2,350

11.4

48.3

17.9

International airtime

444

3.3

486

2.9

653

3.2

9.5

34.4

Other sales and services

141

1.0

132

0.7

127

0.7

(6.4)

(3.8)

Mobile operating revenue

13,657     100.0

17,021     100.0

20,573    100.0

24.6

20.9

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.

157

Year ended March 31,

2006/2005

2007/2006

2005

2006

2007

% change

% change

South Africa

Customers (thousands) (at period end)

(1)

12,838

19,162

23,004

49.3

20.1

Contract

1,872

2,362

3,013

26.2

27.6

Prepaid

10,941

16,770

19,896

53.3

18.6

Community services

25

30

95

20.0

216.7

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

(2)

7.9

8.7

10.7

10.1

23.0

Contract

1.5

2.4

3.1

60.0

29.2

Prepaid

9.0

9.6

11.8

6.7

22.9

Traffic minutes (millions of minutes)

(3)

14,218

17,066

20,383

20.0

19.4

Outgoing

9,231

11,354

13,638

23.0

20.1

Incoming (Interconnection)

4,987

5,712

6,745

14.5

18.1

Average MOU (minutes)

(4)

84

74

69

(11.9)

(6.8)

Contract

226

206

188

(8.8)

(8.7)

Prepaid

52

49

47

(5.8)

(4.1)

Community services

3,185

2,327

1,151

(26.9)

(50.5)

ARPU (ZAR)

(5)

163

139

125

(14.7)

(10.1)

Contract

624

572

517

(8.3)

(9.6)

Prepaid

78

69

63

(11.5)

(8.7)

Community services

2,321

1,796

902

(22.6)

(49.8)

Churn (%)

(6)

27.1

17.7

33.8

(34.7)

91.0

Contract

9.1

10.0

9.7

9.9

(3.0)

Prepaid

30.3

18.8

37.5

(38.0)

99.5

Other African countries

Customers (thousands) (at period end)

(1)

2,645

4,358

7,146

64.8

64.0

Lesotho

147

206

279

40.1

35.4

Tanzania

1,201

2,091

3,247

74.1

55.3

Democratic Republic of the Congo

1,032

1,571

2,632

52.2

67.5

Mozambique

265

490

988

84.9

101.6

ARPU

(5)

Lesotho (ZAR)

92

78

75

(15.2)

(3.8)

Tanzania (ZAR)

81

67

52

(17.3)

(22.4)

Democratic Republic of the Congo (ZAR)

98

86

77

(12.2)

(10.5)

Mozambique (ZAR)

52

36

28

(30.8)

(22.2)

Churn (%)

(6)

Lesotho

17.3

22.3

19.0

28.9

(14.8)

Tanzania

29.6

28.5

35.6

(3.7)

24.9

Democratic Republic of Congo

23.1

28.1

30.4

21.6

8.2

Mozambique

11.3

32.2

41.7

185.0

29.5

(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. Up to June 15, 2006, calls forwarded to voicemail were regarded as

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revenue generating activity and such SIM cards were classified as active customers. Because a large number of SIM
cards have calls forwarded to voicemail as their only revenue generating activity and a majority of such messages are
never retrieved by the customer, resulting in estimated ARPUs of less than R1 per month, Vodacom changed its definition
of active customers to exclude calls forwarded to voicemail from the definition of revenue generating activity effective
June 15, 2006. Vodacom subsequently changed its definition of revenue generating activity back to include calls
forwarded to voicemail effective September 1, 2006. Vodacom deleted approximately 3 million customers during the
period of this rule change. As a result of the rule change, prepaid churn rates and ARPUs increased during the 2007
financial year.

(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.

(4)

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 financial year.

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 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”.

Vodacom’s operating revenue increased in the 2007 financial year primarily due to increased

airtime, data, interconnection and equipment sales revenue as a result of strong customer growth.
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 equipment sales increased in the 2007 and 2006 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

R2,069 million for the year ended March 31, 2007 from R1,486 million in the year ended March 31,
2006 and R1,137 million in the year ended March 31, 2005. The increase in Vodacom’s operating
revenue from other African countries in the 2007 financial year was primarily due to substantial
increases in the number of customers in Vodacom’s operations, particularly in Tanzania, the
Democratic Republic of the Congo and Mozambique, and the weakening of the Rand in the 2007 year
which resulted in higher Rand converted revenue, partially offset by lower ARPU resulting from the
higher volume of lower spending prepaid customers. 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. Revenue from Vodacom’s other African countries as a percentage of Vodacom’s total mobile
operating revenue increased to 10.1% in the year ended March 31, 2007 from 8.7% in the year ended
March 31, 2006 and 8.3% in the year ended March 31, 2005.

A large part of the growth in mobile services was due to the success of prepaid services and the

increased growth in contract customers due to prepaid customers migrating to contracts.
Approximately 86.5% of Vodacom’s South African mobile customers were prepaid customers at

159

March 31, 2007 and approximately 93.2% of all gross connections were prepaid customers in the
2007 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 R125 per month in the 2007 financial year from R139 per month in the 2006 financial
year and R163 per month in the 2005 financial year. South African contract ARPU decreased to
R517 per month in the 2007 financial year from R572 per month in the 2006 financial year and
R624 per month in the 2005 financial year. South African prepaid ARPU decreased to R63 per month
in the 2007 financial year from R69 per month in the 2006 financial year and R78 per month in the
2005 financial year. In the 2007 and 2006 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. In the 2007 financial year, Vodacom changed its definition of
active customers to exclude calls forwarded to voicemail from the definition of revenue generating
activity for a six-month period, resulting in the deletion of approximately 3 million customers. Prepaid
ARPU was positively impacted by this temporary rule change in the 2007 financial year.

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. To date, mobile number portability
had no significant impact on churn.

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 decreased to 9.7% in the 2007 financial year from 10.0% in the
2006 financial year mainly due to an improvement in service and products to customers and the
continued high level of handset support to retain customers. 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 prepaid customers in South Africa increased to 37.5%
in the 2007 financial year from 18.8% in the 2006 financial year. Vodacom’s churn rate for prepaid
customers in South Africa was 30.3% in the 2005 financial year. The increase in prepaid churn in the
2007 financial year was mainly due to the deletion of 3 million customers as a result of the rule
change for revenue generating activity and the resulting clean up of inactive customers. Subsequent
to the clean up, prepaid churn declined to 20%. 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. 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

160

airtime recharge vouchers utilized, which entitle customers to receive unlimited incoming calls up to
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 years ended March 31, 2007 and 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. 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 28.2% and 51.9% in the years ended March 31, 2007 and 2006,
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 2007 and 2006 financial years and Mozambique in the 2007 financial
year. New products, packages and services also had a role in Vodacom’s customer growth in the
2007 and 2006 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, 2007 primarily due to significant growth in SMS usage and the continued rollout of
data initiatives such as Vodafone Mobile Connect Cards, Vodafone Live!, Mobile TV, BlackBerry

®

and

the continued delivery of wireless application services. 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 SMS traffic increased to approximately 4.5 billion SMSs in the year ended

March 31, 2007 from approximately 3.5 billion SMSs in the year ended March 31, 2006 and
approximately 2.4 billion SMSs in the year ended March 31, 2005. The number of MMS users
increased to 1.2 million as of March 31, 2007 from 867,119 as of March 31, 2006 and 328,974 as of
March 31, 2005 and the number of GPRS users increased to 2.8 million as of March 31, 2007 from
1.4 million as of March 31, 2006 and 579,581 as of March 31, 2005. The number of 3G active
handsets increased to 733,043 as of March 31, 2007 from 179,576 as of March 31, 2006 and 10,878
as of March 31, 2005 and the number of Vodafone Mobile Connect customers increased to 138,863
as of March 31, 2007 from 37,798 as of March 31, 2006 and 5,101 as of March 31, 2005. As of
March 31, 2007 Vodacom had 898,527 Vodafone live! and 33,482 Unique Mobile TV users on its
network compared to 351,427 Vodafone live! and 12,903 Unique Mobile TV users as of
March 31, 2006.

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, 2007 and March 31,

2006 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

161

growth in the 2007 and 2006 financial years 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. The increase in national roaming revenue from Cell C also contributed
to the growth in interconnection revenue in the 2006 financial year. 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 R1,454 million, R1,409 million and
R1,364 million in the years ended March 31, 2007, 2006 and 2005, 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 2007 and 2006 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 1,475,115 handsets in the 2007 financial year from
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 34.4% to R653 million in the year ended March 31, 2007 primarily as a result of an
increase in customers resulting in increased traffic. 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.

Other. Other revenue includes, among other things, revenue from non-core operations.

Vodacom’s other sales and services revenue decreased 3.8% to R127 million in the 2007 financial
year primarily due to lower income recognized as a result of a reduction in inactivated starter packs
which do not contain an expiration date, partially offset by higher revenue of Cointel and higher site
rental income. Vodacom’s other sales and services revenue decreased 6.4% to R132 million in the
2006 financial year primarily due to lower income recognized 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.

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.

162

Mobile operating expenses

Year ended March 31,

2005

2006

2007

2006/2005

2007/2006

ZAR

ZAR

ZAR

% change

% change

(in millions, except percentages)

Employee expense

826

1,019

1,186

23.4

16.4

Payments to other network operators

1,826

2,317

2,818

26.9

21.6

Selling, general and administrative expenses

5,891

7,328

8,778

24.4

19.8

Services rendered

45

65

82

44.4

26.2

Operating leases

307

435

629

41.7

44.6

Depreciation, amortization and impairments

1,556

1,472

1,692

(5.4)

14.9

Mobile operating expenses

10,451

12,636

15,185

20.9

20.2

The increase in mobile operating expenses in the 2007 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, 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 impairment, higher
employee costs as a result of increased headcount, average 7.5% annual salary increases, an
increase in the provision for deferred bonus schemes and an increase in the provision for long term
incentives for executives and increased operating leases. 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.

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, 2007 primarily as a result

of an 8.4% increase in the number of employees to support the growth in operations as well as a
7.5% average annual salary increases, an increase in the provision for deferred bonus schemes and
an increase in the provision for long term incentives for executives. 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, a 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.

Total headcount in Vodacom’s South African operations increased 9.8% to 4,727 employees as of

March 31, 2007 and 9.8% to 4,305 employees as of March 31, 2006 from 3,919 employees as of
March 31, 2005. Total headcount in Vodacom’s other African countries increased 31.9% to
1,522 employees as of March 31, 2007 and 7.4% to 1,154 employees as of March 31, 2006 from
1,074 employees as of March 31, 2005. Total headcount includes temporary agency 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,

163

increased 12.0% to 4,825 customers per employee as of March 31, 2007 and 38.9% to 4,308
customers per employee as of March 31, 2006 from 3,101 customers per employee as of March 31,
2005.

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, 2007 and 2006 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 R234 million, R232 million

and R233 million in the years ended March 31, 2007, 2006 and 2005, 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.

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,

2005

2006

2007

2006/2005

2007/2006

ZAR

ZAR

ZAR

% change

% change

(in millions, except percentages)

Selling, distribution and other

5,140

6,416

7,704

24.8

20.1

Marketing

384

488

573

27.1

17.4

Regulatory and license fees

335

406

490

21.2

20.7

Bad debts

32

18

11

(43.8)

(38.9)

Selling, general and administrative expenses

5,891

7,328

8,778

24.4

19.8

Vodacom’s selling, general and administrative expenses increased in the years ended March 31,

2007 and 2006 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 2007 and 2006 financial years was primarily due to increased
customer connections, competition, revenue, 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 Vodafone global
alliance fee.

164

The increase in marketing expenses in the 2007 and 2006 financial years was mainly due to

promoting new technologies, including 3G and Vodafone live!, promoting number portability in the
2007 financial year and further promoting the Vodacom brand in all operations. The introduction of
mobile number portability also contributed to the increase in the 2007 financial year. 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 years ended March 31, 2007 and 2006 primarily due to higher
consultancy costs relating to facility management and special projects and in the 2006 financial year,
higher audit costs resulting from scope changes.

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 year ended March 31, 2007 was primarily due to an increase in the
lease of transmission lines and other accommodation. The increase in Vodacom’s operating leases in
the year ended March 31, 2006 was primarily due to an increase in the lease of transmission lines.
Operating leases in our mobile segment included R453 million, R423 million and R281 million in the
years ended March 31, 2007, 2006 and 2005, respectively, for operating lease payments to our fixed-
line segment, which were eliminated from the Telkom Group’s operating expenses on consolidation.

Depreciation, amortization and impairments. Depreciation, amortization and impairments

increased in the year ended March 31, 2007 primarily due to higher capital expenditure as a result of
the implementation and expansion of 3G/HSDPA networks, the weakening of the Rand against the
other functional currencies of Vodacom and the impairment of assets in Vodacom Mozambique.
Amortization of intangibles was higher in the year ended March 31, 2007 due to the business
acquisitions in that financial year. 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. Additionally,
because of the strengthening of the Rand against the US 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.

165

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,

2005

2006

2007

2006/2005

2007/2006

ZAR

ZAR

ZAR

% change

% change

(in millions, except percentages)

Cash flows from operating activities

15,711

9,506

9,356

(39.5)

(1.6)

Cash flows from investing activities

(6,306)

(7,286) (10,412)

15.5

42.9

Cash flows from financing activities

(9,897)

(258)

(2,920)

(97.4)

n/a

Net (decrease)/increase in cash and cash

equivalents

(492)

1,962

(3,976)

498.8

(302.7)

Effect of foreign exchange rate differences

(3)

(8)

29

166.7

(462.5)

Net cash and cash equivalents at the beginning
of the year

2,796

2,301

4,255

(17.7)

84.9

Net cash and cash equivalents at the end

of the year

2,301

4,255

308

84.9

(92.8)

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 2007 financial year is mainly due to higher taxation payments, partially offset by the
increase in cash generated from operations. 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.

Cash flows from investing activities

Cash flows from 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 is as a result of increased capital
expenditure in both the fixed-line and mobile segments and acquisitions of subsidiaries and reduced
disposals and additions to investments. The increase in cash flows used in investing activities in the
2006 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 from financing activities

Cash flows from financing activities are primarily a function of borrowing and share buy back

activities. In the 2007 financial year, (1) loans and finance leases repaid and shares repurchased and
cancelled exceeded (2) loans raised and the decrease in net financial assets, by R2,920 million. In the
2007 financial year cash flows used in financing activities increased primarily due to the lower sale of
repurchase agreements and derivative instruments that were sold in the 2006 financial year to fund
dividends and tax payments. On October 31, 2006, we repaid the TL06 local bond having a nominal
value of R2,100 million and during the 2007 financial year, we repaid R3,731 million in nominal value
of commercial paper bill debt. Commercial paper bills having a nominal value of R4,651 million were
issued in the 2007 financial year.

166

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.

Working capital

We had negative consolidated working capital of approximately R8.2 billion as of March 31, 2007,

compared to negative consolidated working capital of approximately R3.0 billion as of March 31, 2006
and approximately R2.3 billion as of March 31, 2005 and Vodacom had negative working capital of
approximately R7.4 billion as of March 31, 2007, compared to negative working capital of
approximately R5.2 billion as of March 31, 2006 and approximately R2.8 billion as of March 31, 2005..
Negative working capital arises when current liabilities are greater than current assets. The increase
in negative working capital in the 2007 financial year was primarily due to a reduction in cash used to
pay dividends, tax and capital expenditures and an increase in the current portion of interest bearing
debt, as a result of the TK01 local bond becoming due on March 31, 2008. 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. 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 and with new borrowings and
borrowings available under existing credit facilities. We had R8.7 billion available under existing credit
facilities as of March 31, 2007.

See Item 3. “Key Information – Risk Factors – Risks Related to Our Business – 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”.

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

including intangibles, including our 50% share of Vodacom’s investments, for the periods indicated.

167

Year ended March 31,

2005

2006

2007

ZAR

ZAR

ZAR

(in millions)

Group capital expenditure
Fixed-line

4,104

4,935

6,641

Baseline

1,596

2,128

3,409

Revenue generating

244

374

159

Network evolution

420

330

784

Sustainment

309

596

416

Effectiveness and efficiencies

1,177

1,080

1,141

Company support

211

376

501

Regulatory

116

15

188

Other

31

36

43

Mobile

1,747

2,571

3,608

Total investment in property, plant and equipment and

intangibles

5,851

7,506

10,249

Our capital expenditure of approximately R6.6 billion ($911 million) on fixed-line capital

expenditure in the year ended March 31, 2007 was higher than the budgeted fixed-line capital
expenditure for the 2007 financial year of R6.5 billion largely due to investment in broadband services
and an unfavorable exchange rate. The 34.6% increase in fixed-line capital expenditure in the 2007
financial year was primarily due to higher expenditure for business and residential broadband
services, wholesale services to the mobile cellular operators, access line deployment in selected high
growth residential areas, technologies to support the continued growth in our data services business,
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 40.3% increase in mobile capital expenditure in the 2007 financial year reflects the
increased investment in South Africa and other African countries in network infrastructure due
primarily to the increased customer base and higher traffic and to further support 3G technologies.

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 Neotel and the further liberalization of the South African communications market as a
result of the enactment of the Electronic Communications Act, we have shifted our capital expenditure
focus as we seek to evolve our fixed-line network to an internet protocol-based next generation
network. As a result, we expect that our fixed-line capital expenditures in the 2008 financial year will
be spent primarily in the following areas:

168

• Maintaining 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 2008 financial year

is budgeted to be approximately R11.2 billion, of which approximately R7.0 billion is budgeted to be
spent in our fixed-line segment and approximately R4.2 billion is budgeted to be spent in our mobile
segment, which is our 50% share of Vodacom’s budgeted capital expenditure of approximately
R8.4 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”.

Contingent liabilities

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 which was subsequently increased to US$172 million. 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 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 appealed this dismissal, which was later
dismissed by the Appeals Court of New Jersey. The appeal by Telcordia in the Supreme Court of
Appeals was set down for and heard on October 30 and October 31, 2006. Following the successful
upholding of the appeal, Telkom filed an application for leave to appeal to the Constitutional Court on
the issue revolving around the Supreme Court of Appeals’ failure to recognize Telkom’s rights of
access to the courts under the South African Arbitration Act. The Constitutional Court dismissed
Telkom’s appeal with costs. As a result, the Supreme Court of Appeals’ judgment brought to finality the
dispute over the merits of Telcordia’s claim against Telkom and the parties are expected to reconvene
the arbitration solely for the purposes of determining the amount of damages to which Telcordia is
entitled. Prior to the arbitration proceedings, tentatively scheduled for September 2007, the parties
have an option of considering possible settlement. Following the ruling by the Constitutional Court,
two hearings were held at the International Dispute Resolutions Centre, or IDRC. The first hearing
was held in London on May 21, 2007 and was a ‘directions hearing’, in terms of which the parties
consented to a ruling by the arbitrator setting out a consolidated list of proposals and issues to form
part of the damages hearing in September 2007.

The second hearing was held in London at the IDRC on June 25 and 26, 2007 and dealt with the

application by Telcordia for the striking out of part of Telkom’s defense on the basis that Tekom had

169

raised issues in its defense that had already been heard by the arbitrator prior to his partial award.
This application was dismissed by the arbitrator. The arbitrator also made a ruling compelling
Telcordia to provide certain particulars requested by Telkom with regard to the claims by Telcordia. In
his ruling, the arbitrator also set out a list of issues for determination at the damages hearing to be
held during September 2007.

Although Telkom is currently unable to predict the exact amount that it may eventually be required

to pay Telcordia, it has made provision for estimated liabilities in respect of the Telcordia claim in the
sum of US$70 million (R527 million), including interest but excluding legal fees. If Telcordia recovers
substantial damages from Telkom, Telkom would be required to fund such payments from cash flows
or the incurrence of debt and the amount of any damages above Telkom’s provision would increase
Telkom’s liabilities and decrease its net profit, which could have a material adverse effect on its
financial condition and results of operations.

Competition Commission

We are parties to a number of legal proceedings filed by parties with the South African Competition

Commission alleging anti-competitive practices described below. If Telkom were found to have
committed prohibited practices as contained in the Competition Act, 1998, as amended, Telkom could
be required to cease these practices, divest these businesses and be fined a penalty of up to 10% of
Telkom’s annual turnover, excluding the turnover of subsidiaries and joint ventures, for the financial
years prior to the dates of the complaints. The Competition Commission has to date not imposed the
maximum penalty on any offender.

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. We are currently unable to predict the amount that we may eventually be required to
pay in these proceedings, 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 Telkom is required to cease these practices, divest
itself of the relevant businesses or pay significant fines, Telkom’s business and financial condition could
be materially adversely affected and its revenue and net profit could decline. 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.

Internet Service Providers Association (ISPA)

In December 2005, 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. 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. Telkom provided the Competition Commission with the
information and is awaiting the Commission’s response. This matter and the amount of Telkom’s
liability are not expected to be finalized within the next financial year.

Independent Cellular Service Provider Association of South Africa (ICSPA)

In 2002, the ICSPA filed a complaint against Telkom at the Competition Commission in terms of

the Competition Act alleging that Telkom had entered into contracts with large corporations for its
Cellsaver product, providing large discounts with the effect of discouraging corporations from using
the ‘premicell’ device installed by their members. They alleged various contraventions of the
Competition Act. Telkom provided the Competition Commission with certain information requested.

170

Telkom also referred the Competition Commission to its High Court application in respect of utilization
of the ‘premicell’ device. The Competition Commission declined to refer the matter to the Competition
Tribunal. ICSPA then referred the matter to the Competition Tribunal on September 18, 2003. Telkom
filed its answering affidavit on November 28, 2003.

The South African Value Added Network Services (SAVA)

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 to review the decision by the

Competition Commission, on the basis that the Tribunal does not have the jurisdiction to adjudicate
the matter. The Competition Commission has opposed the application, but the application has not yet
been finally determined by the High Court. The review procedure requires that the Competition
Commission file a full record of its proceedings pursuant to which is decision was taken. Once the
record is filed, Telkom would have an opportunity to supplement its original papers, if required. The
Competition Commission approached the High Court for an order as to how to deal with certain
documents that it regarded as confidential. The Competition Commission subsequently filed its record
of proceedings, but Telkom was of the view that the record was incomplete. Recently the Competition
Commission filed the remainder of its record, including the confidential documents, and Telkom has
supplemented its papers by filling a further affidavit. The Commission has now filed its answering
affidavit. These matters and the amount of Telkom’s liability are expected to be finalized within the
next financial year.

Omnilink

On August 22, 2002 Omnilink filed a complaint against Telkom of the Competition Commission

alleging that Telkom was abusing its dominance by discriminating in its price for Diginet services as
against those charged to VANS and the price charged to customers who apply for a Telkom IVPN
solution. The Competition Commission conducted an enquiry and subsequently referred the
complaint, together with the SAVA complaint, to the Competition Tribunal for adjudication. This matter
is currently being dealt with together with the SAVA matter.

Orion/Telkom (Standard Bank and Edcon)

In April 2003, Orion filed a complaint against Telkom, Standard Bank and Edcon at the

Competition Commission concerning Telkom’s discounts offered on public switched
telecommunication services to corporate customers. In terms of the rules of the Competition
Commission, the Competition Commission, who acts as an investigator, had one year to investigate
the complaint. Orion simultaneously with the filing of the complaint, also filed an application against
Telkom, Standard Bank and Edcon at the Competition Tribunal, for an interim order interdicting and
restraining Telkom from offering Orion’s corporate customers reduced rates associated with Telkom’s
Cellsaver discount plan.

The Competition Commission completed its investigation and decided that there was no prima

facie evidence of any contravention of the Competition Act. Orion however referred the matter to the

171

Competition Tribunal in terms of section 51 of the Competition Act, which allows for parties to refer
matters to the Competition Tribunal themselves. Telkom has not yet filed its answering affidavit in the
main complaint before the Competition Tribunal. To date there has been no further developments on
this matter. These matters and the amount of Telkom’s liability, if any, are not expected to be finalized
within the next financial year.

M-Web and Internet Solutions (IS)

On June 29, 2005, M-Web and Internet Solutions, or IS, jointly lodged a complaint with the

Competition Commission against Telkom and also requested interim relief at the Competition Tribunal.
The complaint at the Competition Commission mainly deals with Telkom’s pricing for ADSL retail
products and its IP Connect products, the termination of the peering link between Telkom and IS, the
wholesale pricing of SAIX bandwidth for ADSL users of other internet service providers, the
architecture of Telkom’s ADSL access route and the manner in which internet service providers can
only connect to Telkom’s edge service router via IP Connect as well as alleged excessive pricing for
bandwidth on Telkom’s international undersea cable. The application for interim relief at the
Competition Tribunal dealt with allegations that Telkom should maintain the peering link between IS
and Telkom in terms of its current peering agreement, and demanded that Telkom treat the traffic
generated by ADSL customers of M-Web as traffic destined for the peering link and that Telkom
upgrade its peering link to accommodate the increased ADSL traffic emanating from M-Web and
maintain a maximum of 65% utilization. Telkom filed its answering affidavit, and is awaiting IS and
M-Web’s replying affidavit.

Since then Telkom has entered into a new peering agreement with IS. To date there has been no

further developments on this matter, either in the filing of a replying affidavit by IS/M-Web in the
interim relief application or in the investigation of the matter by the Competition Commission.

M-Web

On June 5, 2007, MWeb brought an application against Telkom for interim relief at the

Competition Tribunal with regard to the manner in which Telkom provides wholesale ADSL internet
connections. MWeb requested the Competition Tribunal to grant an order of interim relief against
Telkom to charge MWeb a wholesale price for the provision of ADSL internet connections which is not
higher than the lowest retail price. MWeb further applied for an order that Telkom implement the
migration of end customers from Telkom PSTS ADSL access to MWeb without interruption of the
service. Telkom raised the objection that the Competition Tribunal does not have jurisdiction to hear
the matter in its answering affidavit filed at the Competition Tribunal. Telkom still had to “plead over”
as to the merits of the matter. Telkom has also filed an application in the High Court of the Transvaal
Provincial Division on July 3, 2007 for an order declaring that the Competition Tribunal does not have
jurisdiction to hear the application made to it by MWeb.

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

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.

Employee benefit special purpose entity

We had liabilities of R1,139 million, R2,607 million and R2,430 million in the years ended

March 31, 2007, 2006 and 2005, respectively, in respect of post retirement medical aid obligations for
current and retired employees.

172

In order to fund the liability towards the Medical aid, we set up a special purpose entity in the

2002 financial year for the purposes of funding these post retirement medical benefit obligations. In
prior years this special purpose entity was purely used as a financing tool as we still retained our
obligation to provide post retirement medical aid benefits to retired employees. The sinking fund held
in the special purpose entity did not meet the definition of a plan asset in terms of IAS19 – Employee
Benefits. Our interest in the special purpose entity was by way of equity, and this entity was fully
consolidated in the Telkom Group’s financial statements.

During the 2006 financial year, a portion of the funds held in the sinking fund of the special

purpose entity was transferred to an annuity policy with the intention of specifically ringfencing funds
towards the liability for pensioners over the age of 65. As of the end of 2006 financial year, the annuity
policy did not meet the definition of a plan asset in terms of IAS19 – Employee Benefits and therefore
the annuity fund portion was still included in the investments value as noted above. During the 2007
financial year an addendum to the cell captive annuity policy contract was signed, which ensured that
the annuity fund in the special purpose entity qualifies as a plan asset with effect from June 1, 2006.
This has changed the presentation of the liability and asset as the annuity policy meets 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 consolidated annual financial statements is a reduction in
investments as well as liabilities in the amount of R1,961 million. 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. The fair value of the funds in this special purpose entity was R1,279 million,
R2,819 million and R2,208 million as of March 31, 2007, 2006 and 2005, respectively, which was
included in investments.

Off-balance sheet transactions

We did not have any off-balance sheet transactions during the year ended March 31, 2007.

173

Contractual obligations

The following table sets forth the Telkom Group’s contractual obligations as of March 31, 2007:

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

12,549

6,285

876

1,957

3,431

Capital (finance) lease obligations

1,220

61

195

124

840

Operating leases

Buildings

1,465

289

464

307

405

Rental receivable on buildings

(269)

(91)

(129)

(45)

(4)

Transmission and data lines

262

68

82

77

35

Vehicles

573

568

5

–

–

Equipment

23

6

11

6

–

Sport and marketing contracts

441

164

245

30

2

Forward exchange contracts
– To buy

3,538

3,538

–

–

–

– To sell

(1,567)

(1,567)

–

–

–

Other long-term liabilities

(1)

9,995

763

1,661

1,863

5,708

Total

28,230

10,084

3,410

4,319

10,417

(1)

Other long-term liabilities comprise the expected benefit payments from the Telkom Retirement Fund and the Telkom
Pension Fund for the following ten years. These benefit payments are funded by the plan assets in the Telkom Retirement
Fund and Telkom Pension Fund, respectively. The contributions to the fund in each year is determined on a statutory
basis. In addition Telkom may be required to make additional contributions should there be a short fall in the fund. In
addition to the above, Telkom has an obligation under its post-retirement medical aid liability of R4,384 million which
includes an unrecognized net actuarial loss of R1,284 million which is funded by plan assets of R1,961 million resulting in
a recognized liability of R1,139 million. Telkom is required to fund the short fall in this obligation in future years, as and
when the obligation becomes payable.

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 three 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 A3.
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, 2007, 90.6% of our debt was local
debt, compared to 92.3% as of March 31, 2006 and 66.4% as of March 31, 2005. 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, 2007 was 14.8% . Fixed rate
debt represented approximately 90.4% of our total consolidated debt as of March 31, 2007.

174

The following table sets forth our consolidated indebtedness, including finance leases as of

March 31, 2007.

Interest

Outstanding

Nominal amount

Maturing

payment

Interest

as of March

outstanding as of

Year ended March 31,

After

dates

rate (%)

31, 2007

March 31, 2007

2008

2009

2010

2011

2012

2012

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

4,432

4,680

4,680

–

–

–

–

–

6% unsecured local bond

February

due February 24, 2020

22

(TL20)

(4)

6

1,246

2,500

–

–

–

–

–

2,500

Zero coupon unsecured

loan stock due
September 30, 2010
(PP02)

(5)

–

–

264

430

–

–

–

430

–

–

Zero coupon unsecured
loan stock due June 15,
2010 (PP03)

(6)

–

–

844

1,350

–

–

–

1,350

–

–

Finance leases

n/a

13.43%

852

852

4

12

–

10

18

808

37.78%

Repurchase agreements

n/a

–

–

–

–

–

–

–

–

–

Commercial paper

–

–

1,339

1,350

1,350

–

–

–

–

–

Zero coupon unsecured

commercial paper bills with
a maturity not later than
June 1, 2007. The average
discount rate on these
commercial paper bills is
9.044% per annum.

Bank facilities

R600 million unsecured

overdraft facility with
ABSA Bank Limited,

Mutually

repayable on demand

–

agreed

Not utilized

Not utilized

–

–

–

–

–

–

R4 billion unsecured

overdraft facility with
The Standard Bank of
South Africa Limited,

Mutually

repayable on demand

–

agreed

Not utilized

Not utilized

–

–

–

–

–

–

R500 million unsecured

overdraft facility with
FirstRand Bank Limited,

Mutually

repayable on demand

–

agreed

Not utilized

Not utilized

–

–

–

–

–

–

175

Interest

Outstanding

Nominal amount

Maturing

payment

Interest

as of March

outstanding as of

Year ended March 31,

After

dates

rate (%)

31, 2007

March 31, 2007

2008

2009

2010

2011

2012

2012

ZAR

ZAR

ZAR

ZAR

ZAR

ZAR

ZAR

ZAR

(in millions)

R150 million unsecured

overdraft facility with
Commerzbank AG,

Mutually

repayable on demand

–

agreed

Not utilized

Not utilized

–

–

–

–

–

–

$35 million unsecured

short-term loan facility with
Calyon Corporate and
Investment bank, various

Mutually

repayment dates

–

agreed

Not utilized

Not utilized

–

–

–

–

–

–

R1 billion uncommitted/

short-term facility with
Sumitomo Mitsui

Mutually

Banking Corporation –

agreed

Not utilized

Not utilized

–

–

–

–

–

–

R62.75 million unsecured

short-term facility with

Mutually

Standard Chartered Bank

–

agreed

Not utilized

Not utilized

–

–

–

–

–

–

Various bank loans

(3)

–

Various

106

106

–

–

–

16

10

80

Bank overdraft and other

short-term debt

–

–

–

–

–

–

–

–

–

–

Total Telkom

9,083

11,268

6,034

12

–

1,806

28

3,388

VODACOM

(7)

$8.4 million shareholders

Loan with Planetel
Communications Limited

(8)

–

LIBOR + 5%

27

27

–

27

–

–

–

–

$10 million shareholders loan

with Caspian Construction
Company

(8)

–

LIBOR + 5%

32

32

–

32

–

–

–

–

$7.8 million/Euro 3.9 project

finance for Vodacom
Tanzania Limited

–

6% – 14.4%

47

47

47

–

–

–

–

–

$180 million medium-term

loan to Vodacom
International Limited

–

LIBOR + 0.35%

655

655

–

–

655

–

–

–

$37.0 million preference

shares by Vodacom Congo
(R.D.C) s.p.r.l.

(9)

–

4%

135

135

135

–

–

–

–

–

R2.5 million shareholder loan

with Sekha-Metsi
Investment Consortium
Limited

–

13.7%

1

1

–

1

–

–

–

–

R6.0 million of the

shareholder loan with
Number Portability
Company (Proprietary)
Limited

–

Prime

3

3

–

–

–

–

–

3

Various finance leases

(10)

–

12.1% –

16.9%

364

364

57

97

49

81

42

38

Various other short-term loans

–

various

13

13

11

–

–

–

–

2

Bank overdrafts and other

short-term debt

–

–

441

441

441

–

–

–

–

–

Total Vodacom

(7)

1,718

1,718

691

157

704

81

42

43

TDS DIRECTORY
OPERATIONS

Various finance leases

(10)

–

–

4

4

1

3

–

–

–

–

Total TDS Directory

Operations

4

4

1

3

–

–

–

–

TOTAL

10,805

12,990

6,726

172

704

1,887

70

3,431

176

(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, 2007, R4,680 million of

these bonds were in issue.

(3)   R4,537 million of Telkom’s indebtedness outstanding as of March 31, 2007 was guaranteed by the Government of the

Republic of South Africa.

(4)   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.

(5)   Issued on February 25, 2000. Original amount issued was R430 million. The yield to maturity of this instrument issued by

Telkom is 14.37%.

(6)   Issued on June 15, 2000. Original amount issued was R1,350 million. The yield to maturity of this instrument is 15.175%.

(7)   Represents Telkom’s 50% share of Vodacom’s indebtedness.

(8)   Repayable on approval of at least 60% of the shareholders of Vodacom Tanzania Limited.

(9)   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.

(10)   Secured by land and buildings.

We expect to repay the indebtedness and other obligations in the above table with cash flows

from operations, and the refinancing of debt with new borrowings and borrowings available under
existing credit facilities. Telkom’s special purpose entity established to fund post retirement medical
benefits obligations indirectly held 171,002 of Telkom’s ordinary shares as of March 31, 2007.

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, the refinancing of existing indebtedness 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, a side letter to the subscription agreement (as amended) of 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, 2007.

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, 2007, R4.5 billion of our total debt of R10.8 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, 2007.

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

177

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.

Significant accounting judgments and estimates

The preparation of consolidated 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 consolidated 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.

The presentation of the results of operations, financial position and cash flows in the consolidated

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 consolidated financial
statements. Management has made certain judgments in the process of applying the Telkom 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 as follows:

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 categories of property, plant, equipment and intangible assets. Due to the rapid
technological advancement in the telecommunications industry, as well as Telkom’s plan to migrate to
a next generation network over the next few years, the estimation of useful lives could differ
significantly on an annual basis due to unexpected changes in the roll-out strategy. 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 whether the assets will be sold or used to
the end of their useful lives and what their condition will be like at that time.

For intangible 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 Group applies the 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.

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

178

value in use include projected revenues, gross margins, average revenue per asset component,
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.

Asset retirement obligations

Management judgment is exercised when determining whether an asset retirement obligation

exists, and in determining the present value of expected future cash flows and discount rate when the
obligation to dismantle or restore the site arises, as well as the estimated useful life of the related
asset.

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 the decline in fair value is prolonged, reliance is
placed 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 recognized for estimated losses firstly on an individually significant trade

receivable and secondly on a group of trade receivables with similar credit risk that are assessed to
be impaired based on objective evidence as a result of one or more events that occurred during the
reporting period. For those customers which have defaulted management makes judgments based on
an assessment of their ability to make payments based on credit worthiness and historical write-off
experience. Should the financial condition of the 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
realization 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 assets 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 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 dependent 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 consolidated

179

income statement and the current taxation payments. Group entities are regularly subject to
evaluation, by the relevant tax authorities, of its historical tax filings and in connection with such
reviews, disputes can arise with the taxing authorities over the interpretation or application of certain
tax rules to the business of the relevant Group entities. 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 Telkom Group that exceeds management’s estimate.

Deferred taxation rate

Management makes judgments on the tax rate applicable based on the Group’s expectations at

balance sheet date on how the asset is expected to be recovered or the liability is expected to be
settled.

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 30 to the consolidated annual financial statements. 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 used reflects the average timing of the estimated defined benefit payments. The

discount rate is based on long term South African government bonds with the longest maturity period
as reported by the Bond Exchange of South Africa. The discount rate is expected to follow the trend of
inflation.

The overall expected rate of return on assets is determined based on the market prices prevailing

at that date, applicable to the period over which the obligation is to be settled.

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 30 of the Telkom Groups consolidated financial
statements. The assumptions include employee turnover percentages and whether specified
performance criteria will be met. Changes to these assumptions could affect the amount of expense
ultimately recognized in the consolidated financial statements.

Management judgment is required when recognising and measuring provisions and when

measuring contingent liabilities as set out in notes 29 and 39 of the consolidated annual financial
statements, respectively. 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 judgment. The Group is
required to recognize provisions for claims arising from litigation when the occurrence of the claim is
probable 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.

180

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.

181

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.

182

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 29, 2007, the Public Investment Corporation beneficially owned 15.2% of Telkom’s

issued and 15.8% of Telkom’s outstanding ordinary shares and the class B ordinary share that it had
acquired from Thintana Communications, plus an additional 6.4% of Telkom’s issued and 6.7% of

183

Telkom’s outstanding ordinary shares that it had acquired in the market, and the Elephant Consortium
beneficially owned 7.0% of Telkom’s issued and 7.4% 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 29, 2007, the Government of the Republic of South Africa owned
38.9% of Telkom’s issued and 40.6% 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, 2006:

Resignations

Date of resignation

TCP Chikane

June 19, 2006

NE Mtshotshisa

October 31, 2006

LRR Molotsane

April 5, 2007

PL Zim

April 11, 2007

Appointments

Date of appointment

KST Matthews

June 19, 2006

SL Arnold

November 1, 2006

RJ September

May 8, 2007

MJ Lamberti

May 29, 2007

The following are Telkom’s directors as of March 31, 2007. 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

Shirley Lue Arnold

(1)

1960

Telkom Towers North

Chairperson of the

2009

2006

152 Proes Street

Board; Non-

Pretoria,

executive Director

0002

Papi Molotsane

(2)

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

Illovo, 2196

Director

Yekani Tenza

(1)

1957

5th Floor, Carlton

Non-executive

2007

2004

Centre,

Director

150 Commissioner
Street,
Johannesburg, 2001

184

Year

South African

of

business

Expiration of

Year of

Name

birth

address

Position

term of office

appointment

Thabo Mosololi

(3)

1969

Palazzo Towers East,

Non-executive

2007

2004

Montecasino

Director

Boulevard, Fourways,
2055

Lazarus Zim

(3)(4)

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

Tshepo Mahloele

(5)

1967

Glenfield Office Park

Non-executive

2007

2004

Block C 1st Floor

Director

Sprite Avenue
Faerie Glen, 0043

Sibusiso Luthuli

(3)

1973

14 Crompton Street,

Non-executive

2008

2005

Pinetown,

Director

3600

Brahm du Plessis

(3)

1955

41 St. John Road

Non-executive

2007

2004

Houghton, 2041

Director

Keitumetse Matthews

(1)

1951

Shop G4, Richmond

Non-executive

2009

2006

Centre, Main Road,

Director

Plumstead,
Cape Town, 7800

In addition, the following directors were appointed to the board after March 31, 2007:

Reuben September

1957

Telkom Towers North

Acting Chief Executive

See

2007

152 Proes Street

Officer, Executive

Note 6

Pretoria,

Director

0002

Mark Lamberti

1950

54 Oxford Avenue

Non-executive Director

Until

2007

Sandhurst, Sandton

next AGM

2196

in 2007

(1)

Government representative.

(2)

Resigned April 5, 2007.

(3)

Independent.

(4)

Resigned April 11, 2007.

(5)

Public Investment Corporation representative.

(6)

Dependant on the appointment of a chief executive officer.

Shirley Lue Arnold was appointed to the board on November 1, 2006 as chairperson and

non-executive director. Ms. Arnold has served as a non-executive director and chairperson of the
Empowerment Committee of Peermont Global Ltd since July 2004. Ms. Arnold is a member of the
Chairpersons Forum, Gordon Institute of Business and also a member of the Independent Directors
Initiative and the Institute of Directors in South Africa. She is a trustee of the Thutuka Bursary Fund
(SAICA) and the Maths Centre, and is also a patron of the Student Sponsorship Programme.
Ms. Arnold was a non-executive director of Ernst & Young South Africa from February 2002 to
April 2006 and acting chairperson from February 2005 to April 2006. She was also a member of the
accounting firm’s nominations committee from November 2004 to April 2006. Ms. Arnold holds a
Bachelor of Arts degree and a Certificate in Education.

185

Papi Molotsane was appointed to the board and as chief executive officer in September 2005

and left the employment of Telkom on April 5, 2007. 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 was also a director of
Vodacom.

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, director of the ABSA regional advisory board (Eastern
Cape), and a director of Smith Tabata Buchanan Boyes. Mr. Tabata holds a Bachelor of Procuration
and LLB degrees.

Yekani Tenza was appointed to the board on September 20, 2004. 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 (Honors) and a MBA and he is a Certified Public Accountant (USA).

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 (South Africa).

Lazarus Zim was appointed to the board on October 15, 2004 and resigned on April 11, 2007.

Mr. Zim has served as the chairman of Kumba Iron Ore since February 2004 and serves on the
boards of Anglo-American SA Limited, AngloGold Ashanti Limited, Mondi SA Limited and Sanlam
Limited. Mr. Zim is also president of the Chamber of Mines. Previously, he was the chief executive
officer of Anglo American South Africa Limited from February 2005 until April 2006. Mr. Zim has
in-depth knowledge of the African communications markets as he previously worked as the managing
director of MTN International. In this role he was responsible for operations outside of South Africa,
including the establishment of MTN in Nigeria. Prior to this, he was chief executive officer of MIH
South Africa. Mr. Zim holds a Bachelor of Commerce (Honors) 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 (Honors) (Investment Management), MBA
(Cum Laude), Doctorate in Commerce and is a Chartered Accountant (South Africa). Dr. Mostert is
also a director of Vodacom.

186

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
has also served as the deputy chairman of Circle Capital Ventures (Proprietary) Limited since
June 2006. 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 holds a Bachelor of Procurationis.

Brahm du Plessis was appointed to the board on December 2, 2004. Advocate 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. Advocate du Plessis is a member of Advocates
for Transformation and a member of the Johannesburg Bar Council. Advocate du Plessis holds
Bachelor of Arts and LLB degrees from the University of Stellenbosch and an LLM degree from the
University of London (LSE).

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 KwaZulu-Natal Council, director of Richards Bay Industrial
Development Zone (IDZ) Company, member of Thekweni Municipality Audit Committee, director of
Luthuli & Luthuli Investments (Proprietary) Limited, trustee of Amathuli Trust and member of the KZN
Provincial Government 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 (South Africa).

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 (Honors) degree.

Reuben September was appointed to the board on May 8, 2007 following his appointment as

acting chief executive officer on April, 5, 2007. Previously, he served as chief operating officer since
September 2005, as chief technical officer from May 2002 until August 2005 and as managing
executive of technology and network services from March 2000 to April 2002. He has worked in
various engineering and commercial positions at 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.

Mark Lamberti was appointed to the board on May 29, 2007. Mr. Lamberti is the deputy

chairman of the board and chief executive officer of Massmart Holdings Limited, a company he
founded 19 years ago and of which he was the largest private shareholder until recently. Mr. Lamberti
stepped down as chief executive officer and was appointed non-executive chairman on July 1, 2007.

187

Mr. Lamberti currently serves as a non-executive director of Allied Electronics Corporation Limited and
Business Leadership South Africa and is co-chairman of the Consumer Goods Council of South
Africa. Mr. Lamberti holds a Bachelor of Commerce degree from the University of South Africa, a
Masters degree in Business Administration from the University of the Witwatersrand and is an
alumnus of the Harvard Graduate School of Business Administration where he completed the
Presidents Program in Leadership.

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, 2007:

Year of

Year of

Name

birth

Position

employment

Papi Molotsane

(1)

(left the employment of
Telkom on April 5, 2007)

1959

Chief Executive Officer

2005

Kaushik Patel

1962

Chief Financial Officer

2000

Reuben September

(1)(2)

1957

Chief Operating Officer

1977

Wallace Beelders
(resigned March 31, 2007)

1959

Chief Sales and Marketing Officer

1977

Thami Msimango
(resigned March 31, 2007)

1966

Chief Technical Officer

1984

Mandla Ngcobo
(resigned April 1, 2007)

1960

Chief Corporate Affairs

1998

Motlatsi Nzeku

1961

Chief Information Officer

1994

(1)

Biography set forth above.

(2)

Appointed acting Chief Executive Officer on April 5, 2007.

In addition, the following persons were appointed after March 31, 2007:

Ouma Rasethaba
(appointed May 1, 2007)

1960

Acting Chief Corporate Affairs

2006

Godfrey Ntoele
(appointed April 1, 2007)

1960

Acting Chief Sales and Marketing Officer

1997

Bashier Sallie
(appointed April 1, 2007)

1967

Acting Chief Technical Officer

1986

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 (Honors)
degree from the University of South Africa and is a Chartered Accountant (South Africa). Mr. Patel is
also an alternate non-executive director of Vodacom.

Wallace Beelders was appointed chief sales and marketing officer in December 2005 and

resigned on March 31, 2007. 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.

188

Thami Msimango was appointed chief technical officer in September 2005 and resigned on

March 31, 2007. 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
22 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 was a non-executive director of Swiftnet (Pty) Ltd and Telkom Media (Pty) Ltd.

Mandla Ngcobo was appointed as chief corporate affairs officer in September 2005 and resigned

on March 31, 2007 to join Telkom Media (Pty) Ltd. 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 LLB degree from Natal University in 1985 and in 2001 graduated with an
LLM in Company Law at Wits University. Mr. Ngcobo was a trustee of the Telkom Retirement Fund
until November 30, 2005. 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.

Ouma Rasethaba was appointed as acting chief corporate affairs officer on May 1, 2007. She

joined Telkom in February 2006 serving as group executive of regulatory and public policy. Prior to
joining Telkom she practised as an advocate of the High Court of South Africa. She also held the
position of special director of Public Prosecutions at the National Prosecuting Authority from February
2000 to January 2006. She holds a Bachelors degree in law (B.Proc.) from the University of the North,
an Honours degree in law (LLB) from the University of the Witwatersrand, a Masters degree in law
(LLM) from the University of Pretoria as well as a Higher Diploma in Company Law from the University
of the Witwatersrand. She is non-executive director and chairman and member of the audit committee
of TDS Directory Operations (Pty) Limited.

Bashier Sallie was appointed acting chief technical officer on April 1, 2007. Previously, he served

as managing executive for network field operations from January 2006 to March 2007, managing
executive for network service management from April 2004 to December 2005, managing executive
data services from January 2002 to March 2004 and executive for telematics from February 1999 to
December 2001. He joined Telkom in 1986, starting his career in the former Department of Posts and
Telecommunications and served most of his early tenure in technology and network services. He
completed the Management Advancement Program at the Graduate School of Business Leadership at
the University of the Witwatersrand.

Godfrey Ntoele was appointed acting chief sales and marketing officer on April 1, 2007. He has

also served as managing executive, retail business since December 2000. Previously, he served as
executive, national accounts, government accounts and head of sales, government and utilities from
August 1999 to November 2000. Before joining Telkom, Mr. Ntoele was the sales and marketing
director at Nampak. Mr. Ntoele obtained a Bachelor of Arts degree in Law at the University of Fort
Hare in 1985, completed the Management Development Program at Rhodes University in 1989 and
received the Program for Management Development Certificate from the Harvard Graduate School of
Business.

There are no family relationships between any of Telkom’s directors or members of senior

management.

189

Senior management of Vodacom

The following are members of senior management of Vodacom as of March 31, 2007:

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 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 Honor” for his contribution to bringing mobile communications 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 has served as managing director of Vodacom (Pty) Limited since April

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 former 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 Accounting Science (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 degree in Engineering 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.

190

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, which has
been replaced by the executive 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;

• 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.

191

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, 2007:

Performance

Fringe

bonus

and other

Fees

Remuneration

benefits

Total

ZAR

ZAR

ZAR

ZAR

ZAR

2007
Emoluments per director:
Non-executive

2,641,168

–

–

–

2,641,168

NE Mtshotshisa (resigned
October 31, 2006)

463,050

–

–

–

463,050

SL Arnold (appointed
November 1, 2006)

353,719

353,719

TCP Chikane (resigned
June 19, 2006)

32,670

32,670

B du Plessis

213,367

–

–

–

213,367

TD Mahloele

166,667

–

–

–

166,667

TF Mosololi

(1)

214,417

–

–

–

214,417

M Mostert

(2)

232,417

–

–

–

232,417

DD Tabata

175,367

–

–

–

175,367

YR Tenza

321,767

–

–

–

321,767

PL Zim (resigned
April 11, 2007)

152,667

–

–

–

152,667

PSC Luthuli

205,417

205,417

K Matthews (appointed
June 19, 2005)

109,643

109,643

Executive

2,272,785

–

1,653,202

3,925,987

LRR Molotsane

(3)

2,272,785

–

1,653,202

3,925,987

(left the employment of Telkom
on April 5, 2007)
Total emoluments –

Paid by Telkom

2,641,168

2,272,785

–

1,653,202

6,567,155

(1)

Paid to Tsogo Sun Limited.

(2)

In addition to these amounts Vodacom paid Mr. M Mostert R350,000 for fees as a director during the 2007 financial year.

(3)

Included in fringe and other benefits is a pension contribution for LRR Molotsane of R295,462 (2006: R162,597) paid to
the Telkom Retirement Fund. The performance bonus and share allocation for the 2007 financial year is in the process of
being concluded.

In the year ended March 31, 2007, the aggregate consolidated compensation of Telkom’s

directors and senior management (19 persons), paid or accrued, was R41.7 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 (19 persons) in the year ended March 31, 2007,
including directors and members of senior management who resigned or were replaced during the
year.

192

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
individual award. The team award constitutes 80% and the individual award 20% of the overall award.
The team award is based 70% on Telkom financial drivers and 30% on Telkom performance drivers.
The individual award is based on the performance of the individual. Payment of bonuses for the 2007
financial year took place in June 2007.

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 had a service agreement with Papi Molotsane. The service agreement with Mr. Molotsane

had a three year term with a six months’ notice period by either party, which would have ended on
August 31, 2008. Telkom’s service agreement with Papi Molotsane terminated when he left Telkom’s
employment on April 5, 2007. All other members of the executive committee have indefinite service
employment contracts with a three month notice period by either party.

Retention agreement

There are currently no retention agreements in place between Telkom and its members of senior

management.

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 were permitted to
be made available for purposes of the plan, with 15,816,516 ordinary shares remaining available for
grant as of March 31, 2007 representing approximately 3.0% of Telkom’s issued ordinary share capital
as of March 31, 2007. 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

193

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
service packages pursuant to the workforce reduction program. Rights to acquire shares that are lost
are available for reissue under the conditional share plan. 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 grant of 3,046,242 shares 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 was 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 depended 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

194

On June 23, 2005, the Telkom board of directors approved the second grant of 2,024,465 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 Telkom board approved a grant of 1,825,488 shares with effect from June 2, 2006 to

employees pursuant to the Telkom conditional share plan. The third allocation was made based on the
following:

•  the Telkom share price on the JSE based on the last ten trading days prior the allocation date of

June 1, 2006;

•  the individual performance assessment of employees on the management levels for the 2006

financial year;

•  the total remuneration packages of employees as of April 1, 2006; and

•  Telkom’s final financial results for the 2006 financial year.

On June 2, 2006, the board of directors also approved, pursuant to the conditional share plan,

the vesting of one third of the 2004 financial year conditionally allocated shares for non-management

employees, which was two years after the initial allocation. As a result, 450, 505 ordinary shares
granted for the 2004 fiscal year vested.

On June 8, 2007, the board of directors also approved, pursuant to the conditional share plan, the

vesting of a further one third of the 2004 financial year conditionally allocated shares for non-
management employees, which was three years after the initial allocation, one third of the 2005
financial year conditionally allocated shares for non-management employees, which was two years
after the initial allocation, as well as the 2004 financial year conditionally allocated shares for
management employees, which was three years after the initial allocation. As a result, approximately
1.7 million ordinary shares granted for the 2004 and 2005 fiscal years, vested.

The allocation of shares under the conditional share plan for the 2008 financial year is expected

to be submitted to the September 2007 board meeting for approval.

195

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, 2007. 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, 2007.

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.

196

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. A majority of directors, one of whom must be a representative of the Class A Ordinary
Share is required for a quorum 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

Four scheduled board meetings and three special meetings were held during the 2007 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)
(resigned October 31, 2006)

2

2

1

1

TCP Chikane (resigned June 19, 2006)

1

0

0

0

SL Arnold (appointed November 1, 2006)

2

1

2

2

TD Mahloele

4

3

3

2

M Mostert

4

4

3

3

DD Tabata

4

4

3

3

YR Tenza

4

4

3

3

B du Plessis

4

4

3

3

TF Mosololi

4

2

3

2

PL Zim (resigned April 11, 2007)

4

1

3

3

PSC Luthuli

4

4

3

3

KST Matthews (appointed June 19, 2006)

3

3

3

2

Executive
LRR Molotsane (left the employment of Telkom
on April 5, 2007)

4

4

3

3

(1) The table represents the possible meetings based on the appointment and resignation dates of members.

197

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
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, 2007:

• RJ September (Acting Chairman);

• KR Patel;

• GJ Rasethaba;

• MB Sallie;

• SG Ntoele; and

• MJ Nzeku.

Members’ attendance of executive committee meetings

Five scheduled executive committee meetings and six special meetings were held during the

2007 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
KR Patel

5

5

6

6

RJ September (Acting Chairman)

5

4

6

4

MJ Nzeku

5

4

6

6

SG Ntoele (appointed April 1, 2007)

n/a

n/a

n/a

n/a

MB Sallie (appointed April 1, 2007)

n/a

n/a

n/a

n/a

GJ Rasethaba (appointed May 1, 2007)

n/a

n/a

n/a

n/a

Resignations
LRR Molotsane (left the employment of Telkom
on April 5, 2007)

5

5

6

5

W Beelders (resigned March 31, 2007)

5

5

6

6

TG Msimango (resigned March 31, 2007)

5

4

6

4

BMC Ngcobo (resigned April 1, 2007)

5

3

6

6

(1) The table represents the possible meetings based on the appointment and resignation dates of members.

198

Audit and risk management committee

The audit and risk management committee comprises five 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 40 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 annual consolidated financial statements;

• review the annual report on Form 20-F;

• review and recommend changes to Telkom’s statutory audit;

• monitor Telkom’s internal accounting and auditing systems;

• monitor compliance with laws;

• 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 which was extended
through the 2008 financial year. 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.

199

Telkom has in place a policy to address the potential hiring of audit team members to avoid issues

of independence.

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, 2007:

• YR Tenza (Chairman);

• TF Mosololi;

• M Mostert;

• PSC Luthuli; and

• MJ Lamberti.

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 two special meetings were

held during the 2007 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

2

2

M Mostert

4

3

2

1

TF Mosololi

4

2

2

1

PSC Luthuli

4

4

2

0

MJ Lamberti (appointed May 29, 2007)

n/a

n/a

n/a

n/a

(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 make 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.

200

The following are members of the human resources review and remuneration committee as of

June 30, 2007:

• SL Arnold (Chairperson);

• DD Tabata;

• TD Mahloele;

• B du Plessis;

• KST Matthews; and

• MJ Lamberti.

Members’ attendance of human resources review and remuneration committee meetings

Four scheduled human resources review and remuneration committee meetings and one special

meeting were held during the 2007 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
SL Arnold (Chairperson)
(appointed November 1, 2006)

2

2

1

1

TD Mahloele

4

2

1

1

B du Plessis

4

4

1

1

DD Tabata

4

3

1

1

MJ Lamberti

n/a

n/a

n/a

n/a

Ex-officio non-voting member
CK Mokoena (Group Executive: Human Resources)

4

3

n/a

n/a

RJ September (appointed April 5, 2007)

n/a

n/a

1

0

LRR Molotsane (left the employment of Telkom on
April 5, 2007)

4

3

1

0

(1) The table represents the possible meetings based on the appointment and resignation dates of members.

At its meeting held on November 9, 2006, the board resolved that the human resource review

and remuneration committee should comprise only non-executive directors. As a result
Mr. LRR Molotsane, Mr. RJ September and Ms. CK Mokoena attended meetings of the committee by
invitation only.

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.

201

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.

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 40 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 Chairman of the board and the company secretary 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 company secretary. 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

202

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 28 the

consolidated annual financial statements.

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.

On June 7, 2007, Telkom’s Audit committee formalized a Disclosure Committee to oversee the

Company’s disclosures and to assist the Audit Committee, the chief executive officer and the chief
financial officer in fulfilling their responsibilities in this respect.

The purpose of the Disclosure Committee is to ensure that Telkom implements and maintains

internal procedures for the timely collection, evaluation and accurate disclosure, as appropriate, of
information potentially subject to public disclosure under the legal, regulatory and stock exchange
requirements to which it is subject and which is made available in the market place or to the
investment community. Such procedures are designed to source information that is relevant to an
assessment of the need to disclose developments and risks that pertain to Telkom’s businesses, and
their effectiveness for this purpose to be reviewed periodically.

The membership of the Disclosure Committee is initially to be proposed by the chief financial

officer and approved by the chief executive officer. Thereafter members may be replaced, or new
members appointed, as required by the chief executive officer, the chief financial officer and the Audit
Committee. Notwithstanding the foregoing, the chief executive officer and chief financial officer, under
exceptional circumstances may at any time assume any or all of the responsibilities of the Disclosure
Committee.

The Disclosure Committee is required to meet once a quarter commencing after June 2007 or as

frequently as circumstances dictate to ensure accuracy and completeness of Telkom’s disclosure
statements and to evaluate its disclosure controls that may need revision due to changes in Telkom’s
organization, business lines and regulatory environment and any changes in economic or industry
conditions.

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.

203

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.

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.

204

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,

2006/2005

2007/2006

2005

2006

2007

% change

% change

Telkom

28,972

25,575

25,864

(11.7)

1.1

Network and technology

21,528

19,637

19,645

(8.8)

0.0

Marketing and sales

5,210

4,099

4,254

(21.3)

3.8

Support and other

2,234

1,839

1,965

(17.7)

6.9

Subsidiaries

(1)

572

581

933

1.6

60.6

Total

29,544

26,156

26,797

(11.5)

2.5

(1) Includes 308 employees of our newly acquired subsidiary, Africa Online in the 2007 financial year.

In addition to our full time employees, Telkom had 5,807 temporary employees on March 31, 2007.

Our employees are represented by the Communication Workers Union, or CWU, the South African
Communications Union, or SACU, and the MWU-Solidarity Union. The Alliance of Telkom Unions, or
ATU, disbanded during the course of the 2007 financial year. 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, 2007, approximately 69% 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 TDS Directory Operations, Swiftnet and Africa
Online 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;

205

•  limit the maximum ordinary hours of work overtime;

•  increase the rate of pay for overtime;

•  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 R425.9 million in employee training and development in the year ended
March 31, 2007.

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.

Fixed-line employee expenses increased 12.3% from R6.5 billion in the 2006 financial year to
R7.3 billion in the 2007 financial year primarily due to increased salaries and wages and related
benefits as a result of annual average salary increases of 7.0%, a 1.1% increase in the number of
employees in our fixed-line business, excluding subsidiaries, and increased payments to part time
staff and contractors to meet customer centricity objectives and the deployment of next generation
network objectives. The number of Telkom employees declined by approximately 31,236 positions
from March 31, 1997 through March 31, 2006 and increased by 289 positions in the year ended
March 31, 2007. At March 31, 2007, we had 25,864 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 then 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.
Telkom had placed a 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. 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. ATU has since disbanded
and Telkom has signed individual collective bargaining agreements with both SACU and Solidarity.

Mobile employees

The following table sets forth the number of Vodacom’s employees as of the dates indicated.

As of March 31,

2006/2005

2007/2006

2005

2006

2007

% change

% change

South Africa

3,919

4,305

4,727

9.8

9.8

Other African

1,074

1,154

1,522

7.4

31.9

Total

(1)

4,993

5,459

6,249

9.3

14.5

(1) Vodacom had a total of 581, 469 and 183 temporary and contract employees as of March 31, 2007, 2006 and 2005,

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.

206

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 12.3% as of March 31, 2007, approximately 10.2% as of
March 31, 2006 and approximately 13.3% as of March 31,2005. Vodacom believes that the
relationship between its management and its employees and labor unions is good.

SHARE OWNERSHIP

As of March 31, 2007, 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

2007
Non-executive
TF Mosololi

455

455

2006
Non-executive
NE Mtshotshisa

–

–

–

88

88

*

TF Mosololi

455

–

–

–

455

*

Total

455

–

–

88

543

*

*

Less than 1%.

As of March 31, 2007, none of Telkom’s directors or senior management individually held more

than 1% of Telkom’s outstanding ordinary shares.

As of March 31, 2007, Telkom’s directors and senior management (19 persons) collectively

beneficially held 1,667 ordinary shares. The foregoing information does not include ordinary shares
held by the Government or the Public Investment Corporation.

The following ordinary shares were allocated to members of Telkom’s senior management under

its conditional share plan. These shares do not vest until three years from the date of grant subject to
company performance.

June 2004

June 2005

June 2006

Total

allocation

allocation

allocation

allocation

LRR Molotsane (left the employment of Telkom
on April 5, 2007)

–

–

11,457

11,457

RJ September

6,549

5,450

5,849

17,848

KR Patel

5,534

4,733

4,670

14,937

BMC Ngcobo (resigned April 1, 2007)

4,251

3,489

4,436

12,176

W Beelders (resigned March 31, 2007)

4,379

3,489

4,436

12,304

TG Msimango (resigned March 31, 2007)

3,755

3,489

4,436

11,680

MJ Nzeku

4,913

3,667

4,436

13,016

SG Ntoele

4,288

3,489

3,433

11,210

GJ Rasethaba

–

–

2,616

2,616

MB Sallie

4,294

3,205

3,433

10,932

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. 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. 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 were exercisable in four equal
tranches over a period of three years commencing six months after March 4, 2003, which were 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 29, 2007. 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

207,055,865

(1)

38.9%

40.6%

Public Investment Corporation

80,742,596

(2)

15.2%

15.8%

Elephant Consortium

37,506,809

7.0%

7.4%

(1)

Includes one Class A ordinary share held in the Republic of South Africa by the Government, which represents 100% of

the class.

(2)

Includes one Class B ordinary share held by the Public Investment Corporation, which represents 100% of the class.

Includes 6.4% of Telkom’s issued and 6.7% of Telkom’s outstanding ordinary shares acquired in the market.

As of March 30, 2007, ADRs evidencing approximately 1,864,129 ADSs were held of record by

approximately 2 record holders. The 7,456,516 ordinary shares represented by those ADRs
(approximately 1.4% of Telkom’s issued and 1.5% of Telkom’s outstanding ordinary shares) were
registered in the name of Standard Bank of South Africa. As of June 29, 2007, ADRs evidencing
approximately 1,912,277 ADSs were held of record by approximately 2 record holders. The 7,649,108
ordinary shares represented by those ADRs (approximately 1.4% of Telkom’s issued and 1.5% of
Telkom’s outstanding ordinary shares) 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

208

March 30, 2007, 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

approximately 171,002 of Telkom’s ordinary shares as of March 31, 2007.

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

October 14, 2004, October 21, 2005 and October 20, 2006, 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.

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. Telkom repurchased
12,089,371 of its ordinary shares at a volume weighted average price of R132.04 per share, including
costs, in the 2007 financial year. 1,035,506 of these shares have not been cancelled as yet 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.

209

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, particularly regarding the Codes of Good Practice on Broad Based Black
Economic Empowerment.

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 Electronic Communications
Act, 36 of 2005, and the Independent Communications Authority of South Africa Act, 13 of 2000.

210

• Under the Electronic Communications Act, the Ministry 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.

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 Electronic Communications Act, No. 36 of 2005,
which has repealed 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 Electronic Communications Act and the ICASA Act are to:

• conduct public inquiries in any matter relevant to the achievement of the objectives of the

Electronic Communications Act or to the performance of its functions in terms of the Electronic
Communications Act;

• plan, control and manage the radio frequency spectrum and license its usage;

• grant telecommunications licenses;

• make regulations as provided for in the Electronic Communications Act;

• 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 Electronic Communications Act,

regulations or license conditions by licensees and, where appropriate, impose sanctions
provided in the Electronic Communications 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.

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 has applied for an
extension of its exemption from these requirements beyond November 2007. 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 –

211

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, 2007, 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,
2007, R4.5 billion of our total indebtedness of R10.8 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 and Vodafone each have the right to appoint four directors
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.

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.

212

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;

• 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.

213

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, (“the extended territory”) 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 would require the written consent of those shareholders holding 10% or more of the
issued shares of Vodacom if such involvement is a consensus matter as contemplated in the
Vodacom joint venture agreement.

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:

Mesdames Arnold and Matthews and Messrs. Tabata, Tenza and Mostert, five of Telkom’s board

members as of March 31, 2007, were the Government’s representatives on Telkom’s board of
directors. Ms. Chikane, previously a Government representative, resigned on June 19, 2006 and was
replaced by Ms. Matthews and Ms. Mtshotshisa, previously a Government representative, resigned on
October 31, 2006 and was replaced by Ms. Arnold as the Government’s representatives on Telkom’s
board of directors. Mr. Mahloele, one of Telkom’s Board members, was the Public Investment
Corporation’s representative on Telkom’s board of directors. The Public Investment Corporation is
currently only entitled to appoint one representative to Telkom’s board of directors.

214

Mr. Dumisani Tabata, one of Telkom’s board members, is a director and shareholder of Vuwa

Investments (Proprietary) Limited, which acquired a 40% interest in the SAIL Group Limited, with
effect from October 1, 2006. SAIL Group is a sports marketing company that does business with
Telkom. Telkom paid R18, 682,568 for the period October 1, 2006 to March 31, 2007 for goods and
services from the SAIL Group. Telkom paid R36,349,357 for the full 2007 financial year for goods and
services from the SAIL Group. The outstanding creditors balance at Telkom as of March 31, 2007 was
R151,924. Vodacom paid R232,680,689 for the period October 1, 2006 to March 31, 2007 for goods
and services from the SAIL Group. Vodacom paid R599,958,861 for the full 2007 financial year for
goods and services from the SAIL Group. The outstanding creditors balance at Vodacom as of
March 31, 2007 was R18,951,705. Vuwa Investments is a consortium member of Amandla Omoya,
who has bid to acquire a 10% stake in Vodacom.

See also note 42 to the Telkom Group’s consolidated financial statements for additional

information with respect to related party transactions.

215

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

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 which was subsequently increased to
US$172 million. 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. 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 appealed this dismissal, which was later dismissed by the
Appeals Court of New Jersey. The appeal by Telcordia in the Supreme Court of Appeals was set down
for and heard on October 30 and October 31, 2006. Following the successful upholding of the appeal,
Telkom filed an application for leave to appeal to the Constitutional Court on only the issue revolving
around the Supreme Court of Appeals’ failure to recognize Telkom’s rights of access to the courts
under the South African Arbitration Act. The Constitutional Court has since dismissed Telkom’s appeal
with costs. The Supreme Court of Appeal judgment brought to finality the merits dispute of the
Telcordia damages claim against Telkom and the parties are expected to reconvene the arbitration
solely for purposes of determining the amount of damages to which Telcordia is entitled. Prior to the
arbitration proceedings, tentatively scheduled for September 2007, the parties have an option of
considering possible settlement. Following the ruling by the Constitutional Court, two hearings were
held at the International Dispute Resolutions Centre, or IDRC. The first hearing was held in London on
May 21, 2007 and was a ‘directions hearing’, in terms of which the parties consented to a ruling by
the arbitrator setting out a consolidated list of proposals and issues to form part of the damages
hearing in September 2007.

The second hearing was held in London at the IDRC on June 25 and 26, 2007 dealt with the

application by Telcordia for the striking out of part of Telkom’s defense on the basis that Telkom had
raised issues in its defense that had already been heard by the arbitrator prior to his partial award.
This application was dismissed by the arbitrator. The arbitrator also made a ruling compelling
Telcordia to provide certain particulars requested by Telkom with regard to the claims by Telcordia. In
his ruling, the arbitrator also set out a list of issues for determination at the damages hearing to be
held during September 2007.

216

Although Telkom is currently unable to predict the exact amount that it may eventually be

required to pay Telcordia, it has made provisions for estimated liabilities in respect of Telcordia in the
sum of US$70 million, including interest but excluding legal fees. 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.

Competition Commission

We are parties to a number of legal proceedings filed by parties with the South African Competition

Commission alleging anti-competitive practices described below. If Telkom were found to have
committed prohibited practices as contained in the Competition Act, 1998, as amended, Telkom could
be required to cease these practices, divest these businesses and be fined a penalty of up to 10% of
Telkom’s annual turnover, excluding the turnover of subsidiaries and joint ventures, for the financial
years prior to the dates of the complaints. The Competition Commission has to date not imposed the
maximum penalty on any offender.

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. We are currently unable to predict the amount that we may eventually be required to
pay in these proceedings, 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 Telkom is required to cease these practices, divest
itself of the relevant businesses or pay significant fines, Telkom’s business and financial condition could
be materially adversely affected and its revenue and net profit could decline. 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.

Independent Cellular Service Provider Association of South Africa (ICSPA)

In 2002, the ICSPA filed a complaint against Telkom at the Competition Commission in terms of

the Competition Act, alleging that Telkom had entered into contracts with large corporations, providing
large discounts with the effect of discouraging the corporates from using the ‘premicell’ device
installed by their members. They alleged various contraventions of the Competition Act. Telkom
provided the Competition Commission with certain information requested. Telkom also referred the
Competition Commission to its High Court application in respect of utilization of the ‘premicell’ device.
The Competition Commission declined to refer the matter to the Competition Tribunal. ICSPA then
referred the matter to the Competition Tribunal on September 18, 2003. Telkom filed its answering
affidavit on November 28, 2003.

The South African Value Added Network Services (SAVA)

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.

217

Telkom has brought an application in the South African High Court to review the decision by the

Competition Commission, on the basis that the Tribunal does not have the jurisdiction to adjudicate
the matter. The Competition Commission has opposed the application, but the application has not yet
been finally determined by the High Court. The review procedure requires that the Competition
Commission file a full record of its proceedings pursuant to which is decision was taken. Once the
record is filed, Telkom would have an opportunity to supplement its original papers, if required. The
Competition Commission approached the High Court for an order as to how to deal with certain
documents that it regarded as confidential. The Competition Commission subsequently filed its record
of proceedings, but Telkom was of the view that the record was incomplete. Recently the Competition
Commission filed the remainder of its record, including the confidential documents, and Telkom has
supplemented its papers by filling a further affidavit. The Competition Commission has now filed its
answering affidavit. These matters and the amount of Telkom’s liability are expected to be finalized
within the next financial year.

Omnilink

On August 22, 2002 Omnilink filed a complaint against Telkom at the Competition Commission

alleging that Telkom was abusing its dominance by discriminating in its price for Diginet services as
against those charged to VANS and the price charged to customers who apply for a Telkom IVPN
solution. The Competition Commission conducted an enquiry and subsequently referred the
complaint, together with the SAVA complaint, to the Competition Tribunal for adjudication. This matter
is currently being dealt with together with the SAVA matter.

Orion/Telkom (Standard Bank and Edcon)

In April 2003, Orion filed a complaint against Telkom, Standard Bank and Edcon at the

Competition Commission concerning Telkom’s discounts offered on public switched
telecommunication services to corporate customers. In terms of the rules of the Competition
Commission, the Competition Commission, who acts as an investigator, had one year to investigate
the complaint. Orion simultaneously with the filing of the complaint, also filed an application against
Telkom, Standard Bank and Edcon at the Competition Tribunal, for an interim order interdicting and
restraining Telkom from offering Orion’s corporate customers reduced rates associated with Telkom’s
Cellsaver discount plan.

The Competition Commission completed its investigation and decided that there was no prima

facie evidence of any contravention of the Competition Act. Orion however referred the matter to the
Competition Tribunal in terms of section 51 of the Competition Act, which allows for parties to refer
matters to the Competition Tribunal themselves. Telkom has not yet filed its answering affidavit in the
main complaint before the Competition Tribunal. To date there has been no further developments on
this matter. These matters and the amount of Telkom’s liability, if any, are not expected to be finalized
within the next financial year.

Internet Service Association (ISPA)

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. 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. Telkom provided the Competition Commission with the information and is
awaiting the Commission’s response. This matter and the amount of Telkom’s liability are not
expected to be finalized within the next financial year.

218

M-Web and Internet Solutions (IS)

On June 29, 2005, M-Web and Internet Solutions, or IS, jointly lodged a complaint with the

Competition Commission against Telkom and also requested interim relief at the Competition Tribunal.
The complaint at the Competition Commission mainly deals with Telkom’s pricing for ADSL retail
products and its IP Connect products, the termination of the peering link between Telkom and IS, the
wholesale pricing of SAIX bandwidth for ADSL users of other internet service providers, the
architecture of Telkom’s ADSL access route and the manner in which internet service providers can
only connect to Telkom’s edge service router via IP Connect as well as alleged excessive pricing for
bandwidth on Telkom’s international undersea cable. The application for interim relief at the
Competition Tribunal dealt with allegations that Telkom should maintain the peering link between IS
and Telkom in terms of its current peering agreement, and demanded that Telkom treat the traffic
generated by ADSL customers of M-Web as traffic destined for the peering link and that Telkom
upgrade its peering link to accommodate the increased ADSL traffic emanating from M-Web and
maintain a maximum of 65% utilization. Telkom filed its answering affidavit, and is awaiting IS and
M-Web’s replying affidavit.

Since then, Telkom has entered into a new peering agreement with IS. To date there has been no

further developments on this matter, either in the filing of a replying affidavit by IS/M-Web in the
interim relief application or in the investigation of the matter by the Competition Commission.

M-Web

On June 5, 2007, MWeb brought an application against Telkom for interim relief at the

Competition Tribunal with regard to the manner in which Telkom provides wholesale ADSL internet
connections. MWeb requested the Competition Tribunal to grant an order of interim relief against
Telkom to charge MWeb a wholesale price for the provision of ADSL internet connections which is not
higher than the lowest retail price. MWeb further applied for an order that Telkom implement the
migration of end customers from Telkom PSTS ADSL access to MWeb without interruption of the
service. Telkom raised the objection that the Competition Tribunal does not have jurisdiction to hear
the matter in its answering affidavit filed at the Competition Tribunal. Telkom still had to “plead over”
as to the merits of the matter. Telkom has also filed an application in the High Court of the Transvaal
Provincial Division on July 3, 2007 for an order declaring that the Competition Tribunal does not have
jurisdiction to hear the application made to it by MWeb.

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 on any offender.

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 all of these claims in
our consolidated 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.

219

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, 2007, the date of the consolidated annual financial statements
included in this annual report.

220

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

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

221

JSE (ZAR per

NYSE (USD per

ordinary share)

ADS)

High

Low

High

Low

2006 Financial Year

171.00

98.45

111.50

64.01

First Quarter

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

171.00

119.10

109.50

66.00

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

Second Quarter

July 2006

134.50

119.10

78.80

66.00

August 2006

139.50

127.00

79.35

73.90

September 2006

140.50

128.50

77.00

69.01

Third Quarter

October 2006

143.00

132.55

76.70

68.80

November 2006

145.50

127.88

79.95

72.78

December 2006

144.55

131.10

81.90

74.13

Fourth Quarter

January 2007

161.02

141.50

90.24

79.00

February 2007

175.50

155.50

98.49

85.50

March 2007

171.00

155.50

96.20

84.75

2008 Financial Year through June 29

182.05

163.00

104.25

91.75

First Quarter

April 2007

181.00

164.06

102.30

91.75

May 2007

181.65

163.00

102.29

92.00

June 2007

182.05

167.01

104.25

94.00

(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 29, 2007, the last trading price of the ordinary shares as reported by the JSE was

R178.40 per share and the last trading price of the ADSs on the NYSE Composite Tape was $100.75.

222

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 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, 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 R5,449,448,990 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 R5,214,083,200, 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. As of March 31, 2007, 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 each and its issued share capital was R5,328,555,280 divided into
532,855,526 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 each and its outstanding share
capital was, R5,097,694,540 divided into 509,769,452 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.

223

The following shows a reconciliation of shares outstanding from April 1, 2005 through March 31,

2007:

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 issued at March 31, 2006

544,944,899

Shares held in treasury at March 31, 2006

(23,536,579)

Shares repurchased and cancelled during 2007 financial year

(12,089,371)

Shares released from treasury during 2007 financial year

450,505

Shares outstanding at March 31, 2007

509,769,454

Shares held in treasury at March 31, 2007

23,086,074

Shares issued at March 31, 2007

532,855,528

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.

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.

224

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.

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,

225

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.

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.

226

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
consolidated 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.

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.

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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.

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.

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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
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

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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:

• 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.

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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 20, 2006, 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, or 15 months from the date of the resolution, whichever period is
shorter. As a result, Telkom is authorized to purchase up to 20% of its issued share capital.

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.

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.

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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.

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.

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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, if the share capital is divided into shares of par value as Telkom’s are,
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 amount of the nominal value of all the shares
in the company. If, however, the share capital is divided into shares of no par value, a shareholder is
entitled to one vote in respect to each share held. 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.

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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.

Pre-emptive 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.

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.

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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:

• 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.

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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 of a
public company shall consist of at least two members, each of whom shall be a natural person.
The JSE listing requirements require that the minimum number of directors of a listed company
shall be four. 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
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.

236

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,
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.

237

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. A company listed on the JSE is required to comply with the requirements
listed above, any requirements set out in the JSE listings requirements in addition to the requirements
listed above.

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.

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.

238

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:

• 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.

239

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.

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

240

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. South

African companies are generally not required to repatriate to South Africa profits of foreign operations,
but are limited in their ability to utilize profits of one foreign business to finance operations of a
different foreign business. However, all dividends received from foreign subsidiaries since
October 27, 2004 may be retained abroad and used for any purpose. 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 instruments
based on foreign reference assets or issued by foreign entities, listed on the JSE Limited or
the Bond Exchange of South Africa.

• 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 for Excon is required in advance and companies will need 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.

241

•  Since October 7, 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;

• collective investment schemes; or

• the South African Futures Exchange.

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”.

242

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.

243

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”.

The Government announced that the rate of secondary tax on companies will be reduced to 10%

from October 1, 2007 and that it intends to abolish secondary tax on companies in the 2008 financial
year and replace it with a withholding tax at 10%, applicable to both South African residents and
non-residents.

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 present in South Africa for more than
183 days in the aggregate 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 (not subject to the provisions
of any relevant double tax agreement).

244

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
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.

The Government has announced that, with effect from October 1, 2007, shares held for more than

three years will, on sale, be treated as capital gains.

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 may be taxed in South Africa only 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. If the profit is capital in nature and the shares do
not form part of the business property of a permanent establishment of the US resident in South
Africa, the treaty gives only the United States the right to tax.

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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 resident companies are subject to corporate
income tax of 29% of their taxable income. Non-resident companies are, subject to any relevant
double tax agreement, subject to tax in South Africa on their South African source income at the rate
of 34%, but they are exempt from secondary tax on companies. 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
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 R15,000 (R120,000 in
the year of death).

The following table sets out the prescribed portion of a capital gain that would be included

in a taxpayer’s 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

–

–

–

Resident companies

50

29

14.5

Non-resident companies

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

246

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
(real)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 or represents an interest in
immovable (real) property in South Africa equivalent to a United States real property interest.

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 foreign dividends, 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%

247

(35.45% from October 1, 2007). 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.

The rate of secondary tax on companies will be reduced to 10% from October 1, 2007, and the

Government announced that it intends to abolish secondary tax on companies in the 2008 financial
year and replace it with a withholding tax.

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.

248

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;

•  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

pro rata distributions payable only in ordinary shares 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 2010. 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.

249

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
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 such gains recognized
in tax years ending after May 5, 2003 and beginning before January 1, 2011.

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.

250

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

•  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.

251

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.

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.

252

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 receivables and trade payables, arise directly from our operations.

We finance our operations primarily with a mixture of issued share capital, retained earnings 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. We do
not speculate in derivative instruments.

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 90.4%, 92.0% and 91.5% of
our total consolidated debt as of March 31, 2007, 2006 and 2005, respectively. A debt profile of mainly
fixed rate debt has been maintained to limit our exposure to interest rate increases given the size of
our debt portfolio.

253

The following table shows our fixed and variable rate debt for the periods indicated.

At March 31, 2007

2008

2009

2010

2011

2012

Thereafter Total

Fair value

(in ZAR millions, except percentages)

Long term debt
Telkom
Fixed rate (ZAR

denominated)
Long term debt, including
current portion

(6,030)

–

–

(1,780)

–

(2,500) (10,310)

(9,486)

Average interest rate

(1)(2)

14.37%

–

–

14.98%

–

15.00% 14.63%

Finance leases

(4)

(12)

–

(10)

(18)

(808)

(852)

(852)

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

–

–

–

(16)

(10)

(80)

(106)

(106)

Average interest rate

(2)(3)

–

–

–

0.10%

0.10%

0.14%

0.13%

Vodacom

(4)

Fixed (ZAR denominated)

Finance leases and other
short term debt

(57)

(98)

(49)

(81)

(42)

(40)

(367)

(396)

Fixed rate (USD

denominated)
Long term debt, including
current portion

(18)

–

–

–

–

–

(18)

(18)

Average interest rate

(2)

Variable rate (ZAR

denominated)
Long term debt, including
current portion

–

–

–

–

–

(3)

(3)

(3)

Average interest rate

(2)

Variable rate (EURO

denominated)
Long term debt, including
current portion

(19)

–

–

–

–

–

(19)

(19)

Average interest rate

(3)

Variable rate (USD

denominated)
Long term debt, including
current portion

(156)

(59)

(655)

–

–

–

(870)

(870)

Average interest rate

(3)

Variable rate (TSH

denominated)
Long term debt, including
current portion

–

–

–

–

–

–

–

–

Average interest rate

(3)

TDS Directory Operations

Fixed (ZAR denominated)
Finance leases

(1)

(3)

–

–

–

–

(4)

(4)

254

(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, 2007

2008

2009

2010

2011

2012 Thereafter

Total

Fair value

(in ZAR millions, except percentages)

Telkom

ZAR Pay fixed, receive
floating

1,000

–

–

–

–

–

1,000

(26)

Average pay rate

(1)(3)

14.67%

14.67%

Average receive rate

(1)(3)

9.12%

9.12%

Vodacom

(2)

ZAR Receive fixed, pay floating

–

38

–

–

–

61

99

14

Average pay rate

(1)(3)

–

11.45%

–

–

–

11.44%

11.45%

Average receive rate

(1)

–

14.90%

–

–

–

15.05%

14.99%

(1)

Weighted average interest rate.

(2)

Represents Telkom’s 50% share of Vodacom’s indebtedness.

(3)

Variable rate calculated as of March 31, 2007.

Foreign currency exchange rate risk

In respect of South African operations, we manage our foreign exchange rate risk by hedging on a

portfolio basis, 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.

255

The following table sets forth our liabilities and related derivative instruments subject to foreign

exchange risk for the periods indicated.

At March 31, 2007

2008

2009

2010

2011

2012

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)

–

–

–

16

10

80

106

106

Average interest rate

(1)

–

–

–

0.10%

0.10%

0.14%

0.13%

Accounts payable (EURO

denominated)

(2)

133

–

–

–

–

–

133

133

Accounts payable (USD

denominated)

(3)

841

–

–

–

–

–

841

841

interest free

Account payable (GBP

denominated)

(4)

13

–

–

–

–

–

13

13

interest free

Vodacom

Fixed rate (USD

denominated)

(3)

18

–

–

–

–

–

18

18

Variable rate (EURO

denominated)

(2)

19

–

–

–

–

–

19

19

Variable rate (USD

denominated)

(3)

156

59

655

–

–

–

870

870

(1)

Weighted average interest rate.

(2)

EURO converted at the spot rate quoted on Reuters of R9.649 EURO on March 31, 2007.

(3)

USD converted at the spot rate quoted on Reuters of R7.248 USD on March 31, 2007.

(4)

GBP converted at the spot rate quoted on Reuters of R14.189 GBP on March 31, 2007.

256

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, 2007

2008

2009

2010

2011

2012

Thereafter Total

Fair value

(ZAR)

Telkom
US Dollars
Notional amount (millions).

1,209

–

–

–

–

–

1,209

2

Average contractual exchange

rate

7.34

–

–

–

–

–

7.34

EURO
Notional amount (millions).

991

–

–

–

–

–

991

12

Average contractual exchange

rate

9.72

–

–

–

–

–

9.72

Pound Sterling
Notional amount (millions).

32

–

–

–

–

–

32

3

Average contractual exchange

rate

13.09

–

–

–

–

–

13.09

Swedish Krona
Notional amount (millions).

46

–

–

–

–

–

46

(0.6)

Average contractual exchange

rate

1.07

–

–

–

–

–

1.07

Japanese Yen
Notional amount (millions).

2

–

–

–

–

–

2

(0.2)

Average contractual exchange

rate

0.07

–

–

–

–

–

0.07

Vodacom
US Dollar
Notional amount (millions).

120

–

–

–

–

–

120

(3)

Average contractual exchange

rate

7.52

–

–

–

–

–

7.52

EURO
Notional amount (millions).

908

–

–

–

–

–

908

11

Average contractual exchange

rate

9.70

–

–

–

–

–

9.70

Pound Sterling
Notional amount (millions).

229

–

–

–

–

–

229

3

Average contractual exchange

rate

14.17

–

–

–

–

–

14.17

Swiss Franc
Notional amount (millions).

0.65

–

–

–

–

–

0.65

0.02

Average contractual exchange

rate

6.20

–

–

–

–

–

6.20

Australian Dollar
Notional amount (millions).

0.15

–

–

–

–

–

0.15

0.04

Average contractual exchange

rate

5.79

–

–

–

–

–

5.79

257

Forward contracts to sell foreign currencies and buy ZAR

At March 31, 2007

2008

2009

2010

2011

2012

Thereafter Total

Fair value

(ZAR)

Telkom
US Dollars
Notional amount (millions).

994

–

–

–

–

–

994

88

Average contractual exchange

rate

8.13

–

–

–

–

–

8.13

EURO
Notional amount (millions).

483

–

–

–

–

–

483

(5)

Average contractual exchange

rate

9.75

–

–

–

–

–

9.75

Pound Sterling
Notional amount (millions).

23

–

–

–

–

–

23

0.8

Average contractual exchange

rate

14.78

–

–

–

–

–

14.78

Swedish Krona
Notional amount (millions).

16

–

–

–

–

–

16

0.2

Average contractual exchange

rate

1.05

–

–

–

–

–

1.05

Japanese Yen
Notional amount (millions).

1

–

–

–

–

–

1

(0.004)

Average contractual exchange

rate

0.06

–

–

–

–

–

0.06

Vodacom
US Dollar
Notional amount (millions).

0.1

–

–

–

–

–

0.1

0.04

Average contractual exchange

rate

7.33

–

–

–

–

–

7.33

EURO
Notional amount (millions).

22

–

–

–

–

–

22

0.05

Average contractual exchange

rate

9.77

–

–

–

–

–

9.77

Pound Sterling
Notional amount (millions).

28

–

–

–

–

–

28

(0.15)

Average contractual exchange

rate

14.25

–

–

–

–

–

14.25

Swiss Franc
Notional amount (millions).

–

–

–

–

–

–

–

–

Average contractual exchange

rate

–

–

–

–

–

–

–

–

Other market risks

Credit risk management

Credit risk arises from derivative contracts entered into with international financial institutions with

a rating of A1 or better. We are not exposed to significant concentrations of credit risk. Credit limits
are set on an individual basis. Management reduces the risk of irrecoverable debt by improving credit
management through credit checks and limits. To reduce the risk of counter party failure, limits are set
based on the individual ratings of counterparties by well-known ratings agencies. 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. We limit our exposure to any counterparty and
these exposures are monitored daily. We expect that all counterparties will meet their obligations.

258

Trade debtors comprise a large and widespread customer base, covering residential, business

and corporate customer profiles.

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 trade receivable 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 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. Short-term liquidity gaps may
be funded through repurchase agreements.

We had available credit facilities not utilized of R8.7 billion as of March 31, 2007.

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.

259

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

Disclosure controls and procedures

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,
2007, 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, our chief executive officer and our
chief financial officer concluded that, as of such date, our disclosure controls and procedures were
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. Telkom’s management, including its chief executive officer
and chief financial officer, recognize that any set of controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving management’s control
objective. Telkom’s management, including its chief executive officer and chief financial officer, believe
that, as of March 31, 2007, Telkom’s disclosure controls and procedures were effective to provide
reasonable assurance of achieving management’s control objectives.

Management’s report on internal control over financial reporting

Telkom’s management is responsible for establishing and maintaining adequate “internal control

over financial reporting” as such term is defined under Exchange Act Rules 13a-15(f) and 15d-15(f).
Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in conformity with International Financial Reporting Standards, or IFRS, including a
reconciliation of profit after taxes and shareholders’ equity as reported in the consolidated financial
statements under IFRS to profit after taxes and shareholders’ equity in accordance with generally
accepted accounting principles in the United States.

All internal control systems, no matter how well designed, have inherent limitations. Therefore,

even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentations. Also, the effectiveness of internal control over
financial reporting may deteriorate in future periods due to either changes in conditions or declining
levels of compliance with policies or procedures.

In accordance with IFRS, the audited consolidated financial statements of the Company include

the proportionately-consolidated results of our Vodacom Group (Proprietary) Limited joint venture. As
provided by the SEC in “Management’s Report on Internal Control over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports Frequently Asked Questions” (SEC
Section 404 FAQs) and confirmed by the International Practices Task Force (IPTF) of the SEC
Regulations Committee, management’s assessment does not include an assessment of the internal
control over financial reporting of this joint venture as management does not have the ability to dictate
or modify the controls of this joint venture and does not have the ability, in practice, to assess these
controls. Accordingly, management’s conclusion regarding the effectiveness of its internal control over

260

financial reporting does not extend to the internal controls of this entity. The total assets, net assets,
total revenues and net income of this joint venture represent approximately 23%, 19%, 37% and 27%,
respectively, of the Telkom Group’s related consolidated financial statement totals as of and for the
year ended March 31, 2007.

Management has assessed the effectiveness of internal control over financial reporting as of

March 31, 2007. In making its assessment, management has based its assessment on the criteria set
forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal

Control – Integrated Framework. Management concluded, and hereby reports that based on its
assessment, Telkom’s internal control over financial reporting was effective as of March 31, 2007.
Management’s assessment of the effectiveness of internal control over financial reporting as of
March 31, 2007 has been audited by Ernst & Young Inc., an independent registered public accounting
firm. Their audit report on internal control over financial reporting appears below.

Attestation report of registered public accounting firm

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Telkom SA Limited:

We have audited management’s assessment, included in the accompanying “Management’s report on
internal control over financial reporting” appearing under Item 15 of Telkom SA Limited’s (‘Telkom’)
2007 Form 20-F, that Telkom maintained effective internal control over financial reporting as of March
31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Telkom’s management
is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the company’s internal
control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. An audit of internal control over
financial reporting includes obtaining an understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that: (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

261

As indicated in the accompanying “Management’s report on internal control over financial reporting”
appearing under Item 15, management’s assessment of and conclusion on the effectiveness of
internal control over financial reporting did not include the internal controls of Vodacom Group
(Proprietary) Limited, which is included in the March 31, 2007 consolidated financial statements of
Telkom SA Limited and constituted R13,882 million and R 5,984 million of total and net assets,
respectively, as of March 31, 2007 and R19,079 million and R 2,431 million of revenues and net
income, respectively, for the year then ended. Our audit of internal control over financial reporting of
Telkom also did not include an evaluation of the internal control over financial reporting of Vodacom
Group (Proprietary) Limited.

In our opinion, management’s assessment that Telkom maintained effective internal control over
financial reporting as of March 31, 2007, is fairly stated, in all material respects, based on the criteria
established in Internal Control–Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, Telkom maintained, in all
material respects, effective internal control over financial reporting as of March 31, 2007, based on the
criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as at March 31, 2007, 2006 and 2005, the
related consolidated results of operations and cash flows for each of the three years in the period
ended March 31, 2007 of Telkom and our report dated July 9, 2007 expressed an unqualified opinion
thereon.

ERNST & YOUNG Inc.
Pretoria
Republic of South Africa
July 9, 2007

Changes in internal control over financial reporting

There have been no changes in Telkom’s internal controls over financial reporting during the fiscal

year ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect,
Telkom’s internal control over financial reporting.

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
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

262

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 2007 financial years:

Audit related

Audit fees

fees

(1)

Tax fees

All other fees

(2)

Total

(ZAR millions)

2006

29

6

–

–

35

2007

48

–

–

1

49

(1) Audit related services mainly included the services performed in preparing for compliance with the requirements of the

Sarbanes-Oxley Act. Fees for audit services increased in the 2007 financial year, as it includes fees incurred to comply with
Section 404 of the Sarbanes-Oxley Act, reporting on the audit of internal controls over financial reporting.

(2) All other fees mainly include engagements for factual findings and the issuance of related certifications.

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.

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.

263

Item 16D.

Exemptions from the listing standards for audit committees

Rule 10A-3(b)(1)(i) of the Exchange Act requires that each member of the audit committee of a

listed issuer must be a member of the board of directors of the listed issuer, and must otherwise be
independent. Rule 10A-3(b)(1)(ii) of the Exchange Act provides that in order to be considered to be
independent, a member of an audit committee of a listed issuer may not, other than in his or her
capacity as a member of the audit committee, the board of directors, or any other board committee:

•  accept directly or indirectly any consulting, advisory or other compensatory fee from the issuer

or any subsidiary thereof; or

• be an affiliated person of the issuer or any subsidiary thereof.

An affiliated person of an issuer is a person that directly, or indirectly through one or more

intermediaries, controls or is controlled by, or is under common control with, the issuer.

Two members of Telkom’s Audit and Risk Management Committee (the “ARMC”), Mr. Yekani

Tenza, the Chairman of the ARMC, and Mr. Marius Mostert, are representatives of the Government of
the Republic of South Africa. The Government of the Republic of South Africa owned 38.9% of
Telkom’s issued and 40.6% of Telkom’s outstanding ordinary shares and had additional approval
rights as the holder of Telkom’s class A ordinary share, as of June 29, 2007.

Rule 10A-3(b)(1)(iv)(E) of the Exchange Act provides an exemption from the prohibition on being

an affiliated person of the issuer for an audit committee member of a foreign private issuer, who is a
representative or designee of a foreign government or foreign governmental entity that is an affiliate of
the foreign private issuer if the member is not an executive officer of the foreign private issuer.

Messers. Tenza and Mostert are not executive officers of Telkom and are exempt from the

prohibition on being affiliated persons of the issuer contained in Rule 10A-3(b)(1)(ii)(B) under the
Exchange Act pursuant to Rule 10A-3(b)(1)(iv)(E) thereunder as representatives of the Government of
the Republic of South Africa, a foreign government. Telkom does not believe that its reliance on this
exemption would materially adversely affect the ability of its ARMC to act independently and satisfy
the other requirements of Rule 10A-3 of the Exchange Act.

264

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 2005, 2006 and 2007 financial years.

(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, 2005

June 7 to June 21, 2004 2,337,000

76.88

2,337,000

105,883,627

August 3 to August 31, 20047,457,094

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

For the year ended March 31, 2007

June 12 to June 30, 2006 2,147,589

129.49

2,147,589

73,605,606

July 5 to July 26, 2006 2,062,522

123.74

2,062,522

71,543,084

August 1 to August 31, 2006 3,565,202

133.55

3,565,202

67,977,882

September 1 to September 29, 2006

3,278,552

135.71

3,278,552

64,699,330

November 24 to November 30, 2006

193,500

132.93

193,500

64,505,830

December 1 to December 20, 2006

572,122

135.21

572,122

63,933,708

January 3 to January 17, 2007

269,884

143.95

269,884

63,663,824

(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. The shareholders of Telkom provided general approval for the share repurchase program at
the Annual General Meeting held on October 20, 2006. This approval is valid until the next Annual General Meeting or for
15 months from date of the resolution, whichever period is shorter. Telkom plans on continuing its share buy back strategy
based on certain criteria.

265

PART III

Item 17.

Consolidated financial statements

The registrant has responded to Item 18 in lieu of responding to this item.

Item 18.

Consolidated financial statements

See Index to consolidated annual financial statements for a list of all financial statements filed as

part of this annual report.

266

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, Rembrandt 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)

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 (the “20-F”))

(1)

267

4.10

Service Agreement between Telkom SA Limited and Papi Molotsane (Incorporated by

reference to Exhibit 4.10 of Telkom’s Annual Report on Form 20-F for the year ended
March 31, 2006)

(1)

8.1

Subsidiaries of Telkom

(2)

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.

268

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/ Reuben Joseph September

Name: Reuben Joseph September
Title: Acting Chief Executive Officer

Dated: July 17, 2007

F–1

Telkom SA Limited

Content to the consolidated annual financial statements

for the three years ended March 31, 2007

Page

Report 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–2

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, 2007, 2006 and 2005, and the related
consolidated statements of income, shareholders’ equity, and cash flows for the years then ended set
out on pages F–3 to F–143. These financial statements are the responsibility of the Group’s directors
and management. 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 24%, 22%
and 20% at March 31, 2007, 2006 and 2005, respectively, and total revenues constituting 40%, 36%
and 32% for the years ended March 31, 2007, 2006 and 2005, 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.
An audit 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 the other auditors, provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the 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, 2007, 2006 and 2005, 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 46 to the consolidated financial statements).

As described in Note 2 to the consolidated annual financial statements, in 2007 the Group adopted

new and amended accounting standards, IAS 21 (revised) The Effects of Changes in Foreign Exchange

Rates, IAS 39 (revised) Financial Instruments: Recognition and Measurement, IFRIC 4 Determining
whether an Arrangement contains a lease, IFRIC 7 Applying the Restatement Approach under IAS 29
Financial Reporting in Hyperinflationary Economies. The Group has also adopted an accounting policy
whereby acquisitions of minority interests by the Group in subsidiary companies are accounted for using
the parent equity extension method.

We have also audited, in accordance with the standards of the Public Company Accounting

Oversight Board (United States), the effectiveness of Telkom SA Limited’s internal control over financial
reporting as of March 31, 2007, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated July 9, 2007 expressed an unqualified opinion thereon.

E

ERNST &  YOUNG Inc

Pretoria
Republic of South Africa
July 9, 2007

■ Telephone (011) 772-3000

Telefax(011) 772-4000

Docex123 Randburg

Websitewww.ey.com.za

■

Ernst & Young Inc.
Wanderers Office Park
52 Corlett drive, Illovo
Private Bag X14
Northlands 2116
Co. Reg. No. 2005/002308/21

F–3

Consolidated income statement

for the three years ended March 31, 2007

2005

2006

2007

Notes

Rm

Rm

Rm

Total revenue

3.1

43,696

48,260

52,157

Operating revenue

3.2

43,160

47,625

51,619

Other income

4

280

480

384

Operating expenses

32,179

33,428

37,533

Employee expenses

5.1

8,111

7,489

8,454

Payments to other operators

5.2

6,132

6,826

7,590

Selling, general and administrative expenses

5.3

8,824

10,273

12,902

Services rendered

5.4

2,021

2,114

2,291

Operating leases

5.5

803

850

981

Depreciation, amortisation, impairment and write-offs

5.6

6,288

5,876

5,315

Operating profit

11,261

14,677

14,470

Investment income

6

350

397

235

Finance charges and fair value movements

7

1,694

1,223

1,125

Interest

1,686

1,346

1,327

Foreign exchange and fair value movement

8

(123)

(202)

Profit before taxation

9,917

13,851

13,580

Taxation

8

3,082

4,523

4,731

Profit for the year

6,835

9,328

8,849

Attributable to:
Equity holders of Telkom

6,752

9,189

8,646

Minority interest

83

139

203

6,835

9,328

8,849

Basic earnings per share (cents)

9

1,246.9

1,746.1

1,681.0

Diluted earnings per share (cents)

9

1,244.5

1,736.6

1,676.3

Dividend per share (cents)

9

110.0

900.0

900.0

F–4

Consolidated balance sheet

at March 31

2005

2006

2007

Notes

Rm

Rm

Rm

Assets
Non-current assets

42,552

44,813

48,770

Property, plant and equipment

10

36,448

37,274

41,254

Intangible assets

11

3,182

3,910

5,111

Investments

12

2,277

2,894

1,384

Deferred expenses

13

133

254

270

Finance lease receivables

14

–

–

158

Deferred taxation

15

512

481

593

Current assets

15,045

12,731

10,376

Short-term investments

12

69

69

77

Inventories

16

658

814

1,093

Income tax receivable

34

–

–

520

Current portion of deferred expenses

13

214

226

287

Current portion of finance lease receivables

14

–

–

88

Trade and other receivables

17

5,820

6,399

7,303

Other financial assets

18

5,074

275

259

Cash and cash equivalents

19

3,210

4,948

749

Total assets

57,597

57,544

59,146

Equity and liabilities
Equity attributable to equity holders of Telkom

26,141

29,165

31,724

Share capital and premium

20

8,293

6,791

5,329

Treasury shares

21

(1,812)

(1,809)

(1,774)

Share-based compensation reserve

22

68

151

257

Non-distributable reserves

23

360

1,128

1,413

Retained earnings

24

19,232

22,904

26,499

Minority interest

25

220

301

284

Total equity

26,361

29,466

32,008

Non-current liabilities

13,870

12,391

8,554

Interest-bearing debt

26

9,504

7,655

4,338

Other financial liabilities

18

–

–

36

Provisions

29

2,460

2,677

1,443

Deferred revenue

13

959

991

1,021

Deferred taxation

15

947

1,068

1,716

Current liabilities

17,366

15,687

18,584

Trade and other payables

31

6,782

6,103

7,362

Shareholders for dividend

35

7

4

15

Current portion of interest-bearing debt

26

4,499

3,468

6,026

Current portion of provisions

29

1,428

1,660

2,095

Current portion of deferred revenue

13

1,717

1,975

1,983

Income tax payable

34

1,711

1,549

594

Other financial liabilities

18

313

235

68

Credit facilities utilised

19

909

693

441

Total liabilities

31,236

28,078

27,138

Total equity and liabilities

57,597

57,544

59,146

F–5

Consolidated statement of changes in equity

for the three years ended March 31, 2007

Attributable to equity holders of Telkom

Share-

based

Non-

compen-

distri-

Share

Share

Treasury

sation

butable

Retained

Minority

Total

capital

premium

shares

reserve

reserves earnings

Total

interest

equity

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Balance at April 1, 2004

5,570

2,723

(238)

–

91

13,482

21,628

200

21,828

Total recognised income and

expense for the year

(22)

6,752

6,730

83

6,813

Total income and expense recognised

directly in equity for the year
(refer to note 23)

(22)

(22)

(22)

Fair value adjustment on investment

9

9

9

Realisation of fair value adjustment
on investment

(31)

(31)

(31)

Profit for the year – restated as

per note 2

6,752

6,752

83

6,835

Dividend declared (refer to note 35)

(606)

(606)

(67)

(673)

Transfer to non-distributable reserves

(refer to note 23)

279

(279)

–

–

Foreign currency translation reserve

(net of tax of RNil) – restated as
per note 2 (refer to note 23)

12

12

(1)

11

Purchase of treasury shares

(1,574)

(1,574)

(1,574)

Business combination

(117)

(117)

(117)

Net increase in share-based

compensation reserve (refer to note 22)

68

68

68

Acquisition of subsidiary

(refer to note 36)

–

5

5

Balance at March 31, 2005

5,570

2,723

(1,812)

68

360

19,232

26,141

220

26,361

Total recognised income and

expense – Profit for the year
– restated as per note 2

9,189

9,189

139

9,328

Dividend declared (refer to note 35)

(4,801)

(4,801)

(78)

(4,879)

Transfer to non-distributable reserves

(refer to note 23)

716

(716)

–

–

Foreign currency translation reserve

(net of tax of RNil) – restated as
per note 2 (refer to note 23)

52

52

(7)

45

Net increase in share-based

compensation reserve (refer to note 22)

86

86

86

Shares vested and re-issued

(refer to note 22)

3

(3)

–

–

Acquisition of subsidiary

(refer to note 36)

–

27

27

Shares bought back and cancelled

(refer to note 20)

(121)

(1,381)

(1,502)

(1,502)

Balance at March 31, 2006

5,449

1,342

(1,809)

151

1,128

22,904

29,165

301

29,466

Total recognised income and

expense – Profit for the year

8,646

8,646

203

8,849

Dividend declared (refer to note 35)

(4,678)

(4,678)

(166)

(4,844)

Transfer to non-distributable reserves

(refer to note 23)

239

(239)

–

–

Foreign currency translation reserve

(net of tax of R4 million)
(refer to note 23)

46

46

14

60

Net increase in share-based

compensation reserve (refer to note 22)

141

141

141

Shares vested and re-issued

(refer to note 22)

35

(35)

–

–

Acquisition of subsidiaries and

minorities (refer to note 36)

–

(68)

(68)

Shares bought back and cancelled

(refer to note 20)

(120)

(1,342)

(134)

(1,596)

(1,596)

Balance at March 31, 2007

5,329

–

(1,774)

257

1,413

26,499

31,724

284

32,008

F–6

Consolidated cash flow statement

for the three years ended March 31, 2007

2005

2006

2007

Notes

Rm

Rm

Rm

Cash flows from operating activities

15,711

9,506

9,356

Cash receipts from customers

43,561

46,958

50,979

Cash paid to suppliers and employees

(24,939)

(27,234)

(30,459)

Cash generated from operations

32

18,622

19,724

20,520

Interest received

463

482

422

Dividends received

6

14

50

3

Finance charges paid

33

(1,272)

(1,316)

(1,115)

Taxation paid

34

(1,487)

(4,550)

(5,690)

Cash generated from operations before dividend paid

16,340

14,390

14,140

Dividend paid

35

(629)

(4,884)

(4,784)

Cash flows from investing activities

(6,306)

(7,286)

(10,412)

Proceeds on disposal of property, plant and equipment
and intangible assets

37

92

54

Proceeds on disposal of investments

267

493

77

Additions to property, plant and equipment
and intangible assets

(5,880)

(7,396)

(10,037)

Acquisition of subsidiaries and minorities

36

(138)

–

(445)

Additions to other investments

(592)

(475)

(61)

Cash flows from financing activities

(9,897)

(258)

(2,920)

Shares bought back and cancelled

–

(1,502)

(1,596)

Loans raised

1,157

4,123

5,624

Loans repaid

(5,027)

(7,399)

(6,922)

Purchase of treasury shares

(1,710)

–

–

Finance lease capital repaid

(13)

(24)

(37)

(Increase)/decrease in net financial assets

(4,304)

4,544

11

Net (decrease)/increase in cash and cash equivalents

(492)

1,962

(3,976)

Net cash and cash equivalents at beginning of the year

2,796

2,301

4,255

Effect of foreign exchange rate differences

(3)

(8)

29

Net cash and cash equivalents at end of the year

19

2,301

4,255

308

Comparatives

The line items on the detail note disclosure for 2005 and 2006 have been restated due to the

adoption of IAS21 (revised). This has, however, not had any impact on the face of the cash flow
statement (refer to note 2).

F–7

Notes to the consolidated annual financial statements

for the three years ended March 31, 2007

1.    Corporate information

Telkom SA Limited (‘Telkom’) is a company incorporated and domiciled in the Republic of South

Africa (‘South Africa’) whose shares are publicly traded. The Company, its subsidiaries and joint
venture (‘the Group’) is the leading provider of fixed-line voice and data communication services in
South Africa and mobile communication services through the 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;

• e-commerce, including internet access service provider, application service provider, hosting,

data storage, e-mail and security services;

• directory and wireless data services through our TDS Directory Operations Group and Swiftnet

subsidiaries, respectively; and

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

and handset sales through Vodacom.

2. Significant accounting policies

Basis of preparation

The consolidated annual 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 the amendments to IAS21 (revised) and IAS39 (revised) and IFRIC4

and IFRIC7 with effect from April 1, 2006; and

• the Group has adopted an accounting policy regarding the acquisition of minority interests in

subsidiary companies in terms of IAS8.

Adoption of amendments to standards and new interpretations

The following changes to the Group accounting policies have been made in adopting the revised

standards and interpretations for the year under review:

F–8

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)

Adoption of amendments to standards and new interpretations (continued)

Amendment to IAS21 The Effects of Changes in Foreign Exchange Rates (revised)

The amendment, Net Investment in a Foreign Operation, requires that even if a monetary item

(which is part of a net investment) is denominated in a functional currency which is neither that of the
reporting entity nor that of the 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 functional currency of the reporting entity or that of the foreign operation. The impact of this
amendment on previously reported results is a movement from Retained earnings to Non-distributable
reserves of R8 million in 2006 (2005: R1 million) and an increase in Profit attributable to equity
holders of Telkom of R7 million in 2006 (2005: R1 million).

Amendments to IAS39 Financial Instruments: Recognition and Measurement (revised)

The revision of IAS39 relates to three amendments to the existing standard.

The first amendment requires that issuers of financial guarantee contracts recognise a financial

liability arising from the issuance of a financial guarantee. 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 has not had a material
impact on the Group’s financial statements.

The second amendment deals with cash flow hedge accounting for forecast intragroup

transactions. For hedge accounting purposes, only assets, liabilities, firm commitments or highly
probable forecast transactions that involve a party external to the entity can be designated as hedged
items. The foreign currency risk of a highly probable forecast intragroup transaction may qualify as a
hedged item 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 profit or
loss. This amendment has not had 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 third amendment introduces additional requirements to be met before the entity can choose

to designate some of its financial assets or financial liabilities as ‘at fair value through profit or loss’.
The amendment has not had 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’.

IFRIC4 Determining whether an Arrangement contains a Lease

IFRIC4 requires that when an entity enters into a service arrangement as a supplier or a customer

and the supply of the service depends on the use of a specific asset, or the right to control the use of
the specific asset is conveyed to the customer, the arrangement should be assessed to determine
whether it contains a lease. Once it has been concluded that an arrangement contains a lease, it
should be assessed against criteria in IAS17 to determine if the arrangement should be recognised as
a finance lease or an operating lease. Where an entity does not apply IFRIC4 retrospectively, IFRIC4
requires the entity 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 beginning of that period. The effect of the application of this interpretation was not considered
material for prior periods, and therefore all cumulative adjustments were made in the current year.

F–9

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2.    Significant accounting policies (continued)

Adoption of amendments to standards and new interpretations (continued)

IFRIC4 Determining whether an Arrangement contains a Lease (continued)

The cumulative impact of this interpretation for the year ended March 31, 2007 was an increase

in Profit before taxation of R83 million and an increase in Taxation of R24 million which resulted
in an increase in Profit for the year of R59 million. It further resulted in a finance lease receivable of
R207 million which was recognised in the Balance sheet at March 31, 2007 in this regard.

IFRIC7 Applying the Restatement Approach under IAS29 Financial Reporting in
Hyperinflationary Economies

The IFRIC provides guidance on the measuring unit at the balance sheet date. It also provides

guidance on how to account for the deferred tax opening balance in restated financial statements.
The interpretation does not have a material impact since the Group does not operate in a
hyperinflationary economy and does not have material investments in hyperinflationary economies.

New accounting policy

Acquisition of minorities

The Group has adopted an accounting policy regarding the acquisition of minority interests in

subsidiary companies in terms of IAS8 paragraph 10. Minority shareholders are treated as equity
participants and, therefore, all acquisitions of minority interests by the Group in subsidiary companies
are accounted for using the parent entity extension method. Under this method, the assets and
liabilities of the subsidiary are not restated to reflect their fair values at the date of the acquisition. The
difference between the purchase price and the minorities’ share of the assets and liabilities reflected
within the consolidated balance sheet at the date of the acquisition is recorded as goodwill. The
adoption of this policy has not had any impact on previously reported results.

Accounting pronouncements not yet adopted

The Group has not applied the following standards, interpretations and amendments that have

been issued and are not yet effective:

IAS1 Presentation of Financial Statements (amended)

This amendment is effective for annual periods beginning on or after January 1, 2007. As a result

of the development of IFRS7 Financial Instruments: Disclosures, IAS1 has been amended to require
the disclosure of 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. The impact of this
standard is that it requires more extensive disclosure of the Group’s capital management.

IFRS7 Financial Instruments: Disclosures

An entity shall apply this standard for annual periods beginning on or after January 1, 2007.

IFRS7 adds certain new disclosures to those currently required by IAS32. It also replaces the
disclosures currently required by IAS30. All financial instruments disclosures will now be in terms of
IFRS7. The remaining parts of IAS32 now only deal with the classification and presentation of
financial instruments. One of the main disclosure requirements added by IFRS7 is that an entity must
group its financial instruments into classes of similar instruments, and when disclosures are required,
make disclosures by class. IFRS7 also requires information about the significance of financial
instruments and information about the nature and extent of risks arising from financial instruments.
The impact of this standard will be to expand on certain disclosures relating to financial instruments
and will require additional disclosures not currently disclosed.

F–10

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)

Accounting pronouncements not yet adopted (continued)

IFRS8 Operating Segments

An entity shall apply this standard for annual periods beginning on or after January 1, 2009.

IFRS8 sets out the requirements for disclosure of information about an entity’s operating segments
and also about the entity’s products and services, the geographical areas in which it operates, and its
major customers. IFRS8 further requires the entity to disclose factors used to identify the entity’s
operating segments and type of products and services from which each operating segment derives its
revenues. IFRS8 will require segments to be identified based on the information that management
uses to make decisions about operating matters. The possible impact of this standard will be to
expand on disclosures relating to operating segments, products and services.

IFRIC8 Scope of IFRS2

The interpretation is effective for annual periods beginning on or after May 1, 2006. IFRIC8

clarifies that IFRS2 applies to transactions in which an entity receives goods or services as
consideration for equity instruments of the entity. This includes transactions in which the entity 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 equity as a purchase consideration for the transaction, other than those paid to employees in
share-based payment transactions (refer to note 30).

IFRIC9 Reassessment of Embedded Derivatives

The interpretation is effective for annual periods beginning on or after June 1, 2006. IFRIC9

clarifies that an entity is required to separate an embedded derivative from the host contract and
account for it as a derivative if and only if the entity first becomes a party to the contract. It further
clarifies that reassessment is only allowed when there is a change in the terms of the contract which
significantly modifies the cash flows that would otherwise be required under the contract. The possible
impact of this interpretation is currently being evaluated.

IFRIC10 Interim Financial Reporting and Impairment

The interpretation is effective for annual periods beginning on or after November 1, 2006. IFRIC10

clarifies that an entity should not reverse an impairment loss recognised in a previous interim period in
respect of goodwill or an investment in either an equity instrument classified as available for sale or
financial asset carried at cost. The possible impact of this interpretation is not expected to be material.

IFRIC11 IFRS2 – Group and Treasury Share Transactions

The interpretation is effective for annual periods beginning on or after March 1, 2007. The IFRIC

clarifies that regardless of whether the entity chooses or is required to buy equity instruments from
another party to satisfy its obligations to its employees under the share-based payment arrangement
by delivery of its own shares, the transaction should be accounted as equity settled. This
interpretation also applies regardless of whether the employee’s rights to the equity instruments were
granted by the entity itself or by its shareholders or was settled by the entity itself or by its
shareholders. The possible impact of this interpretation is currently being evaluated.

F–11

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2.    Significant accounting policies (continued)

Accounting pronouncements not yet adopted (continued)

IFRIC12 Service Concession Arrangements

This interpretation is effective for annual periods beginning on or after January 1, 2008. The

interpretation clarifies that contractual service arrangements do not convey the right to control the use
of the public service infrastructure to the operator, instead the operator acts as a service provider. The
infrastructure under these arrangements shall therefore not be recognised as the property, plant and
equipment of the operator. The operator shall recognise and measure revenue in accordance with
IAS11 and IAS18 for the services it performs. The operator should recognise the asset as an
intangible asset for the right (or licence) it receives to charge the users of the public service or as a
financial asset when it has the right to receive cash from the grantor for construction services. The
IFRIC provides guidance on the recognition and measurement of the various aspects of service
concession arrangements from an operator’s perspective. The possible impact of this interpretation is
currently not expected to be material as the Group has not received service concession grants.

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 may ultimately 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 as follows:

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 categories of property, plant, equipment and intangible assets. Due to the rapid
technological advancement in the telecommunications industry as well as Telkom’s plan to migrate to
a Next Generation Network over the next few years, the estimation of useful lives could differ
significantly on an annual basis due to unexpected changes in the roll-out strategy. 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 whether the
assets will be sold or used to the end of their useful lives and what their condition will be like at that
time.

For intangible 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.

F–12

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)

Significant accounting judgements and estimates (continued)

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 a 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 asset component,
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.

Asset retirement obligations

Management judgement is exercised when determining whether an asset retirement obligation

exists, and in determining the present value of expected future cash flows and discount rate when the
obligation to dismantle or restore the site arises, as well as the estimated useful life of the related
asset.

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 the decline in fair value is
prolonged, reliance is placed 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 recognised for estimated losses firstly on an individually significant trade

receivable and secondly on a group of trade receivables with similar credit risk that are assessed to
be impaired based on objective evidence as a result of one or more events that occurred during the
reporting period. For those customers which have defaulted, management makes judgements based
on an assessment of their ability to make payments based on credit worthiness and historical write-off
experience. Should the financial condition of the customers change, actual write-offs could differ
significantly from the impairment.

F–13

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2.    Significant accounting policies (continued)

Significant accounting judgements and estimates (continued)

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
realisation 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 required in recognising and measuring
deferred taxation balances more challenging. The resolution of taxation issues is not always within the
control of the Group and it is often dependent 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 consolidated income statement and the current taxation payments.

Group entities are regularly subject to evaluation, by the relevant tax authorities, of its historical

tax filings and in connection with such reviews, disputes can arise with the taxing authorities over the
interpretation or application of certain tax rules to the business of the relevant Group entities. 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.

Deferred taxation rate

Management makes judgements on the tax rate applicable based on the Group’s expectations at

balance sheet date on how the asset is expected to be recovered or the liability is expected to be
settled.

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 30. 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.

F–14

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)

Significant accounting judgements and estimates (continued)

Employee benefits (continued)

The discount rate reflects the average timing of the estimated defined benefit payments. The

discount rate is based on long term South African government bonds with the longest maturity period
as reported by the Bond Exchange of South Africa. The discount rate is expected to follow the trend of
inflation.

The overall expected rate of return on assets is determined based on the market prices prevailing

at that date, applicable to the period over which the obligation is to be settled.

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 30. The assumptions include employee turnover
percentages and whether specified performance criteria will be met. Changes to these assumptions
could affect the amount of expense ultimately recognised in the financial statements.

Management judgement is required when recognising and measuring provisions and when

measuring contingent liabilities as set out in notes 29 and 39 respectively. 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 recognise provisions for claims arising from
litigation when the occurrence of the claim 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.

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.

F–15

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2.    Significant accounting policies (continued)

Significant accounting judgements and estimates (continued)

Dealer incentives (continued)

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 prepaid 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 recognised based on the same
recognition criteria of the individual deliverable at the time the product or service is delivered.

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 recognised 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 recognised 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.

F–16

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)

Summary of significant accounting policies

Basis of consolidation

The consolidated financial statements include those of Telkom, its foreign and domestic

subsidiaries and joint ventures. Subsidiaries are those entities over which 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. Consolidation takes place
from the date that effective control passes to the Group.

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.

Minority shareholders are treated as equity participants and, therefore, all acquisitions of minority

interest by the Group in subsidiary companies are accounted for using the parent entity extension
method. Under this method, the assets and liabilities of the subsidiary are not restated to reflect their
fair values at the date of the acquisition. The difference between the purchase price and the minority
interest’s share of the assets and liabilities reflected within the consolidated balance sheet at the date
of the acquisition is therefore reflected as goodwill.

Minority interests are separately presented in the consolidated financial statements.

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 fair value of fixed or
determinable consideration that has been received or is receivable.

Revenue for services is measured 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.

F–17

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2.    Significant accounting policies (continued)

Summary of significant accounting policies (continued)

Operating revenue (continued)

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 by the customer.

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.

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 as the

traffic flow 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.

F–18

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)

Summary of significant accounting policies (continued)

Operating revenue (continued)

Directory services

Revenue is recognised when paper directories are released for distribution, as the significant risks

and rewards of ownership have been transferred to the buyer. Electronic directories’ revenue is
recognised on a monthly basis, as earned.

Other

Other revenue is recognised when the economic benefit flows to the Group and the earnings

process is complete.

Mobile

The Vodacom 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.

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.

Vodacom revenue from the handset is recognised when the product is delivered limited to the

amount of cash received. 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.

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 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.

F–19

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2.    Significant accounting policies (continued)

Summary of significant accounting policies (continued)

Operating revenue (continued)

Prepaid products (continued)

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.

Data revenue

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 amounts
billed to the customer or the amount receivable by the Group as commission for facilitating the
service.

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.

Interest on debtors’ accounts

Interest is raised on overdue accounts on a time proportionate basis and recognised in the

income statement.

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 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.

Investment income

Dividends from investments are recognised on the date that the Group is entitled to the dividend.

Interest is recognised on a time proportionate basis taking into account the principal amount
outstanding and the effective interest rate.

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 to the taxation authorities, using taxation rates and laws that have been enacted or substantively
enacted by the balance sheet date.

F–20

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)

Summary of significant accounting policies (continued)

Deferred taxation

Deferred taxation is accounted for using the balance sheet liability method on all temporary

differences at the balance sheet date between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes.

Deferred tax is not provided on the initial recognition of goodwill or 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.

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. The carrying amount of deferred tax assets is reviewed at each
balance sheet date and 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.

Deferred tax relating to items recognised directly in equity is recognised in equity and not in the

income statement.

Deferred income tax liabilities are recognised for all taxable temporary differences, except:

• Where the deferred income tax liability arises from the initial recognition of goodwill or of an

asset or liability in a transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss; and

• In respect of taxable temporary differences associated with investments in subsidiaries,

associates and interests in joint ventures, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary differences will not reverse in
the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry forward

of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be
available against which the deductible temporary differences, and the carry forward of unused tax
credits and unused tax losses can be utilised except:

• Where the deferred income tax asset relating to the deductible temporary differences arises

from the initial recognition of an asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither the accounting profit nor taxable
profit or loss; and

• In respect of deductible temporary differences associated with investments in subsidiaries,

associates and interests in joint ventures, deferred income tax assets are recognised only to the
extent that it is probable that temporary differences will reverse in the foreseeable future and
taxable profit will be available against which the temporary differences can be utilised.

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.

F–21

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2.    Significant accounting policies (continued)

Summary of significant accounting policies (continued)

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.

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.

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 component 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 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 at balance sheet date. 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 at balance sheet date.

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.

F–22

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)

Summary of significant accounting policies (continued)

Property, plant and equipment (continued)

The estimated useful lives assigned to groups of property, plant and equipment are:

Years

Freehold buildings

15 to 40

Leasehold buildings

7 to 25

Network equipment

Cables

20 to 40

Switching equipment

5 to 18

Transmission equipment

5 to 18

Other

2 to 20

Support equipment

8 to 13

Furniture and office equipment

4 to 15

Data processing equipment and software

5 to 10

Other

2 to 15

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.

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

At initial recognition acquired intangible assets are recognised at their purchase price, including

import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. The
recognised cost includes any directly attributable costs for preparing the asset for its intended use.
Internally generated intangible assets are recognised at cost comprising all directly attributable costs
necessary to create and prepare the asset to be capable of operating in the manner intended by
management. Licences, software, trademarks, copyrights and other intangible assets are carried 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.

F–23

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2.    Significant accounting policies (continued)

Summary of significant accounting policies (continued)

Intangible assets (continued)

Licences, software, trademarks, copyrights and other (continued)

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. Due to the nature of the
asset 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 asset’s 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 at balance sheet
date.

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 intangible
assets 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 assets 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

5 to 10

Trademarks, copyrights and other

3 to 15

Asset retirement obligations

Asset retirement obligations related to property, plant and equipment and intangible assets are

recognised 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 and fair value
movements. 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 or loss.

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 exceed the carrying amount of the assets, the excess is recognised
immediately in profit and loss.

F–24

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)

Summary of significant accounting policies (continued)

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 costs to sell.

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 unit’s 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 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. Impairment on goodwill is not reversed.

Repairs and maintenance

The Group expenses all costs associated with repairs and maintenance, unless it is probable that

such costs would result in increased 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.

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.

F–25

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2.    Significant accounting policies (continued)

Summary of significant accounting policies (continued)

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.

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.

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.

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 future. Derivatives not designated as hedges are also classified as
held for trading. On remeasurement to fair value the gains or losses on held for trading financial
assets are recognised in net finance charges and fair value movements 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.

F–26

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)
Summary of significant accounting policies (continued)

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. Equity instruments are
all treated as available-for-sale financial instruments. 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, except financial

guarantee contracts and financial liabilities held at fair value through profit or loss, including trade and
other payables, at amortised cost using the effective interest method. 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 and fair value movements for the year. Financial liabilities are
classified as held for trading if they are acquired for the purpose of settling in the near term.

Financial guarantee contracts

Financial guarantee contracts are recognised initially at fair value and subsequently at the higher

of the amount determined in accordance with IAS37 Provisions, Contingent Liabilities and Contingent
Assets or the amount initially recognised less, when appropriate, cumulative amortisation, recognised
in accordance with IAS18 Revenue.

Listed investments

Listed investments classified as ‘available for sale’, 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 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 and fair value movements. 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.

F–27

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2.    Significant accounting policies (continued)

Summary of significant accounting policies (continued)

Derivative financial instruments (continued)

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.

Repurchase agreements

Securities sold under repurchase agreements are not derecognised. These transactions are

treated as collateralised arrangements and classified as non-trading financial 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 method.

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, financial assets are transferred or financial
liabilities are extinguished.

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 and fair value movements 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 and fair value movements for the year.

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 and fair value movements.

Impairment of financial assets

At each balance sheet date an assessment is made of whether there are any indicators of

impairment of a financial asset or a group of financial assets based on observable data about one or
more loss events that occurred after the initial recognition of the asset or the group of assets. 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.

F–28

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)

Summary of significant accounting policies (continued)

Impairment of financial assets (continued)

If, in a subsequent period, the amount of the impairment loss for financial assets decreases and

the decrease can be related objectively to an event occurring after the impairment was recognised,
the previously recognised impairment loss is reversed except for those financial assets classified as
available-for-sale and carried at cost that are not 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. Reversals in respect of equity instruments classified as
available-for-sale are not recognised in the income statement. Reversals of impairment losses on debt
instruments classified as available-for-sale are reversed through the income statement, if the increase
in fair value of the instrument can be objectively related to an event occurring after the impairment
loss was recognised.

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 whichever occurs first. Exchange differences on
the settlement or translation of monetary assets and liabilities are included in finance charges and fair
value movements in the period in which they arise.

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 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.

All gains and losses on the translation of equity loans to foreign operations that are intended to be

permanent whether they are denominated in one of the entities functional currencies or in a third
currency, are recognised in equity.

Goodwill and intangible assets 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.

All foreign exchange gains and losses on an investment in a foreign operation are now recognised

in equity.

Treasury shares

Where the Group 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 and loss on the
purchase, sale, issue or cancellation of the Group’s own equity instruments. Such shares are not
remeasured for changes in fair value.

F–29

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2.    Significant accounting policies (continued)

Summary of significant accounting policies (continued)

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
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.

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.

Leases

A lease is classified as a finance lease if it transfers substantially all the risks and rewards

incidental to ownership. All other leases are classified as operating leases.

Where the Group enters into a service agreement as a supplier or a customer that depends on

the use of a specific asset, and conveys the right to control the use of the specific asset, the
arrangement is assessed to determine whether it contains a lease. Once it has been concluded that
an arrangement contains a lease, it is assessed against the criteria in IAS17 to determine if the
arrangement should be recognised as a finance lease or operating lease.

The land and buildings elements of a lease of land and buildings are considered separately for

the purposes of lease classification unless it is impracticable to do so.

Initial direct costs incurred in negotiating and securing finance lease arrangements are recognised

as an expense when the profit on sale is recognised.

Lessee

Operating lease payments are recognised in the income statement on a straight-line basis over

the lease term.

Assets acquired in terms of finance leases are capitalised at the lower of fair value or the 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.

F–30

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)

Summary of significant accounting policies (continued)

Leases (continued)

Lessor

Operating lease revenue is recognised in the income statement on a straight-line basis over the

lease term.

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.

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 the
related plan assets. The amount of any surplus recognised and reflected as deferred expenses 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, except gains and losses related
to the pensioners in the Telkom Retirement Fund, or unless the standard requires faster recognition.
For the Telkom Retirement Fund pensioners, the cumulative unrecognised actuarial gains and losses
in excess of the 10% corridor at the beginning of the year are recognised immediately.

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.

F–31

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2.    Significant accounting policies (continued)

Summary of significant accounting policies (continued)

Employee benefits (continued)

Leave benefits

Annual leave is provided for over the period that the leave accrues and is subject to a cap of

22 days.

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. In the case of an offer made to encourage voluntary
redundancy, the measurement of termination benefits is based on the number of employees expected
to accept the offer.

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 or intangible asset 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.

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.

F–32

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2. Significant accounting policies (continued)
Summary of significant accounting policies (continued)
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 also have
businesses in certain other African countries. The basis of segment reporting is representative of the
Group’s internal reporting structure. The geographical location of the Group’s customers has been
identified as the secondary basis of segment reporting.

The Fixed-line business segment provides local telephony and data, 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.

2005

2006

2007

Rm

Rm

Rm

3. Revenue
3.1 Total revenue

43,696

48,260

52,157

Operating revenue

43,160

47,625

51,619

Other income (excluding profit on disposal of property,

plant and equipment and investments, refer to note 4)

186

238

303

Investment income (refer to note 6)

350

397

235

3.2 Operating revenue

43,160

47,625

51,619

Fixed-line

30,888

32,039

32,540

Mobile

12,272

15,586

19,079

Fixed-line

30,888

32,039

32,540

Subscriptions, connections and other usage

5,385

5,803

6,286

Traffic

17,723

17,534

16,738

Domestic (local and long distance)

9,286

8,886

8,104

Fixed-to-mobile

7,302

7,647

7,646

International (outgoing)

1,135

1,001

988

Interconnection

1,320

1,433

1,418

Data

5,484

6,223

6,973

Directories and other

976

1,046

1,125

4. Other income

280

480

384

Other income (included in Total revenue, refer to note 3)

186

238

303

Interest received from debtors

129

136

190

Sundry income

57

102

113

Profit on disposal of property, plant and equipment

and intangible assets

30

79

29

Profit on disposal of investment and subsidiary

64

163

52

Sundry income includes rental received for the partial

sub-letting of commercial properties (refer to note 38).

F–33

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

5.

Operating expenses

Operating expenses comprise:

5.1   Employee expenses

8,111

7,489

8,454

Salaries and wages

5,573

5,566

6,362

Medical aid contributions

406

371

385

Retirement contributions

474

435

496

Post-retirement pension and retirement fund (refer to note 30)

12

(58)

33

Current service cost

3

4

5

Interest cost

320

364

329

Expected return on plan assets

(360)

(454)

(508)

Actuarial loss/(gain)

34

78

(136)

Settlement loss

–

–

21

Asset limitation

15

(50)

322

Post-retirement medical aid (refer to note 29 and 30)

182

361

330

Current service cost

27

48

83

Interest cost

249

249

286

Expected return on plan asset

–

–

(188)

Actuarial loss

–

63

149

Settlement loss

18

7

–

Curtailment gain

(112)

(6)

–

Telephone rebates (refer to note 29 and 30)

15

19

104

Current service cost

2

3

4

Interest cost

16

16

19

Past service cost

–

–

76

Actuarial loss

–

–

5

Curtailment gain

(3)

–

–

Share-based compensation expense (refer to note 30 and 22)

68

127

141

Other benefits

992

1,200

1,275

Workforce reduction expense

961

88

24

Employee expenses capitalised

(572)

(620)

(696)

Post-retirement pension and retirement fund

Settlement loss

The settlement loss in the current year relates to a settlement event that occurred in the Telkom

Pension Fund whereby 106 members were transferred to the Telkom Retirement Fund. The portion of
unrecognised cumulative actuarial gains and losses that relates to the settlement event has also been
recognised in the current financial year.

F–34

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

5. Operating expenses (continued)
Post-retirement medical aid and telephone rebates

Expected return on plan asset

During the current year the medical aid cell captive annuity policy qualified as a plan asset.

The expected return on this asset is therefore determined from that date (refer to note 12).

Curtailment gain

The curtailment gain in 2005 resulted from a reduction in the number of participants covered by

the post-retirement medical aid and telephone rebates.

Past service cost

The past service cost recognised in the current year relates to an

increase in the telephone rebate amount provided to pensioners
during the year. This has resulted in an increase in the Group’s
defined benefit obligation for telephone rebates. The past service
cost for pensioners and active members aged over 55 years has
been recognised immediately, as the increased benefit, which has
already vested, relates to employee service provided in prior periods.

Other benefits

Other benefits include skills development, annual leave, performance

incentive and service bonuses.

2005

2006

2007

Rm

Rm

Rm

5.2 Payments to other operators

6,132

6,826

7,590

Payments to other network operators consist of expenses in

respect of interconnection with other network operators.

5.3 Selling, general and administrative expenses

8,824

10,273

12,902

Selling and administrative expenses

5,863

7,240

9,248

Maintenance

1,993

1,928

2,286

Marketing

740

899

1,215

Bad debts

228

206

153

Included in the current year’s selling and administrative expenses

is an amount of R510 million provided for the dispute with Telcordia
as discussed in note 39.

Change in comparatives

Maintenance has increased by R334 million and selling and

administrative expenses has decreased by R334 million in 2006 due
to the reclassification of maintenance expenses.

F–35

Notes to the consolidated annual financial statements

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

5.

Operating expenses (continued)

5.4   Services rendered

2,021

2,114

2,291

Facilities and property management

1,069

1,110

1,142

Consultancy services

159

182

266

Security and other

759

772

821

Auditors’ remuneration

34

50

62

Audit services

31

38

61

Company auditors

19

28

48

Current year

19

26

47

Prior year underprovision

–

2

1

Other auditors – current year

12

10

13

Audit related services

3

9

–

Company auditors – current year

–

6

–

Other auditors

3

3

–

Other services

–

3

1

Audit related services in the prior years mainly included the services

performed in preparing for compliance with the requirements of the
Sarbanes-Oxley Act of the United States of America. Fees for audit
services increased in the current year, as it includes the fees
incurred for the Section 404 of the Sarbanes-Oxley Act audit of
internal controls over financial reporting.

5.5   Operating leases

803

850

981

Buildings

204

221

284

Transmission and data lines

16

42

63

Equipment

81

78

80

Vehicles

502

509

554

5.6   Depreciation, amortisation, impairment and write-offs

6,288

5,876

5,315

Depreciation of property, plant and equipment (refer to note 10)

5,442

5,154

4,483

Amortisation of intangible assets (refer to note 11)

502

560

536

Impairment of intangible assets (refer to note 11)

49

–

–

Impairment of property, plant and equipment (refer to note 10)

85

–

12

Reversal of impairment of property, plant and equipment

(refer to note 10)

–

(26)

–

Write-offs of property, plant and equipment and intangible assets

(refer to note 10 and 11)

210

188

284

In recognition of the changed usage patterns of certain items of

property, plant and equipment and intangible assets, the Group
reviewed their remaining useful lives as at March 31, 2006.

F–36

Notes to the consolidated annual financial statements

for the three years ended March 31, 2007

5.

Operating expenses (continued)

5.6 Depreciation, amortisation, impairment and write-offs (continued)

The assets affected were certain items included in Network

equipment, Support equipment, Furniture and office equipment,
Data processing equipment and software, Other equipment and
Intangible assets. The revised estimated useful lives of these assets
as set out below, resulted in a decrease of the current year
depreciation and amortisation charges of R983 million.

Previous life

Revised life

Years

Years

Property, plant and equipment

Network equipment

Cables

15 – 40

20 – 40

Switching equipment

5 – 15

5 – 18

Transmission equipment

5 – 15

5 – 18

Other

2 – 25

2 – 20

Support equipment

8 – 10

8 – 13

Furniture and office equipment

6 – 10

4 – 15

Data processing equipment and software

5 – 7

5 – 10

Other

2 – 10

2 – 15

Intangible assets

Subscriber bases

3 – 5

3 – 8

Software

5 – 7

5 – 10

2005

2006

2007

Rm

Rm

Rm

6. Investment income

350

397

235

Interest received

336

347

232

Dividends received from investments

14

50

3

7. Finance charges and fair value movements

1,694

1,223

1,125

Interest

1,686

1,346

1,327

Local debt

1,515

1,506

1,488

Foreign debt

281

9

–

Less: Finance costs capitalised

(110)

(169)

(161)

Foreign exchange gains and losses and fair value movement

8

(123)

(202)

Foreign exchange losses

111

47

246

Fair value adjustments on derivative instruments

(103)

(170)

(448)

Capitalisation rate

15.23%

13.91%

14.77%

Change in comparatives

Foreign exchange losses have decreased by R10 million in 2006

(2005: R1 million) due to the change in Group policy on net
investment in a foreign operation (refer to note 2).

F–37

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

8.    Taxation

3,082

4,523

4,731

South African normal company taxation

2,493

3,763

3,528

Current tax

2,497

3,754

3,564

(Overprovision)/underprovision for prior year

(4)

9

(36)

Deferred taxation

345

173

516

Temporary differences – normal company taxation

606

229

584

Temporary difference – Secondary Taxation on Companies
(‘STC’) tax credits (raised)/utilised

(151)

51

(69)

Change in tax rate from 30% to 29%

(37)

–

–

(Overprovision)/underprovision for prior year

(73)

(107)

1

Secondary Taxation on Companies

238

585

670

Foreign taxation

6

2

17

The net deferred taxation expense results mainly from the extension

of useful lives, offset slightly by an increase in the STC tax credits.

%

%

%

Reconciliation of taxation rate
Effective rate

31.1

32.7

34.8

South African normal rate of taxation

30.0

29.0

29.0

Adjusted for:

1.1

3.7

5.8

Change in tax rate from 30% to 29%

(0.4)

–

–

Exempt income

(1.0)

(1.3)

(0.2)

Disallowable expenditure

2.0

0.9

1.2

Tax losses not utilised

0.3

0.6

–

STC tax credits (raised)/utilised

(1.5)

0.4

(0.3)

STC tax charge

2.4

4.2

4.9

Capital gains tax

–

–

0.8

Net overprovision for prior year

(0.6)

(1.1)

(0.5)

Utilisation of assessed loss

(0.1)

–

(0.1)

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.

Where required, provisions have been made or adjusted for anticipated obligations related to

various ongoing investigations by tax authorities on indirect taxes. The provisions made include
estimates of anticipated interest and penalties where appropriate. As of March 31, 2007, the Group
has accrued for tax obligations in the amount of RNil, (2006: R199 million and 2005: R262 million).
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.

F–38

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

8. Taxation (continued)

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.

Change in comparatives

Taxation has increased by R3 million in 2006 (2005: RNil) due to the change in Group policy on

net investment in a foreign operation (refer to note 2).

2005

2006

2007

Rm

Rm

Rm

9. Earnings per share

Basic earnings per share (cents)

1,246.9

1,746.1

1,681.0

The calculation of earnings per share is based on

profit attributable to equity holders of Telkom for the
year of R8,646 million (2006: R9,189 million; 2005:
R6,752 million) and 514,341,282 (2006: 526,271,093;
2005: 541,498,547) weighted average number of
ordinary shares in issue.

Diluted earnings per share (cents)

1,244.5

1,736.6

1,676.3

The calculation of diluted earnings per share is based

on earnings for the year of R8,646 million
(2006: R9,189 million; 2005: R6,752 million) and
515,763,579 diluted weighted average number of
ordinary shares (2006: 529,152,318; 2005: 542,537,579).
The 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)*

1,279.2

1,728.6

1,710.7

The calculation of headline earnings per share is

based on headline earnings of R8,799 million
(2006: R9,097 million; 2005: R6,927 million) and
514,341,282 (2006: 526,271,093; 2005: 541,498,547)
weighted average number of ordinary shares in issue.

Diluted headline earnings per share (cents)*

1,276.8

1,719.2

1,706.0

The calculation of diluted headline earnings per share

is based on headline earnings of R8,799 million
(2006: R9,097 million; 2005: R6,927 million) and
515,763,579 (2006: 529,152,318; 2005: 542,537,579)
diluted weighted average number of ordinary shares
in issue. The 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.

F–39

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

9.    Earnings per share (continued)

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 shares bought back

–

(7,211,710)

(7,442,253)

Weighted average number of treasury shares

(15,533,272)     (23,536,579)

(23,086,074)

Weighted average number of shares prior to vesting

–

(12,437)

(75,290)

Weighted average number of shares outstanding

541,498,547     526,271,093

514,341,282

Reconciliation between earnings and headline earnings:
Earnings as reported

6,752

9,189

8,646

Adjustments:
Profit on disposal of investments

(64)

(163)

(52)

Profit on disposal of property, plant and equipment

and intangible assets

(30)

(79)

(29)

Impairment/(reversal of impairment) of property,

plant, equipment and intangible assets

134

(26)

12

Write-offs of property, plant and equipment

210

188

284

Acquisition of subsidiary

–

(35)

–

Tax and minority interest effects

(75)

23

(62)

Headline earnings

6,927

9,097

8,799

Reconciliation of diluted weighted average number
of ordinary shares:

Ordinary shares in issue (refer to note 20)

541,498,547     526,271,093

514,341,282

Expected future vesting of shares

1,039,032

2,881,225

1,422,297

Weighted average number of shares outstanding

542,537,579      529,152,318

515,763,579

Dividend per share (cents)

110.0

900.0

900.0

The calculation of dividend per share is based on dividends of R4,678 million (2006: R4,801 million;

2005: R606 million) declared on June 2, 2006 and 519,711,236 (2006: 533,465,571; 2005:
551,509,083) number of ordinary shares outstanding on the date of dividend declaration. 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 Limited and is not a recognised

measure under IFRS and US GAAP. It has been calculated in accordance with the South African
Institute of Chartered Accountants’ circular issued in this regard.

F–40

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

9. Earnings per share (continued)

Change in comparatives

The amounts for basic, diluted, headline and diluted headline earnings per share for 2006 and

2005 have changed as a result of the change in accounting policy as discussed in note 2. The effect
of the change on previously reported numbers is not material.

2005

2006

2007

Accum-

Accum

Accum

ulated

ulated

ulated

depre-

Carrying

depre-

Carrying

depre-

Carrying

Cost

ciation

value

Cost

ciation

value

Cost

ciation

value

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

10. Property, plant
and equipment

Freehold land and buildings

4,280

(1,615)

2,665

4,510

(1,811)

2,699

4,594

(1,837)

2,757

Leasehold buildings

869

(251)

618

940

(322)

618

926

(362)

564

Network equipment

58,318

(29,982)

28,336

59,418

(30,477)

28,941

63,003

(31,820)

31,183

Support equipment

3,790

(2,435)

1,355

3,740

(2,419)

1,321

4,045

(2,436)

1,609

Furniture and office equipment

456

(301)

155

469

(335)

134

536

(366)

170

Data processing equipment

and software

5,288

(3,253)

2,035

5,612

(3,530)

2,082

5,836

(3,707)

2,129

Under construction

1,084

–

1,084

1,320

–

1,320

2,536

–

2,536

Other

585

(385)

200

552

(393)

159

860

(554)

306

74,670

(38,222)

36,448

76,561

(39,287)

37,274

82,336

(41,082)

41,254

A major portion of this capital expenditure relates to the expansion of existing networks and

services. An extensive build program with focus on Next Generation Network technologies has
resulted in an increase in property, plant and equipment additions which is expected to continue over
the next few years.

Fully depreciated assets with a cost of R1,225 million (2006: R3,724 million; 2005: R1,382 million)

were derecognised in the 2007 financial year. This has reduced both the cost price and accumulated
depreciation of property, plant and equipment.

The carrying amounts of property, plant and equipment can be reconciled as follows:

Impair-

Carrying

Foreign

ment,

Carrying

value at

Business

currency write-offs

value at

beginning combi-

trans-

and

Depre-

end

of

of year

Additions

nations

Transfers

lation

reversals Disposals

ciation

year

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

2007
Freehold land and buildings

2,699

209

–

–

2

17

(1)

(169)

2,757

Leasehold buildings

618

–

–

1

–

–

(14)

(41)

564

Network equipment

28,941

5,154

1

849

240

(199)

(270)

(3,533)

31,183

Support equipment

1,321

442

–

109

2

(15)

–

(250)

1,609

Furniture and office equipment

134

51

3

8

1

–

–

(27)

170

Data processing equipment

and software

2,082

466

12

(36)

8

(10)

(2)

(391)

2,129

Under construction

1,320

2,165

–

(912)

–

(37)

–

–

2,536

Other

159

161

–

58

4

(1)

(3)

(72)

306

37,274

8,648

16

77

257

(245)

(290)

(4,483)

41,254

F–41

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

10.    Property, plant
and equipment (continued)

Impair-

Carrying

Foreign

ment,

Carrying

value at

Business

currency write-offs

value at

beginning combi-

trans-

and

Depre-

end

of

of year

Additions

nations

Transfers

lation

reversals Disposals

ciation

year

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

153

(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

1,584

29

(194)

(6)

(4,160)

28,336

Support equipment

1,421

95

22

109

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

(21)

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

The average time taken to construct assets is 83.37 days.

Full details of land and buildings are available for inspection at the registered offices of the Group.

No temporary idle property, plant and equipment is included in the amounts disclosed above.

In March 2006 the Group started a process of determining whether an asset which incorporates

both a tangible and an intangible element, should be recognised as tangible or intangible assets,
based on management judgement and on facts available and the significance of each element to the
total value of the asset. This ongoing process has resulted in further assets with a carrying value to
the net amount of R77 million being reclassified from intangible assets to property, plant and
equipment in the current year.

An amount of R240 million under property, plant and equipment disposals relates to the

reclassification of Customer Premises Equipment. The disposals are as a result of the Group adopting
IFRIC4 which requires assessment of whether an arrangement contains a lease. These leases are
classified as a finance lease in terms of IAS17 since they transfer significant risks and rewards of
ownership to the customer.

F–42

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

11. Intangible assets

2005

2006

2007

Accumulated Carrying

Accumulated Carrying

Accumulated Carrying

Cost

amortisation

value

Cost

amortisation

value

Cost

amortisation

value

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Goodwill

269

–

269

305

–

305

673

–

673

Trademarks, copyrights and other

588

(389)

199

685

(472)

213

761

(521)

240

Licences

171

(107)

64

155

(95)

60

222

(116)

106

Software

4,674

(2,929)

1,745

5,607

(3,338)

2,269

6,720

(3,737)

2,983

Under construction

905

–

905

1,063

–

1,063

1,109

–

1,109

6,607

(3,425)

3,182

7,815

(3,905)

3,910

9,485

(4,374)

5,111

The carrying amounts of intangible assets can be reconciled as follows:

Carrying

Foreign

Impair-

Carrying

value at

Business

currency

ment

value at

beginning combi-

trans-

and

Amorti-

end

of

of year

Additions

nations

Transfers

lation

write-offs Disposals

sation

year

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

Rm

2007
Goodwill

305

186

173

–

9

–

–

–

673

Trademarks, copyrights and other

213

8

69

–

–

–

–

(50)

240

Licences

60

47

1

–

8

–

–

(10)

106

Software

2,269

628

–

559

7

(4)

–

(476)

2,983

Under construction

1,063

729

–

(636)

–

(47)

–

–

1,109

3,910

1,598

243

(77)

24

(51)

–

(536)

5,111

2006
Goodwill

269

–

37

–

(1)

–

–

–

305

Trademarks, copyrights and other

199

2

91

2

–

–

–

(81)

213

Licences

64

1

–

–

(1)

–

–

(4)

60

Software

1,745

219

–

801

(2)

–

(19)

(475)

2,269

Under construction

905

974

–

(816)

–

–

–

–

1,063

3,182

1,196

128

(13)

(4)

–

(19)

(560)

3,910

2005
Goodwill

234

–

35

–

–

–

–

–

269

Trademarks, copyrights and other

239

–

68

–

–

–

–

(108)

199

Licences

91

–

26

–

5

(49)

–

(9)

64

Software

1,164

103

–

863

–

–

–

(385)

1,745

Under construction

136

1,284

–

(515)

–

–

–

–

905

1,864

1,387

129

348

5

(49)

–

(502)

3,182

The carrying amounts of intangible assets pledged as security for liabilities at March 31, 2007 is

R56 million, which consist of licenses with a carrying value of R6 million and other intangible assets of
R50 million (refer to note 26).

Intangible assets that are material to the Group consist of Software, Trademarks and Copyrights

and Licences, whose average remaining amortisation period is between 7 and 17 years.

In March 2006 the Group started a process of determining whether an asset which incorporates

both a tangible and an intangible element, should be recognised as tangible or intangible assets,
based on management judgement and on facts available and the significance of each element to the
total value of the asset. This ongoing process has resulted in further assets with a carrying value to
the net amount of R77 million being reclassified from intangible assets to property, plant and
equipment in the current year.

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.

F–43

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

11.   Intangible assets (continued)

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 ten year period and discount rates of between 12.5% and 13.7% in South
African Rand terms.The terminal growth rate applicable is 4.5%. 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 ten year period and a discount rate of 17.2% in US Dollar
terms. Cash flows beyond this period have been extrapolated using annual nominal growth rates of
7%. 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 ten year period and a discount rate of 15% in US Dollar terms.
The terminal growth rate applicable is 8.4%. 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.

F–44

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

11. Intangible assets (continued)

2005

2006

2007

Rm

Rm

Rm

Impairment and write-offs of property, plant and
equipment and intangible assets

344

162

296

a) Intangible assets

Software assets under construction written-off

–

–

51

Licences impaired*

49

–

–

b)Property, plant and equipment

295

162

245

Assets under construction written-off

(refer to note 10)

49

75

37

Data processing equipment and software

(refer to note 10)

20

10

–

Assets relating to Vodacom Mozambique, S.A.R.L.*

12

–

–

Data processing equipment and software written-off

8

10

–

Network equipment (refer to note 10)

194

49

199

Assets relating to Vodacom Mozambique, S.A.R.L.*

71

–

9

Reversal of impairment *

–

(26)

–

* 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 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, 2007.
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 in 2006
related to an increase in the fair value of
infrastructure assets.

Decommissioned and obsolete equipment written-off

123

75

190

Other

Support equipment, data processing equipment
and software and other assets written-off

32

28

9

F–45

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

12.    Investments

2,277

2,894

1,384

Available for sale

–

–

40

Unlisted investments
Rascom

–

–

–

0.69% (2006: 0.70%; 2005: 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 this unlisted investment cannot be practicably

determined. The directors’ valuation is based on the Group’s
interest in the entity’s net asset value converted at year-end
exchange rates. The directors’ valuation of the above unlisted
investment is RNil (2006: RNil; 2005: RNil).

WBS Holdings (Proprietary) Limited

–

–

40

2,500 ordinary shares at R0.01 each

The directors’ valuation of this unlisted investment is not materially

different from the carrying amount (refer to note 28).

Listed investments

8

–

–

SAGE Limited

8

–

–

9,090,909 ordinary shares of R0.01 each.

The SAGE shares were classified as an available-for-sale investment

in 2005. They were sold during the prior year at a loss of
R1,85 million (Group share: R1 million) as a result of the delisting
of SAGE.

Loans and receivables

80

89

65

Planetel Communications Limited

22

21

25

The loan with a nominal value of USD7 million (Group share:

USD3,5 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 26).

F–46

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

12. Investments (continued)
Loans and receivables (continued)
Caspian Construction Company Limited

26

25

29

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 26).

Number Portability Company (Proprietary) Limited

–

–

3

The shareholder loan made to Number Portability Company

(Proprietary) Limited (‘NPC’) for an amount of R6 million
(Group share: R3 million) at March 2007, is subordinated
and ranks behind the claims of all creditors of NPC for
repayment until such time as the assets of NPC fairly
valued exceed its liabilities and in such case, the loan
shall cease to be sub-ordinated to the extent that the
assets of NPC exceed its liabilities from time to time. The
shareholder loan bears interest at the maximum rate of the
prevailing South African prime rate of 10.5% or a lesser rate
determined by a resolution passed by majority vote of
the board at a duly constituted meeting of such board.

Sekha-Metsi Investment Consortium Limited

–

–

8

The loan was advanced to Sekha-Metsi Investment Consortium

Limited and bears interest at South African overdraft interest rates
plus a margin of 2%. Interest is payable monthly in arrears. The
loan is repayable on demand when Sekha-Metsi Investment
Consortium Limited is able to obtain a loan externally. Sekha-Metsi
Investment Consortium Limited have pledged their shares in
Sekha-Metsi Enterprises (Proprietary) Limited as security for the loan.

Tel.One (Pvt) Limited

32

32

–

The loan to Tel.One (Pvt) Limited is unsecured, interest-free and

was repayable through traffic revenue from June 2004 over
5 years. R41 million traffic has been set off against the loan in the
current financial year, hence settling the full amount of the loan
in advance.

Other receivables

–

11

–

F–47

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

12.  Investments (continued)
Other investments
G-Mobile Holdings Limited

–

–

7

The Group purchased a 10% equity stake in G-Mobile Holdings

Limited and a 25.93% equity stake in Gogga Tracking Solutions
(Proprietary) Limited. The investee companies also granted the
Group an option to increase the investments (refer to note 28).

Held-for-trading

2,258

2,874

1,349

Linked insurance policies – Coronation

765

1,182

1,280

Linked insurance policies – Investec

22

24

–

Ordinary shares – listed

667

1,059

–

Cash

559

229

–

Other money market investments

118

284

69

Government stock

68

44

–

Other unlisted investments

59

52

–

Less: Short-term investments

(69)

(69)

(77)

Tel.One (Pvt) Limited

(10)

(13)

–

Sekha-Metsi Investment Consortium Limited

–

–

(8)

Other money market investments

(51)

(56)

(69)

SAGE Limited

(8)

–

–

Included in held-for-trading investments is R1,279 million (2006: R2,819 million; 2005:

R2,208 million) that will be used to fund the post-retirement medical aid liability. These investments
are made through a cell captive, in which Telkom holds 100% of the preference shares of the cell
captive, and represent the fair value of the underlying investments of the cell captive. The initial cost
of the investment amounts to R535 million (2006: R1,891 million; 2005: R1,660 million). Telkom bears
all the risks and rewards of the investment, as the returns/losses on the preference shares are
dependant on the performance of the underlying investments made by the cell captive. On this basis
Telkom as the preference shareholder, receives any residual gains or losses made by the captive. The
ordinary shareholders of the cell captive do not bear any of the risks and rewards.

The cell captive has been consolidated in full.

The cell captive has an investment in a sinking fund and an annuity policy. During the current year

an addendum to the cell captive annuity policy was signed, which resulted in the annuity policy
qualifying as a plan asset.

This has resulted in a reduction in the investment of R1,961 million (refer to note 30).

F–48

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

13. Deferred revenue and Deferred expenses
Deferred expenses

347

480

557

Long-term deferred expenses

133

254

270

Current portion of deferred expenses

214

226

287

The current portion of deferred expenses represents

the deferral of connection costs.

Deferred revenue

2,676

2,966

3,004

Long-term deferred revenue

959

991

1,021

Current portion of deferred revenue

1,717

1,975

1,983

Included in deferred revenue is profit on the sale and lease-back of certain Telkom buildings of

R129 million (2006: R140 million; 2005: R151 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 38).

Total

< 1 year

1 – 5 years

> 5 years

Rm

Rm

Rm

Rm

14. Finance lease receivables

The Group provides voice and non-voice services to

its customers, which make use of router and PABX
equipment that is dedicated to specific customers.

In terms of IFRIC4 the Group has concluded that

some of its voice and non-voice service arrangements
with its customers contain a lease. The disclosed
information relates to those arrangements which were
assessed to be finance leases in terms of IAS17.

2007

Minimum lease payments
Lease payments receivables

312

110

202

–

Unearned finance income

(66)

(22)

(44)

–

Present value of minimum lease payments

246

88

158

–

Lease receivables

246

88

158

–

F–49

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

15.   Deferred taxation

(435)

(587)

(1,123)

Opening balance

(118)

(435)

(587)

Income statement movements

(346)

(173)

(516)

Temporary differences

(456)

(280)

(515)

Overprovision/(underprovision) prior year

73

107

(1)

Change in tax rate from 30% to 29%

37

–

–

Business combinations

(19)

21

(16)

Acquired from the minorities of Vodacom Congo
(RDC) s.p.r.l.

48

–

–

Foreign equity revaluation

–

–

(4)

The balance comprises:

(435)

(587)

(1,123)

Capital allowances

(2,512)

(2,682)

(3,225)

Provisions and other allowances

1,586

1,682

1,719

Tax losses

139

112

13

STC tax credits

352

301

370

Deferred tax balance is made up as follows:

(435)

(587)

(1,123)

Deferred tax assets

512

481

593

Deferred tax liabilities

(947)

(1,068)

(1,716)

Unutilised STC credits

2,801

2,393

2,958

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 R1,134 million (2006: R876 million; 2005: R355 million) (Group share: R567 million;
2006: R438 million; 2005: R178 million). The full effect of this would be a R363 million
(2006: R279 million; 2005: R109 million) (Group share: R182 million; 2006: R140 million;
2005: R55 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 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.

The deferred tax asset mainly represents STC credits on past dividends received that are

available to be utilised against dividends declared and tax losses. It is considered probable, given
Telkom’s dividend policy, that these credits will be utilised prior to October 1, 2007, at which date it is
expected that the proposed change to STC tax treatment as announced by the Minister of Finance,
will be effected. The asset will be released as a tax expense when the dividends are declared.

The deferred tax liability increased mainly due to the increase in the difference between the

carrying value and tax base of assets, resulting from the change in the estimate of useful lives of
assets.

Comparatives

The comparatives of the capital allowances and the provision and other allowances were updated

based on a misallocation found between these two categories in prior year calculations.

F–50

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

16. Inventories

658

814

1,093

Gross inventories

725

916

1,275

Write-down of inventories to net realisable value

(67)

(102)

(182)

Inventories consist of the following categories:

658

814

1,093

Installation material, maintenance material and network equipment

313

487

811

Merchandise

345

327

282

Write-down of inventories to net realisable value

67

102

182

Opening balance

77

67

102

Charged to selling, general and administrative expenses

30

64

154

Inventories written-off

(40)

(29)

(74)

Inventory levels as at March 31, 2007 have increased due to the
roll-out of the Next Generation Network and increased inventory
levels required to improve customer service.

17. Trade and other receivables

5,820

6,399

7,303

Trade receivables

5,222

5,798

6,557

Gross trade receivables

5,507

6,088

6,792

Impairment of receivables

(285)

(290)

(235)

Prepayments and other receivables

598

601

746

Impairment of receivables

285

290

235

Opening balance

325

285

290

Charged to selling, general and administrative expenses

228

206

153

Business combination

3

–

–

Receivables written-off

(271)

(201)

(208)

18. Other financial assets and liabilities

5,074

275

259

Other financial assets consist of:

Held-to-maturity

Repurchase agreements

3,769

–

–

At fair value through profit or loss

1,305

275

259

Bills of exchange

77

107

98

Derivative instruments (refer to note 28)

1,228

168

161

F–51

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

18.   Other financial assets and liabilities (continued)

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.

2007

There were no repurchase agreements held at March 31, 2007.

2006

There were no repurchase agreements held at March 31, 2006.

2005

Maturity period

Yield

7 days

7.35%

3,769

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.

2005

2006

2007

Rm

Rm

Rm

Other financial liabilities consist of:
At fair value through profit or loss

Derivative instruments

(313)

(235)

(68)

Other

–

–

(36)

F–52

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

19. Net cash and cash equivalents

2,301

4,255

308

Cash shown as current assets

3,210

4,948

749

Cash and bank balances

2,375

1,853

649

Short-term deposits

835

3,095

100

Credit facilities utilised

(909)

(693)

(441)

Undrawn borrowing facilities

4,750

9,519

8,658

The undrawn borrowing facilities are unsecured, when drawn 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.

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.

The decrease in net cash and cash equivalents in the 2007 financial year is primarily due to the

substantially higher taxation paid, the increase in cash outflows for additions to property, plant and
equipment, as well as the cash outflows for the redemption of the TL06 local bond.

20. Share capital and premium

Authorised and issued share capital and share premium are made
up as follows:

2005

2006

2007

Rm

Rm

Rm

Authorised

10,000

10,000

10,000

999,999,998 ordinary shares of R10 each

10,000

10,000

10,000

1 Class A ordinary share of R10

–

–

–

1 Class B ordinary share of R10

–

–

–

Issued and fully paid

8,293

6,791

5,329

532,855,526 (2006: 544,944,897; 2005: 557,031,817) ordinary
shares of R10 each

5,570

5,449

5,329

1 (2006: 1; 2005: 1) Class A ordinary share of R10

–

–

–

1 (2006: 1; 2005: 1) Class B ordinary share of R10

–

–

–

Share premium

2,723

1,342

–

F–53

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Number of

Number of

Number of

shares

shares

shares

20.   Share capital and premium (continued)

Issued and fully paid (continued)
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

544,944,899

Shares bought back and cancelled*

–

(12,086,920)

(12,089,371)

Shares in issue at end of year

557,031,819

544,944,899

532,855,528

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.

Share buy-back

During the year Telkom bought back 12,089,371 ordinary shares at a total consideration of R1,596

million. This reduced Share capital by R120 million, Share premium by R1,342 million and Retained
earnings by R134 million.

During the year ended March 31, 2006, 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 Share premium
by R1,381 million.

*1,035,506 shares bought back are in the process of being cancelled from the issued share capital by
the Registrar of Companies.

2005

2006

2007

Rm

Rm

Rm

21.   Treasury shares

(1,812)

(1,809)

(1,774)

At March 31, 2007, 12,237,016 (2006: 12,687,521; 2005: 12,717,190) and 10,849,058 (2006:

10,849,058; 2005: 10,849,058) ordinary shares in Telkom, with a fair value of R2,031 million (2006:
R2,038 million; 2005: R1,366 million) and R1,801 million (2006: R1,743 million; 2005: R1,166 million)
are 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 (‘TCSP’).

The reduction in the treasury shares is due to 450,505 shares (2006: 29,669 shares) that vested

in terms of the TCSP during the current year. The fair value of these shares at the date of vesting was
R63 million (2006: R4 million).

F–54

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

22. Share-based compensation reserve

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 30).

The Telkom Board approved the third allocation of shares to employees as at September 15, 2006

with a grant date of November 2, 2006, the day that the employees and Telkom shared a common
understanding of the terms and conditions of this grant. The total number of shares granted is
1,825,488.

The following table illustrates the movement within the Share-based compensation reserve:

2005

2006

2007

Rm

Rm

Rm

Balance at beginning of year

–

68

151

Net increase in equity

68

83

106

Employee cost

68

120

141

Accelerated vesting of shares

–

(37)

–

Vesting and transfer of shares

–

–

(35)

Balance at end of year

68

151

257

23. Non-distributable reserves

360

1,128

1,413

Opening balance as restated

91

360

1,128

Movement during the year

269

768

285

Foreign currency translation reserve (net of tax
of R4 million; 2006: RNil; 2005: RNil)

12

52

46

Fair value adjustment on investments

(22)

–

–

Life fund reserve (Cell Captive)

279

716

239

The balance comprises:

360

1,128

1,413

Foreign currency translation reserve

(156)

(104)

(58)

Cell Captive reserve

516

1,232

1,471

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 Group’s cell captive partner, Nova

Risk Partners Limited is required to recognise 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 the fair value of available-for-sale investments are recognised

directly in equity until the financial asset is disposed of.

F–55

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

23.   Non-distributable reserves (continued)

Change in comparatives

The Foreign currency translation reserve in 2006 decreased by R8 million (2005: R1 million) due

to a change in Group policy on net investment in a foreign operation (refer to note 2).

2005

2006

2007

Rm

Rm

Rm

24.   Retained earnings

19,232

22,904

26,499

Opening balance as restated

13,482

19,232

22,904

Movement during year

5,750

3,672

3,729

Net profit for the year

6,752

9,189

8,646

Transfer to non-distributable reserves
(refer to note 23)

(279)

(716)

(239)

Dividend declared (refer to note 35)

(606)

(4,801)

(4,678)

Change in shareholding in Vodacom Congo
(RDC) s.p.r.l.

(117)

–

–

Shares bought back (refer to note 20)

–

–

(134)

The balance comprises:

19,232

22,904

26,499

Company

15,033

18,534

21,906

Joint venture

4,030

4,293

4,762

Subsidiaries

311

568

786

Eliminations

(142)

(491)

(955)

Change in comparatives

The Retained earnings for the year in 2006

increased by R8 million (2005: R1 million) due
to a change in Group policy on net investment
in a foreign operation (refer to note 2).

25.   Minority interest

220

301

284

Opening balance

200

220

301

Movement during the year

20

81

(17)

Reconciliation:

220

301

284

Balance at beginning of year

200

220

301

Share of earnings

83

139

203

Acquisition of subsidiary and minorities

5

27

(68)

Foreign currency translation reserves

(1)

(7)

14

Dividend declared

(67)

(78)

(166)

F–56

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

26.

Interest-bearing debt

Long-term interest-bearing debt

9,504

7,655

4,338

Total interest-bearing debt

14,003

11,123

10,364

Gross interest-bearing debt (refer to
note 27)

16,914

13,686

12,549

Discount on debt instruments issued

(2,911)

(2,563)

(2,185)

Less: Current portion of interest-bearing debt

(4,499)

(3,468)

(6,026)

Local debt

(264)

(2,642)

(5,772)

Locally registered Telkom debt instruments

–

(2,211)

(4,432)

Commercial paper bills

(262)

(429)

(1,339)

Short-term interest-free loans

(2)

(2)

(1)

Foreign debt

(4,210)

(786)

(193)

Finance leases

(25)

(40)

(61)

Total interest-bearing debt is made up as follows:

14,003

11,123

10,364

(

a) Local debt

7,790

8,938

8,131

Locally registered Telkom debt instruments

7,526

8,507

6,786

Name, maturity, rate p.a., nominal value
TK01, 2008, 10%, R4,680 million
(2006: R4,689 million; 2005: R4,658 million)

4,018

4,230

4,432

TL06, 2006, 10.5%, RNil (2006: R2,100 million;
2005: R1,500 million)

1,492

2,103

–

TL20, 2020, 6%, R2,500 million
(2006: R2,500 million; 2005: R2,500 million)

1,186

1,214

1,246

PP02, 2010, 0%, R430 million
(2006: R430 million; 2005: R430 million)

200

230

264

PP03, 2010, 0%, R1,350 million
(2006: R1,350 million; 2005: R1,350 million)

630

730

844

Local bonds

The local Telkom bonds are unsecured, but a side letter to the subscription agreement (as

amended) of the TL20 bond contains a number of restrictive financial covenants which, if not met,
could result in the early redemption of the loan. The TL20, TL06, and PP02 local bonds limit Telkom’s
ability to create encumbrances on revenues or assets, and secure any indebtedness without securing
the outstanding bonds equally and rateably with such indebtedness.

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
(refer to note 18). 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 bond.

F–57

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

26.   Interest-bearing debt (continued)
(a)  Local debt (continued)

Commercial paper bills

262

429

1,339

Rate p.a., nominal value
2007, 9.04% (2006: 7%; 2005: 14.06%),
R1,350 million (2006: R430 million; 2005: R263 million)

Number Portability Company (Proprietary) Limited

–

–

3

The Vodacom Group’s share of the shareholders

loan provided, amounted to R6 million at
March 31, 2007 (Group share: R3 million).
The shareholder loan is subordinated and bears
interest at the maximum rate of the prevailing
South African prime rate of 10.5%, or a lesser
rate determined by the board of Number
Portability Company (Proprietary) Limited.

Non-interest bearing loans
Sekha-Metsi Investment Consortium Limited

–

–

1

The shareholder loan bears no interest and is

repayable in 10 equal 6 monthly instalments
commencing on September 30, 2006.
Effective April 1, 2007 the repayment terms
changed to 4 equal 6 monthly instalments.
The loan was remeasured at amortised
cost at a fixed effective interest rate of 13.7%
during the current financial year. The gain on
remeasurement is included in equity.

Vodacom Lesotho (Proprietary) Limited

2

2

–

The loan was previously uncollatoralised with

no repayment terms.

Minority shareholder’s loan of Smartcom
(Proprietary) Limited

–

–

2

The minority shareholder’s loan amounting to

R3 million (Group share: R2 million) is unsecured,
bears no interest and no repayment terms have
been arranged.

F–58

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

26. Interest-bearing debt (continued)
(b) Foreign debt

5,004

913

1,013

Maturity, rate p.a., nominal value

4,135

85

106

Euro: 2010 – 2025, 0.10% – 0.14%
(2006: 0.10% – 6.81%; 2005:
0.10% – 7.13%), €11 million
(2006: €11 million; 2005: €512 million)

Planetel Communications Limited

19

21

27

The shareholder loan of USD8 million

(2006: USD8 million; 2005: USD8 million)
(Group share: USD4 million; 2006:
USD4 million; 2005: 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.

Caspian Construction Company Limited

23

25

32

The shareholder loan of USD10 million

(2006: USD10 million; 2005: USD10 million)
(Group share: USD5 million; 2006: USD5 million;
2005: 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 remeasured at amortised cost at
an effective interest rate of LIBOR plus 5%.
The gain on remeasurement was included
in equity.

F–59

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

26.  Interest-bearing debt (continued)
(b)  Foreign debt (continued)

Loan to Vodacom International Limited

564

557

655

The loan provided by Standard Bank Plc

and RMB International (Dublin) Limited that
amounts to USD180 million (2006:
USD180 million; 2005: USD180 million)
(Group share USD90 million; 2006:
USD90 million; 2005: USD90 million)
is collateralised by guarantees provided
by the Vodacom Group.
The loan originally repayable on July 19, 2006,
was refinanced during the current period.
The loan is now repayable on July 26, 2009
and bears interest at an effective interest rate
of LIBOR plus 0.35%.

Project finance funding for Vodacom Tanzania
Limited

143

92

47

The drawn down portions of the project finance

funding from external parties include the following:

(a)

Netherlands Development Finance Company
USD4 million (2006: USD8 million; 2005:
USD10 million) (Group share: USD2 million;
2006: USD4 million; 2005: USD5 million)

(b)

Deutsche Investitions – Und Entwicklungs-
gesellschaft mbH €4 million (2006: €8 million;
2005: €10 million) (Group share: €2 million;
2006: €4 million; 2005: €5 million)

(c)

Standard Corporate and Merchant Bank
USD4 million (2006: USD8 million;
2005: USD12 million) (Group share:
USD2 million; 2006: USD4 million; 2005:
USD6 million)

(d)

Barclays Bank (Local Syndicate Tanzania)
TSHNil (2006: TSH5,704 million; 2005:
TSH10,969 million) (Group share: TSHNil;
2006: TSH2,852 million; 2005: TSH5,485 million)

F–60

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

26. Interest-bearing debt (continued)
(b) Foreign debt (continued)

The funding is collateralised by a charge over

51% of the shares, the license and Vodacom
Tanzania Limited’s tangible assets and intangible
assets. The loans bear interest based upon the
foreign currency denomination of the project
financing between 6% and 14.4% per annum
and will be fully repaid by March 2008.

Vodacom Congo (RDC) s.p.r.l.

4

19

11

Vodacom’s share of the short-term facility amounts

to USD3 million (2006: USD6 million;
2005: USD1 million) (Group share: USD2 million;
2006: USD3 million; 2005: USD0.5 million).
USD1 million (Group share: USD0.5 million)
of these facilities bears interest at 18% per annum
with no fixed repayment terms. USD2 million
(Group share: USD1 million) of these facilities
is repayable on June 30, 2007 and bears interest
at LIBOR plus 6% per annum.

Preference shares issued by Vodacom Congo
(RDC) s.p.r.l.

116

114

135

The preference shares of USD37 million

(2006: USD37 million; 2005: USD37 million)
(Group share: USD19 million; 2006: USD19 million;
2005: USD19 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

1,209

1,272

1,220

The finance leases are secured by buildings

with a carrying value of R565 million
(2006: R618 million; 2005: R618 million) and office
equipment with a book value of R10 million
(2006: R6 million; 2005: RNil) (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%.

F–61

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

26.   Interest-bearing debt (continued)

Included in long-term and short-term debt is:

Debt guaranteed by the South African Government

4,113

4,315

4,537

A major portion of the guaranteed debt relates

to the TK01 debt instrument.

Telkom may issue or re-issue locally registered

debt instruments in terms of the Post Office
Amendment Act 85 of 1991. The borrowing powers
of Telkom are set out as per note 19.

2005

2006

2007

2007

2007

Total

Total

Foreign

Local

Total

Rm

Rm

Rm

Rm

Rm

27.   Repayment of gross interest-bearing debt

2005/2006

4,499

–

–

–

–

2006/2007

2,162

3,471

–

–

–

2007/2008

4,755

4,649

6,092

193

6,285

2008/2009

97

112

113

59

172

2009/2010

92

50

49

655

704

2010/2011

1,874

1,884

1,871

16

1,887

2011/2012

–

–

60

10

70

Thereafter

3,435

3,520

3,351

80

3,431

16,914

13,686

11,536

1,013

12,549

Commercial Paper Bills with a nominal value of R3,731 million were redeemed in the current

financial year. These redemptions were mainly financed with cash flows from operations.
Commercial Paper Bills with a nominal value of R4,651 million were issued in the current financial
year. Of these R1,350 million were outstanding as at March 31, 2007. The Commercial Paper Bills
range in maturities from 4 days to 2 months.

The medium-term loan to Vodacom International Limited that amounts to R1,312 million

(Group share: R656 million) was refinanced during the current year. The loan is now repayable
on July 26, 2009 and bears interest at an effective interest rate of LIBOR plus 0.35%.

The TL06 local bond with a nominal value of R2,100 million at March 31, 2006 was redeemed

on October 31, 2006. The facility was repaid/refinanced with a mixture of operating cash flows and
short-term Commercial Paper Bills.

The repayment/refinancing of R6,026 million 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.

F–62

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

28. 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, and to hedge specific exposure in the
interest rate repricing profile of the existing borrowings and anticipated peak additional borrowings, the
Group makes use of interest rate derivatives as approved in terms of the Group policy limits. Fixed
rate debt represents approximately 90.37% (2006: 92.04%; 2005: 91.55%) of the total 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.

Fixed

Fixed

Fixed

Floating rate

rate

rate

rate

<1 year

1 – 5 years

>5 years

Total

Rm

Rm

Rm

Rm

Rm

Interest rate repricing profile for interest-bearing debt:

2007

Borrowings

998

5,851

1,422

2,093

10,364

Percentage of borrowings

9.63% 56.46% 13.72% 20.19% 100.00%

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%

F–63

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

28.   Financial instruments and risk management (continued)
Interest rate risk management (continued)

Borrowings do not include credit facilities utilised of R441 million (2006: R693 million; 2005: R909

million), which are floating rate debt.

The effective interest rate for the year was 14.77% (2006: 13.91%; 2005: 15.23%).

At March 31, 2007 the Group did not have a significant interest rate risk exposure on financial assets.

The table below summarises the interest rate swaps outstanding as at March 31:

National

Weighted

Average

amount

average

maturity

Currency

m

coupon rate

2007

Interest rate swaps
Pay fixed

< 1 year

ZAR

1,000 14.67%

Receive fixed

1-5 years

ZAR

38 11.45%

> 5 years

ZAR

61 11.44%

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%

Pay fixed

The floating rate is based on the three month 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. At the reporting date, there was no significant concentration of credit risk.
The maximum exposure to the Group from counterparties is a net favourable position of R144 million
(2006: R158 million; 2005: R1,083 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.

F–64

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

28. Financial instruments and risk management (continued)
Trade receivables

Credit limits are set on an individual 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 managed by Telkom’s Corporate Finance
division in accordance with policies and guidelines formulated by Telkom’s 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 over which the 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, 2007 amounted to R8,658 million (2006: R9,519

million; 2005: R4,750 million) (refer to note 37).

Put and call options

In terms of various shareholders’ agreements, put and call options exist for the acquisition of

shares in the following companies:

Call options

Period

VM, S.A.R.L call option

Four years from August 23, 2003. Replaced with a new
option for a period of 5 years after April 1, 2007.

The Somnium Family Trust

36 months following month of trigger event.

WBS Holdings (Proprietary) Limited

Until September 14, 2007, subject to fulfilment of
conditions.

G-Mobile Holdings Limited

Irrevocable call option to subscribe for such number of
further shares as specified in the agreement.

Put Options

Smartphone SP (Proprietary) Limited

For as long as the service provider agreement is in place.

Smartcom (Proprietary) Limited

Either on termination by Smartphone of the agency
agreement or if Vodacom Group reduce the standard
service provider discount below stipulated percentages as
per the put option agreement.

Congolese Wireless Network s.p.r.l.

Maximum 8 years after December 1, 2001. The option
liability had a value of R249 million (2006: RNil; 2005:
RNil) (Group share: R125 million; 2006: RNil; 2005: RNil)
as at March 31, 2007.

F–65

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

28.   Financial instruments and risk management (continued)
Put and call options (continued)

Except as separately disclosed below, none of the above put and call options have any value at

any of the periods presented as the conditions set out in the agreements 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 foreign exchange contracts to hedge interest expense and purchase and sale commitments
denominated in foreign currencies (primarily United States Dollars and Euros). 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
2007
Currency
ZAR

9,348

444

14,793

24,585

USD

18

870

1,369

2,257

Euro

–

125

133

258

Other

–

–

38

38

9,366

1,439

16,333

27,138

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

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

28. Financial instruments and risk management (continued)
Foreign currency exchange rate risk management (continued)
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.

<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

2007
Buy foreign currency and sell ZAR

USD181

1,329

–

–

–

–

Pound Sterling

19

261

–

–

–

–

Euro

196

1,899

–

–

–

–

Swedish Krona

43

46

–

–

–

–

Japanese Yen

23

2

–

–

–

–

Swiss Franc

–

1

–

–

–

–

3,538

–

–

Buy ZAR and sell foreign currency

USD

122

994

–

–

–

–

Pound Sterling

4

51

–

–

–

–

Euro

52

505

–

–

–

–

Swedish Krona

15

16

–

–

–

–

Japanese Yen

14

1

–

–

–

–

1,567

–

–

2006

Buy foreign currency and sell ZAR

USD

178

1,157

–

–

–

–

Pound Sterling

28

321

–

–

–

–

Euro

156

1,235

–

–

–

–

Swedish Krona

56

46

–

–

–

–

Japanese Yen

33

2

–

–

–

–

2,761

–

–

F–67

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

28.   Financial instruments and risk management (continued)
Foreign currency exchange rate risk management (continued)
Forward exchange contracts (continued)

<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

Buy ZAR and sell foreign currency

USD

103

679

25

275

–

–

Pound Sterling

5

56

–

–

–

–

Euro

41

309

–

–

–

–

Swedish Krona

28

22

–

–

–

–

Japanese Yen

26

1

–

–

–

–

1,067

275

–

2005
Buy foreign currency and sell ZAR

USD

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

USD

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

USD

2

19

–

–

–

–

F–68

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

28. Financial instruments and risk management (continued)
Foreign currency exchange rate risk management (continued)
Currency swaps

There were no currency swaps in place at March 31, 2007 and March 31, 2006.

2005

Average

Average

Average

maturity

Receive

coupon

Pay

coupon

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%

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, 2007, have been determined using available market

information and appropriate valuation methodologies as outlined below. This value is not necessarily
indicative of the amounts that the Group could realise in the normal course of business.

2005

2006

2007

Carrying

Fair

Carrying

Fair

Carrying

Fair

amount

value

amount

value

amount

value

Rm

Rm

Rm

Rm

Rm

Rm

Liabilities

Total interest-bearing debt
(refer to Note 26)

14,003

16,054

11,123

13,149

10,364

11,754

Derivatives are carried at fair value.

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 of the borrowings disclosed above are based on quoted prices or, where such

prices are not available, the 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.

2005

2006

2007

R

R

R

Exchange rate table (closing rate)

USD

6.226

6.180

7.248

Euro

8.080

7.482

9.649

Pound Sterling

11.743

10.737

14.189

Swedish Krona

0.883

0.793

1.033

Japanese Yen

0.058

0.052

0.061

Swiss Franc

5.215

4.732

5.933

F–69

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

29.   Provisions

2,460

2,677

1,443

Employee related

3,772

4,232

2,924

Annual leave

337

356

413

Balance at beginning of year

401

337

356

Charged to employee expenses

74

88

66

Leave paid

(138)

(69)

(9)

Post-retirement medical aid (refer to note 30)

2,430

2,607

1,139

Balance at beginning of year

2,420

2,430

2,607

Interest cost

249

249

286

Current service cost

27

48

83

Expected return on plan asset

–

–

(188)

Actuarial loss

–

63

149

Curtailment gain

(112)

(8)

–

Settlement loss

18

7

–

Termination settlement

(13)

(29)

–

Plan asset – initial recognition

–

–

(1,720)

Benefits paid

(159)

(153)

(78)

Telephone rebates (refer to note 30)

179

198

282

Balance at beginning of year

164

179

198

Interest cost

16

16

19

Current service cost

2

3

4

Past service cost

–

–

76

Curtailment gain

(3)

–

–

Actuarial loss

–

–

5

Benefits paid

–

–

(20)

Bonus

826

1,071

1,090

Balance at beginning of year

685

826

1,071

Charged to employee expenses

732

965

965

Payment

(591)

(720)

(946)

Non-employee related

116

105

614

Supplier dispute (refer to note 39)

–

–

527

Balance at beginning of year

–

–

–

Charged to expenses

–

–

527

Warranty provision

14

16

–

Balance at beginning of year

17

14

16

Charged to expenses

6

20

–

Provision utilised

(9)

(18)

(16)

Other

102

89

87

F–70

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

29. Provisions (continued)

Less: Current portion of provisions

(1,428)

(1,660)

(2,095)

Annual leave

(337)

(356)

(402)

Post-retirement medical aid

(171)

(159)

(186)

Telephone rebates

(16)

(17)

(26)

Bonus

(826)

(1,071)

(911)

Supplier dispute

–

–

(527)

Warranty provision

(14)

(16)

–

Other

(64)

(41)

(43)

Annual leave

In terms of Telkom’s policy, employees are entitled to accumulate vested leave benefits not taken

within a leave cycle, to a cap of 22 days with effect from July 31, 2007 (previously 25 days) which
must be taken within an 18 month leave cycle. 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 bi-annually to all
qualifying employees after Telkom’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.

Supplier dispute

Telkom provided R527 million for its estimate of the probable liability as discussed in note 39. This

consists of R510 million which is included in Selling and administration expenses and R17 million in
Finance charges and fair value movements.

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. The
suppliers of the various handsets will assume responsibility for the second year warranty subsequent
to March 31, 2007 and accordingly there is no remaining provision.

F–71

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

29.   Provisions (continued)

Other

Included in other provisions is an amount provided for asset retirement obligations.

Other provisions also include provisions for advertising received from suppliers of handsets and

various other smaller provisions.

30.   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 and
pension funds are performed at intervals not exceeding three years.

At March 31, 2007, the Group employed 33 047 employees (2006: 31,458; 2005: 31,790).

Actuarial 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 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 paid during 2004.

The latest actuarial valuation performed at March 31, 2007 indicates that the pension fund is in a

surplus position of R54 million after unrecognised gains. 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 fund performed in March 2006, indicated that the fund is fully

funded. The current contributions (plus an annual top-up lump sum if necessary) are based on that
valuation. Management expects to complete the next statutory valuation in November 2007.

With effect from July 1, 1995, the Telkom Pension Fund was closed to new members. During the

financial year a settlement event occurred in the Telkom Pension Fund whereby 106 members were
transferred to the Telkom Retirement Fund. The funded status of the Telkom Pension Fund is
disclosed below:

F–72

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

30. Employee benefits (continued)

The Telkom Pension Fund (continued)
The net periodic pension costs includes the following components:
Interest and service cost on projected benefit obligations

22

22

22

Expected return on plan assets

(22)

(24)

(19)

Recognised actuarial loss

5

78

9

Settlement losses

–

–

21

Net periodic pension expense recognised

5

76

33

Pension fund contributions

12

22

8

The status of the pension plan obligation is as follows:
At beginning of year

190

186

281

Interest and service cost

22

22

22

Employee contributions

3

4

2

Benefits paid

–

(20)

(2)

Settlements

–

–

(70)

Actuarial (gain)/loss

(29)

89

(28)

Benefit obligation at end of year

186

281

205

Plan assets at fair value:
At beginning of year

219

231

243

Expected return on plan assets

22

24

19

Benefits paid

14

6

8

Settlements

–

–

(61)

Actuarial (loss)/gain

(24)

(18)

75

Plan assets at end of year

231

243

284

Present value of funded obligation

186

281

205

Fair value of plan assets

(231)

(243)

(284)

Funded status

(45)

38

(79)

Unrecognised net actuarial (loss)/gain

(89)

(118)

25

Unrecognised/recognised net asset

(134)

(80)

(54)

Expected return on plan assets

22

24

19

Actuarial (loss)/return on plan assets

(24)

(18)

75

Actual (loss)/return on plan assets

(2)

6

94

Principal actuarial assumptions were as follows:
Discount rate (%)

9.0

7.5

7.5

Yield on government bonds (%)

9.0

7.5

7.5

Long-term return on equities (%)

12.0

10.5

10.5

Long-term return on cash (%)

7.0

5.5

5.5

Expected return on plan assets (%)

10.0

9.5

9.7

Salary inflation rate (%)

6.0

6.0

6.0

Pension increase allowance (%)

3.6

2.9

2.9

F–73

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

30.   Employee benefits (continued)

The Telkom Pension Fund (continued)

The overall long-term expected rate of return on assets is 9.7%.

This is based on the portfolio as a whole and not the sum of the
returns of individual asset categories. The expected return takes
into account the asset allocation of the Telkom Pension Fund and
expected long-term return of these assets, of which South African
Equities and foreign investments are the largest contributors.
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, minus one year age rating as
published by the Institute and Faculty of Actuaries in London
and Scotland, for retirement purposes.
Funding level per statutory actuarial valuation (%)                                                        98.5          99.8        100.0

The number of employees registered under the Telkom Pension Fund                           295           255           153

The valuation results are sensitive to changes in the underlying assumptions. The following table

provides an indication of the impact of changing some of the valuation assumptions:

Current

assumption Decrease

Increase

Rm

Rm

Rm

Salary inflation rate

6.0%

(1.0%)

1.0%

Benefit obligation

205

185

225

Percentage change

(9.8%)

9.8%

Service cost and interest cost 2007/2008

21

19

23

Percentage change

(9.5%)

9.5%

Discount rate

7.5%

(1.0%)

1.0%

Benefit obligation

205

225

185

Percentage change

9.8%

(9.8%)

Service cost and interest cost 2007/2008

21

23

19

Percentage change

9.5%

(9.5%)

2005

2006

2007

The fund portfolio consists of the following:
Equities (%)

62

84

74

Bonds (%)

21

9

5

Cash (%)

17

7

3

Foreign Investments (%)*

–

–

8

Insurance policies (%)*

–

–

2

Offshore unit trusts (%)*

–

–

8

* Previously these funds were included in equities. In the current year a

decision was made to improve disclosure and therefore the funds are
disclosed separately.

The total expected contributions payable to the pension fund for the next financial year are

R7 million.

F–74

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

Rm

30. Employee benefits (continued)

The Telkom Pension Fund (continued)
Expected future benefit payments are as follows:
2008

8

2009

8

2010

8

2011

9

2012

9

>5 years

53

Total

95

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.
Telkom 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 valuation performed at
March 31, 2007 indicates that the retirement fund is in a surplus funding position of R1,176 million
after unrecognised losses.

The Telkom Retirement Fund is governed by the Pension Funds Act 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 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 Telkom has a potential asset with regards to this Fund.

F–75

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

30.   Employee benefits (continued)
The Telkom Retirement Fund (continued)
The funded status of the Telkom Retirement Fund is disclosed below:
The net periodic retirement costs include the following components:
Interest and service cost on projected benefit obligations

301

346

312

Expected return on plan assets

(338)

(430)

(489)

Recognised actuarial loss/(gain)

29

–

(145)

Net periodic pension expense recognised

(8)

(84)

(322)

Retirement fund contributions (refer to note 5.1)

429

383

439

Benefit obligation:
At beginning of year

3,162

4,020

4,377

Interest cost

301

346

312

Benefits paid

(329)

(377)

(486)

Liability for new pensioners

–

–

44

Actuarial loss

886

388

2,334

Benefit obligation at end of year

4,020

4,377

6,581

Plan assets at fair value:
At beginning of year

3,540

4,477

5,973

Expected return on plan assets

338

431

489

Benefits paid

(329)

(377)

(486)

Asset backing new pensioners’ liabilities

–

–

44

Actuarial gain

928

1,442

1,641

Plan assets at end of year

4,477

5,973

7,661

Present value of funded obligation

4,020

4,377

6,581

Fair value of plan assets

(4,477)

(5,973)

(7,661)

Funded status

(457)

(1,596)

(1,080)

Unrecognised net actuarial (loss)/gain

(312)

742

(96)

Unrecognised net asset

(769)

(854)

(1,176)

Expected return on plan assets

338

430

489

Actuarial return on plan assets

928

1,442

1,641

Actual return on plan assets

1,266

1,872

2,130

For the March 31, 2006 year end Telkom actuaries used the roll forward method, permitted under

IAS19, to determine the present value of the benefit obligation and the fair value of the plan assets
using the March 31, 2005 statutory valuation as a base applying the relevant assumptions determined
by management to arrive at the present value of the benefit obligation, and the fair value of plan
assets.

The increase in the benefit obligation was mainly driven by changes in the pension increase

assumption rate from 2.87% per annum to 4.50% per annum during the year, as well as higher than
expected actual pension increases and bonus payments in the current year.

The increase in the fair value of plan assets during the year mainly resulted from higher than

expected returns on assets during the financial year.

F–76

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

30. Employee benefits (continued)
The Telkom Retirement Fund (continued)
Included in the fair value of plan assets is:
Office buildings occupied by Telkom

221

274

371

Telkom bonds

39

56

21

Telkom shares

187

287

284

The Telkom Retirement Fund invests its funds in South Africa and

internationally. Sixteen fund managers invests in South Africa and five
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.

Principal actuarial assumptions were as follows:

Discount rate (%)

9.0

7.5

7.5

Yield on government bonds (%)

9.0

7.5

7.5

Long-term return on equities (%)

12.0

10.5

10.5

Long-term return on cash (%)

7.0

5.5

5.5

Expected return on plan assets (%)

10.0

8.5

9.3

Pension increase allowance (%)*

3.6

2.9

4.5

The overall long-term expected rate of return on assets is 9.3%.

This is based on the portfolio as a whole and not the sum of the returns
of individual asset categories. The expected return takes into account
the asset allocation of the Retirement Fund and expected long-term
return on these assets, of which South African equities, foreign
investments and SA fixed interest bonds are the largest contributors.

* Pension increase allowance

The basis on which the pension increase allowance is determined has been reassessed
in the current year to take into account the recent history of actual pension increases
awarded to pensioners as a result of the strong financial position and performance
of the Retirement Fund.

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, minus one year age rating as published by the Institute and
Faculty of Actuaries in London and Scotland, for retirement purposes.

Funding level per statutory actuarial valuation (%)

100

100

100

The number of pensioners registered under the Telkom Retirement
Fund

14,087

14,323

14,451

The number of in-service employees registered under the Telkom
Retirement Fund

28,677

25,320

25,766

F–77

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

Current

assumption Decrease

Increase

Rm

Rm

Rm

30.   Employee benefits (continued)
The Telkom Retirement Fund (continued)

The valuation results are sensitive to changes in the underlying

assumptions. The following table provides an indication of the
impact of changing some of the valuation assumptions:

Pension increase rate

4.5%

______    ______    ______

______    ______    ______

______    ______    ______

______    ______    ______

______    ______    ______

______    ______    ______

(1.0%)

1.0%

Benefit obligation

6,581

5,871

7,359

Percentage change

(10.8%)

11.8%

Discount rate

7.5%

(1.0%)

1.0%

Benefit obligation

6,581

7,337

5,891

Percentage change

11.5%(10.5%)

Post-retirement mortality rate

PA(90)

ultimate-1    (10.0%)

10.0%

Benefit obligation

6,581

6,774

6,409

Percentage change

2.9%

(2.6%)

2005

2006

2007

The fund portfolio consists of the following:
Equities (%)

57

72

59

Property (%)

5

4

2

Bonds (%)

21

21

19

Cash (%)

17

3

7

Foreign investments (%)*

–

–

13

* Previously these funds were included in equities. In the current year a decision was

made to improve disclosure and therefore the funds are disclosed separately.

The total expected contributions payable to the Retirement Fund for the next financial year are

R713 million.

Rm

Expected future benefit payments are as follows:
2008

755

2009

799

2010

846

2011

896

2012

949

>5 years

5,655

Total

9,900

F–78

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

30. Employee benefits (continued)
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 R42 million (2006: R38 million;
2005: R35 million). The Group’s share of the current contributions to the Provident Fund amounted
to R6 million (2006: R6 million; 2005: R2 million). The Vodacom Group’s employees totalled
6,249 (2006: 5,459; 2005: 4,993) at March 31, 2007. The South African funds are governed
by the Pension Funds Act 24 of 1956.

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 29.
Telkom 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 benefit. The most recent actuarial valuation of the benefit was performed
as at March 31, 2007.

F–79

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

30.   Employee benefits (continued)
Medical benefits (continued)

Telkom has allocated certain investments to fund this liability as set out in note 12. During the

current year an addendum to the cell captive annuity policy contract was signed, which resulted in the
annuity policy qualifying as a plan asset in terms of IAS19, effective June 1, 2006. The effect of this is
a reduction in investments to the value of R1,961 million and the liability is disclosed below:

2005

2006

2007

Rm

Rm

Rm

Medical aid
Benefit obligation:
At beginning of year

2,378

3,079

3,904

Interest cost

249

249

286

Current service cost

27

48

83

Actuarial loss

692

712

283

Curtailment gain

(112)

–

–

Settlement loss/(gain)

18

(2)

–

Termination settlement

(14)

(29)

–

Benefits paid from plan assets

–

–

(94)

Contributions paid by Telkom

(159)

(153)

(78)

Benefit obligation at end of year

3,079

3,904

4,384

Plan assets at fair value:
At beginning of year

–

Plan asset – initial recognition

1,720

Expected return on plan assets

188

Benefits paid from plan assets

(94)

Actuarial gain

147

Plan assets at end of year

1,961

Present value of funded obligation

3,079

3,904

4,384

Fair value of plan assets

–

–

(1,961)

Funded status

3,079

3,904

2,423

Unrecognised net actuarial loss

(649)

(1,297)

(1,284)

Liability as disclosed in the balance sheet (refer to note 29)

2,430

2,607

1,139

Expected return on plan assets

188

Actuarial return on plan assets

147

Actual return on plan assets

335

F–80

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

30. Employee benefits (continued)
Medical benefits (continued)
Principal actuarial assumptions were as follows:
Discount rate (%)

9.0

7.5

7.5

Expected return on plan assets (%)

–

–

13.5

Salary inflation rate (%)

6.0

6.0

6.0

Medical inflation rate (%)

7.0

6.5

6.5

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,
minus one year age rating 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

60

60

60

Number of members

18,890

17,872

17,119

Number of pensioners

8,845

8,665

8,494

F–81

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

30.   Employee benefits (continued)
Medical benefits (continued)

The valuation results are extremely sensitive to changes in the

underlying assumptions. The following table provides an indication
of the impact of changing some of the valuation assumptions above:

Current

assumption Decrease

Increase

Rm

Rm

Rm

Medical cost inflation rate

6.5%

(1.0%)

1.0%

Benefit obligation

4,366

3,969

5,126

Percentage change

(15.3%)

17.4%

Service cost and interest cost 2007/2008

405

355

465

Percentage change

(12.3%)

14.8%

Discount rate

7.5%

(1.0%)

1.0%

Benefit obligation

4,366

5,116

3,706

Percentage change

17.2% (15.1%)

Service cost and interest cost 2007/2008

405

415

395

Percentage change

2.5%

(2.5%)

Post-retirement mortality rate

PA(90)

ultimate-1 (10.0%)

10.0%

Benefit obligation

4,366

4,541

4,211

Percentage change

4.0%

(3.6%)

Service cost and interest cost 2007/2008

405

420

395

Percentage change

3.7%

(2.5%)

The fund portfolio consists of the following:

2005

2006

2007

Equities (%)

59

Bonds (%)

3

Cash and money markets investments (%)

21

Foreign investments (%)

9

Insurance policies (%)

8

Telephone rebates

Rm

Rm

Rm

Telkom provides telephone rebates to its pensioners. The most

recent actuarial valuation was performed as at March 31, 2007.
Eligible employees must be employed by Telkom until retirement age
to qualify for the telephone rebates. The scheme is a defined benefit
plan. The rebate amount given to pensioners has been increased
during the current year from R131.00 per month to R187.87 per month.

The status of the telephone rebate liability is disclosed below:

Present value of unfunded obligation

177

251

307

Unrecognised net actuarial gain/(loss)

2

(53)

(25)

Liability as disclosed in the balance sheet (refer to note 29)

179

198

282

F–82

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

30. Employee benefits (continued)
Telephone rebates (continued)
Principal actuarial assumptions were as follows:
Discount rate (%)

9.0

7.5

7.5

Rebate inflation rate (%)

0.0

0.0

0.0

Actual retirement age

65

65

65

Average retirement age

60

60

60

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, minus one year age rating as published by the Institute and
Faculty of Actuaries in London and Scotland, for retirement purposes.
Number of members18,83419,16419,515

Number of pensioners10,57111,14810,918

The valuation results are sensitive to changes in the underlying assumptions. Changing the

valuation assumptions has the following impact on the telephone rebate liabilities:

Current

assumption Decrease

Increase

Rm

Rm

Rm

Rebate inflation rate

0.0%

1.0%

Benefit obligation

307

341

Percentage change

11.1%

Discount rate

7.5%

(1.0%)

1.0%

Benefit obligation

307

339

277

Percentage change

10.4%

(9.8%)

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 third allocation of shares to

employees as at September 15, 2006 with a grant date of
November 2, 2006, the day that the employees and Telkom shared
a common understanding of the terms and conditions of this grant.
A total of 1,825,488 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 granted shares to vest.

F–83

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

30.   Employee benefits (continued)
Telkom Conditional Share Plan (continued)

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, 2007 is 1.75 years
(2006: 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:
Outstanding at beginning of the year

–

2,943,124

2,414,207

Granted during the year                                                                         3,046,242

90

1,212

Forfeited during the year                                                                        (103,118)

(67,573)

(80,923)

Vested during the year

–

(17,341)

(450,505)

Settled during the year

–

(444,093)

–

Outstanding at end of the year

2,943,124

2,414,207

1,883,991

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 the year

–

–

1,930,687

Granted during the year

–

2,024,465

1,005

Forfeited during the year

–

(62,354)

(67,651)

Vested during the year

–

(12,328)

–

Settled during the year

–

(19,096)

–

Outstanding at end of the year

–

1,930,687

1,864,041

The following table illustrates the movement of the

maximum number of shares that will vest to employees
for the November 2006 grant:
Outstanding at beginning of the year 

–

–

–

Granted during the year

–

–

1,825,488

Forfeited during the year

–

–

(52,127)

Outstanding at end of the year

–

–

1,773,361

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 fair value of the shares granted on
November 2, 2006 has been calculated by an actuary using a market share price of R141.25 at grant
date, and adjusted for a 3.5% dividend yield.

F–84

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

30. Employee benefits (continued)
Telkom Conditional Share Plan (continued)

The principal assumptions used in calculating the expected

number of shares that will vest are as follows:
Employee turnover (%)

5

5

5

Meeting specified performance criteria (%)

100

100

100

At March 31, 2007 the estimated total compensation

expense to be recognised over the vesting period was
R580 million (2006: R381 million; 2005: R192 million),
of which R141 million (2006: R127 million; 2005: R68 million)
was recognised in employee expenses for the year.

Rm

Rm

Rm

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 of the Vodacom Group
receive the value of vested benefits.

The Group exposure is 50% of the following items:

Net liability at beginning of year

–

–

122

Interest cost

–

7

10

Current service cost

–

9

18

Past service and interest costs

–

76

–

Actuarial loss

–

47

13

Net cost

–

139

163

Total benefit payments

–

(17)

(2)

Net liability at end of year

–

122

161

F–85

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2003

2004

2005

2006

2007

Rm

Rm

Rm

Rm

Rm

30.   Employee benefits (continued)
The amounts for the current and previous four

years are as follows:

Telkom Pension Fund
Defined benefit obligation

(162)

(190)

(186)

(281)

(205)

Plan assets

211

219

231

243

284

Surplus/(deficit)

49

29

45

(38)

79

Unrecognised actuarial loss/(gain)

50

100

89

118

(25)

Unrecognised/recognised net asset

99

129

134

80

54

Telkom Retirement Fund
Defined benefit obligation

(2,679)

(3,162)

(4,020)

(4,377)

(6,581)

Plan assets

3,106

3,540

4,477

5,973

7,661

Surplus

427

378

457

1,596

1,080

Unrecognised actuarial gain/(loss)

190

382

312

(742)

96

Unrecognised net asset

617

760

769

854

1,176

Medical benefits
Defined benefit obligation

(2,162)

(2,378)

(3,079)

(3,904)

(4,384)

Plan assets

–

–

–

–

1,961

Deficit

(2,162)

(2,378)

(3,079)

(3,904)

(2,423)

Unrecognised actuarial (gain)/loss

(127)

(42)

649

1,297

1,284

Liability recognised

(2,289)

(2,420)

(2,430)

(2,607)

(1,139)

Telephone rebates
Defined benefit obligation

(162)

(164)

(177)

(251)

(307)

Unrecognised actuarial (gain)/loss

–

–

(2)

53

25

Liability recognised

(162)

(164)

(179)

(198)

(282)

F–86

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

31. Trade and other payables

6,782

6,103

7,362

Trade payables

4,233

4,371

5,636

Finance cost accrued

385

141

22

Accruals and other payables

2,164

1,591

1,704

Accruals and other payables mainly represent amounts

payable for goods received, net of Value-added Tax
obligations and licence fees.

32. Reconciliation of profit for the year to cash
generated from operations

18,622

19,724

20,520

Profit for the year

6,834

9,321

8,849

Finance charges and fair value movements

1,695

1,233

1,125

Taxation

3,082

4,520

4,731

Investment income

(350)

(397)

(235)

Interest received from debtors

(127)

(136)

(190)

Non-cash items

6,329

6,206

6,582

Depreciation, amortisation, impairment and write-offs

6,288

5,876

5,315

Cost of equipment disposed when recognising finance
leases

–

–

240

Increase in provisions

135

554

1,107

Profit on disposal of property, plant and equipment and
intangible assets

(30)

(79)

(29)

Profit on disposal of investment and subsidiary

(64)

(163)

(52)

Loss on disposal of property, plant and equipment
and intangible assets

–

18

1

Decrease/(increase) in working capital

1,159

(1,023)

(342)

Inventories

(127)

(198)

(393)

Accounts receivable

441

(667)

(758)

Accounts payable

845

(158)

809

33. Finance charges paid

(1,272)

(1,316)

(1,115)

Finance charges per income statement

(1,695)

(1,233)

(1,125)

Non-cash items

423

(83)

10

Movements in interest accruals

(84)

(276)

(119)

Net discount amortised

482

423

409

Fair value adjustment

(83)

(302)

(338)

Unrealised gain/(loss)

108

72

58

F–87

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

34.   Taxation paid

(1,487)

(4,550)

(5,690)

Liability at beginning of year

(460)

(1,711)

(1,549)

Current taxation (excluding deferred taxation)

(2,500)

(3,795)

(3,545)

Business combinations

–

(8)

–

Secondary Taxation on Companies

(238)

(585)

(670)

Net taxation liability at end of year

1,711

1,549

74

35.   Dividend paid

(629)

(4,884)

(4,784)

Dividend payable at beginning of year

(7)

(7)

(4)

Declared during the year: Dividend on ordinary shares:

(606)

(4,801)

(4,678)

Final dividend for 2004: 110 cents

(606)

Final dividend for 2005: 400 cents

(2,134)

Special dividend for 2005: 500 cents

(2,667)

Final dividend for 2006: 500 cents

(2,599)

Special dividend for 2006: 400 cents

(2,079)

Dividends paid to minorities

(23)

(80)

(117)

Dividend payable at end of year

7

4

15

36.   Acquisition of subsidiaries, joint ventures and
minority shareholders’ interests

The following acquisitions were made:

By Telkom
Africa Online Limited

On February 23, 2007 Telkom acquired a 100% shareholding in Africa Online Limited from African

Lakes Corporation for a total cost of R150 million.

Africa Online Limited is an internet service provider active in Cote d’Ivoire, Ghana, Kenya, Namibia,

Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. Africa Online Limited is incorporated in the
Republic of Mauritius.

At this stage Telkom has not taken a decision to dispose of any operations as a result of the

combination.

The process of calculating a fair value of the identified assets, liabilities and contingent liabilities

will continue beyond the year end as it was impracticable to collect and analyse all the relevant
information at the time of preparation of the consolidated annual financial statements.

The purchase consideration of Africa Online Limited is not considered to be material in the

consolidated annual financial statements, and the affect of any post balance sheet transactions are
not considered to materially alter the results reported.

The contribution to revenue and net profit from Africa Online Limited since acquisition and for the

full year are not considered material.

F–88

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

36. Acquisition of subsidiaries, joint ventures and
minority shareholders’ interests (continued)

By Telkom (continued)
Africa Online Limited (continued)

The following intangible assets were identified and fair valued

at year end:

Licences

1

Brand

42

43

The goodwill recognised for year end was provisionally

calculated as follows:
Net liabilities acquired (excluding fair value of intangible
assets)

(26)

Fair value of intangible assets valued to date

43

Deferred tax raised on intangible assets

(12)

Goodwill

145

Purchase price

150

The purchase price allocation will be completed in the 2008

financial year. Goodwill has not been tested for impairment
as the accounting is provisional, and has not been allocated
to the various cash-generating units.

By the Group’s 50% joint venture, Vodacom
Africell Cellular Services (Proprietary) Limited

Effective October 1, 2006 the Vodacom Group acquired the

cellular business of Africell Cellular Services (Proprietary)
Limited. The fair value of the assets and liabilities acquired
were preliminarily determined as follows:

Fair value of net assets acquired

18

Property, plant and equipment

2

Intangible assets

23

Deferred taxation liability (including taxation effect
on intangible assets)

(7)

Goodwill

22

Purchase price

40

The customer base was not previously recorded in the

accounting records of Africell Cellular Services (Proprietary)
Limited as it was an internally generated intangible asset.

F–89

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

36.   Acquisition of subsidiaries, joint ventures
and minority shareholders’ interests (continued)

By the Group’s 50% joint venture, Vodacom (continued)

Africell Cellular Services (Proprietary) Limited (continued)

The goodwill related to the acquisition represents future

synergies and the ability to directly control Vodacom
Group’s customers in South Africa. It is impracticable
to disclose the revenue and profit of the business that
is included in the current 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 this reason it is also not practicable to determine
the impact on revenue and profits of the Group for a full year.

InterConnect s.p.r.l.

Effective November 1, 2006 the Vodacom Group acquired

the internet service provider business of InterConnect s.p.r.l.
The fair values of the assets and liabilities acquired were
preliminarily determined as follows:

Fair value of net assets acquired

4

Property, plant and equipment

1

Intangible assets

5

Deferred taxation liability

(2)

Goodwill

6

Purchase price

10

The initial purchase price of R21 million (US$3 million) (Group share: R10 million) excluding

capitalised costs was paid on November 1, 2006.

Revenue amounting to R8 million (US$1 million) (Group share: R4 million) and net profit of

R3 million (US$0.4 million) (Group share: R2 million) are included in the 2007 year results. It is
impracticable to disclose the impact of the consolidated revenue and consolidated net profit for
the full year.

The goodwill related to the acquisition represents future synergies and are allocated to the

Democratic Republic of Congo cash-generating unit.

F–90

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

36. Acquisition of subsidiaries, joint ventures
and minority shareholders’ interests (continued)

By the Group’s 50% joint venture, Vodacom (continued)
Smartphone SP (Proprietary) Limited and subsidiaries

On April 16, 2004, the Vodacom Group acquired a 85.75%

interest in the equity of Smartcom (Proprietary) Limited
through its then 51% owned subsidiary, Smartphone SP
(Proprietary) Limited. The fair values of the assets and
liabilities acquired were determined as follows:
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 in South Africa.

Tiscali (Proprietary) Limited

On February 1, 2005, the Vodacom Group acquired the

cellular business of Tiscali (Proprietary) Limited.
The fair value of the assets and liabilities acquired were
determined as follows:15

Trademarks, copyrights and other

22

Deferred taxation liability

(7)

Goodwill

5

Purchase price

20

F–91

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

36.   Acquisition of subsidiaries, joint ventures
and minority shareholders’ interests (continued)

By the Group’s 50% joint venture, Vodacom (continued)
Tiscali (Proprietary) Limited (continued)

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
in South Africa.

Cointel VAS (Proprietary) Limited

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.

The goodwill related to the acquisition represents future synergies and are allocated to the mobile

South African cash-generating unit.

F–92

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

36. Acquisition of subsidiaries, joint ventures
and minority shareholders’ interests (continued)
By the Group’s 50% joint venture, Vodacom (continued)

Smartphone SP (Proprietary) Limited and subsidiaries

On August 30, 2006, the Vodacom Group acquired a further

19% interest, in addition to the 51% interest already held,
in the equity of Smartphone SP (Proprietary) Limited, which
had a 85,75% shareholding in Smartcom (Proprietary) Limited
at that time, 100% shareholding in Stand 13 Eastwood Road
Dunkeld (Proprietary) Limited and 52% shareholding in Ithuba
Smartcard (Proprietary) Limited. The acquisition was accounted
for using the parent entity extension method.

Minority interest acquired

11

Goodwill

157

Purchase price

168

Smartcom (Proprietary) Limited

On September 13, 2006, the Vodacom Group increased

its interest in Smartcom (Proprietary) Limited to 88%
by acquiring an additional 2.25% interest through its 70%
owned subsidiary, Smartphone SP (Proprietary) Limited.
The acquisition was accounted for using the parent entity
extension method.

Minority interest acquired (<R1 million)

0

Goodwill

4

Purchase price

4

Cointel V.A.S. (Proprietary) Limited

On October 4, 2006 the Vodacom Group increased its

interest to 100% by acquiring 49% from the minority
shareholders. The acquisition was accounted for using
the parent entity extention method.

Minority interest                                                                                                                                               28

Goodwill

45

Purchase price

73

On October 9, 2006, Smartphone SP (Proprietary) Limited, acquired a 100% shareholding of

Cointel V.A.S. (Proprietary) Limited from Vodacom Group (Proprietary) Limited for R300 million (Group
share: R150 million).

F–93

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

36.   Acquisition of subsidiaries, joint ventures
and minority shareholders’ interests (continued)

By the Group’s 50% joint venture, Vodacom (continued)
Cointel V.A.S. (Proprietary) Limited (continued)

As a result of the sale of Cointel V.A.S (Proprietary) Limited from Vodacom Group (Proprietary)

Limited to Smartphone SP (Proprietary) Limited, R38.0 million (Group share: R19.0 million) goodwill
was realised, which resulted in the realisation of R17.4 million profit (Group share: R8.7 million) on
consolidation.

37. Undrawn borrowing facilities and guarantees

37.1 Rand denominated facilities and guarantees

Telkom has general banking facilities of R6,566 million with no amounts utilised at March 31,

2007. The facilities are unsecured. When drawn 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 Rand denominated credit facilities totalling R4,989 million with R816 million utilised

at March 31, 2007. The facilities that are uncommitted can also be utilised for foreign loans to foreign
entities 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.

F–94

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

37. Undrawn borrowing facilities and guarantees
37.1 Rand denominational facilities and guarantees (continued)

Guarantor

Details

Beneficiary

2005

2006

2007

Rm

Rm

Rm

Vodacom (Proprietary)

All guarantees individually less

Various

3

3

3

Limited

than R2 million

Vodacom Service

All guarantees individually less

Various

3

3

3

Provider Company

than R2 million

(Proprietary) Limited

Vodacom Service

Guarantee in respect of receipt SA Insurance

18

21

27

Provider Company

of independent intermediaries

Association

(Proprietary) Limited

of premiums on behalf of

for benefit of

short-term insurers and

insurers

Lloyd’s underwriters, and
relating to short-term insurance
business carried on in RSA.
Terminates on May 31, 2007.

Smartcom (Proprietary)

Guarantees for salary bank

Various

3

3

3

Limited

account and debit orders.

Cointel VAS

Guarantees for operating lease Various

–

–

1

(Proprietary) Limited

and debit orders.

Vodacom (Proprietary)

Letter of undertaking in

Attorneys

–

–

7

Limited

respect of land.

27

30

44

F–95

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

37.   Undrawn borrowing facilities and guarantees (continued)
37.2   Foreign denominated facilities and guarantees

The Group exposure is 50% of the following items:

Vodacom Tanzania Limited has project funding facilities of USD13 million, which were fully utilised

at March 31, 2007. Vodacom Congo (RDC) s.p.r.l. has various facilities of USD17 million of which
USD5 million was fully utilised at March 31, 2007. Vodacom International Limited has a revolving term
loan of USD180 million which was fully utilised at March 31, 2007. Vodacom Lesotho (Proprietary)
Limited has overdraft facilities with various banks of M47 million of which MNil was utilised at
March 31, 2007. 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

2005

2006

2007

Rm

Rm

Rm

Nedbank on behalf of

Unsecured standby letters

Alcatel CIT

3Nil million

330

86

–

Vodacom (Proprietary)

of credit

(2006: 311 million;

Limited

2005: 341 million)

Vodacom Group

Guarantees issued for the

Standard Bank

(Proprietary)Limited

obligation of Vodacom

Plc and

USD180 million

1,129

1,114

1,312

International Limited’s

RMB

(2006: USD180 million;

term loan facility*#

International 2005: USD180million)

(Dublin) Limited

Vodacom International Guarantees issued for the Alcatel CIT

€Nil million

122

38

–

Limited

obligation of Vodacom

(2006: €5 million;

Congo (RDC) s.p.r.l.*

2005: €15 million)

1,581

1,238

1,312

* Foreign denominated guarantees amounting to R1,312 million (2006: R1,152 million; 2005: R1,190 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.

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.

F–96

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

38. Commitments
Capital commitments authorised

7,970

10,265

11,167

Fixed-line

5,029

6,519

7,008

Mobile

2,941

3,746

4,159

Commitments against authorised capital expenditure

825

842

1,099

Fixed-line

91

200

508

Mobile

734

642

591

Authorised capital expenditure not yet contracted

7,145

9,423

10,068

Fixed-line

4,938

6,319

6,500

Mobile

2,207

3,104

3,568

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 and receivables

2007
Buildings

1,465

289

771

405

Rental receivable on buildings

(269)

(91)

(174)

(4)

Transmission and data lines

262

68

159

35

Vehicles

573

568

5

–

Equipment

23

6

17

–

Sport and marketing contracts

441

164

275

2

Customer premises equipment receivable

(57)

(30)

(27)

–

Total

2,438

974

1,026

438

Customer premises equipment receivable

The disclosed information relates to those arrangements

which were assessed to be operating leases in terms
of IAS17.

F–97

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

Total

<1 year

1 – 5 years

>5 years

Rm

Rm

Rm

Rm

38. Commitments (continued)
Operating lease commitments and receivables (continued)

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

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 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 6% to 15%.

Penalties in terms of the lease agreements are only payable should Telkom vacate a 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 (refer to note 29).

The master lease agreement for vehicles is effective April 1, 2005 for a period of three years. In

accordance with this 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 airport
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.

F–98

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

38. Commitments (continued)
Operating leases (continued)

The master lease agreements for office equipment are with two suppliers with initial periods

of 36 months effective from November 25, 2005. In terms of these agreements the leases of
individual equipment shall be valid for 36 months at a fixed fee for the entire period.

Total

<1 year

1 – 5 years

>5 years

Rm

Rm

Rm

Rm

Finance lease commitments
2007
Minimum lease payments

2,418

227

859

1,332

Finance charges

(1,198)

(166)

(540)

(492)

Finance lease obligation

1,220

61

319

840

2006
Minimum lease payments

2,644

217

908

1,519

Finance charges

(1,372)

(172)

(587)

(613)

Finance lease obligation

1,272

45

321

906

2005
Minimum lease payments

2,730

172

1,021

1,537

Finance charges

(1,521)

(168)

(642)

(711)

Finance lease obligation

1,209

4

379

826

Finance leases

A major portion of the finance leases relates to the sale and lease-back of the Group’s office

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 three 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:

Global Alliance fees

The Vodacom Group pays annual fees from February 18, 2005 for the services provided by

Vodafone Group Plc. The fee is calculated as a percentage of revenue and amounts to R250 million
(2006: R175 million; 2005: R17 million).

Retention incentives

The Vodacom Group has committed a maximum of R652 million (2006: R456 million; 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.

F–99

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

38.   Commitments (continued)
Activation bonuses

The Vodacom Group has a potential liability in respect of activation bonuses payable related to

starter packs sold which have not yet been validated. The exposure is estimated at approximately
R8 million (2006: R9 million; 2005: R6 million).

Activation commissions

The Vodacom Group has a commitment to a maximum of R116 million (2006: R142 million; 2005:

R23 million) in terms of activation commissions on gross prepaid connections in excess of the legal
liability recorded in the financial statements.

39. Contingencies

2005

2006

2007

Rm

Rm

Rm

Third parties

33

30

28

Fixed-line

30

27

24

Mobile

3

3

4

Guarantee of employee housing loans – fixed-line

122

55

27

Third parties

These amounts represent sundry disputes with suppliers 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. 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, 2007 have reduced significantly due to negotiations with financial

institutions to release certain guarantees older than 5 years.

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 15.5% per year, which has subsequently increased to
USD172 million, 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.

F–100

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

39. Contingencies (continued)
Supplier dispute (continued)

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’s subsequent appeal was dismissed by the 3rd Circuit Appeal Court with one exception – it
reversed the issue of the dismissal of the previous courts’ decision on the basis that the US courts
did not have personal jurisdiction over Telkom. Telkom instructed its attorneys to pursue an appeal on
this aspect only, to prevent Telcordia from bringing similar petitions in the future. However, the appeal
was dismissed by the Appeal Court.

On November 22, 2006, under the auspices of the Supreme Court of Appeal, Bloemfontein,

Telcordia successfully appealed the judgment in the High Court, which earlier set aside the decision of
the arbitrators partial award. Subsequent to this Telkom filed an application to the Constitutional Court
of South Africa for leave to appeal in respect of one of the issues dealt with in the judgment of the
Supreme Court of Appeals, namely, the so-called ‘Section 20’ issue. This issue revolves around the
proper relationship between the arbitrator and the courts of law in South Africa and how this
relationship is to be understood in the light of the right of access to courts set out in Section 34 of the
South African Constitution. The Supreme Court of Appeals, in its judgment, effectively failed to
recognise Telkom’s right of access to the courts for a stated case under Section 20 of the Arbitration
Act. During the course of December 2006, Telkom filed its application in the Constitutional Court.
Telkom’s application was dismissed with costs.

The parties have since reached an advanced stage in their preparation to determine the quantum

payable by Telkom to Telcordia. The quantum hearing is expected to take place in Johannesburg,
South Africa during September 2007. Following the ruling by the Constitutional Court, two hearings
were held at the International Dispute Resolutions Centre (IDRC). The first hearing was held in
London on May 21, 2007 and was a ‘directions hearing’, in terms of which the parties consented to a
ruling by the arbitrator setting out a consolidated list of proposals and issues to form part of the
quantum hearing in September 2007.

The second hearing in London at the IDRC on 25 and 26 June 2007 dealt with the application by

Telcordia for the striking out of part of Telkom’s defence on the basis that Telkom had raised issues in
its defence that had already been heard by the arbitrator prior to his partial award. This application
was dismissed by the arbitrator. The arbitrator also made a ruling compelling Telcordia to provide
certain particulars requested by Telkom with regards to the claims by Telcordia. In his ruling, the
arbitrator also set out a list of issues for determination at the quantum hearing to be held during
September 2007.

As Telkom now has a present obligation it has recognised USD70 million (R527 million) (2006 and

2005: RNil) for its estimate of probable liabilities.

Competition Commission
Independent Cellular Service Provider Association of South Africa (‘ICSPA’)

This is a complaint in terms of the Competition Act, which was brought in 2002. ICSPA alleged that

Telkom had concluded Cellsaver contracts with large corporations, providing large discounts with the
effect of discouraging the corporates from using the ‘premicell’ device installed by their members.
They alleged various contraventions of the Act. Telkom provided the Competition Commission with
certain information requested. Telkom also referred the Competition Commission to its High Court
application in respect of utilisation of the ‘premicell’ device. The Competition Commission declined to
refer the matter to the Competition Tribunal. The complainant itself then referred the matter to the
Competition Tribunal on September 18, 2003 but has done nothing since, notwithstanding that Telkom
filed its answering affidavit on November 28, 2003.

F–101

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

39.   Contingencies (continued)
Competition Commission (continued)
Independent Cellular Service Provider Association of South Africa (‘ICSPA’) (continued)

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, 1988 (as amended). The Competition Commission has to date not
imposed the maximum penalty on any offender.

The South African Value Added Network Services (‘SAVA’)

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. The complaint against Telkom was filed at the Competition Commission during May
2002. Telkom was notified by the Competition Commission of the complaint during June 2002. The
actual complaint with all of its particulars was only made available to Telkom several months later.
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 on any offender.

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.
The Competition Commission has now filed the remainder of the record, including the confidential
documents, and Telkom has filed a supplementary affidavit. The Competition Commission has filed its
answering affidavit and Telkom will prepare a reply thereto shortly.

It appears that the Competition Commission is addressing the matter and some progress towards

the finalisation of the matter can be expected within the next twelve months.

Omnilink

Omnilink alleged that Telkom was abusing its dominance by discriminating in its price for Diginet

services as against those charged to VANS and the price charged to customers who apply for a
Telkom IVPN solution. The Competition Commission conducted an enquiry and subsequently referred
the complaint, together with the SAVA complaint, to the Competition Tribunal for adjudication. This
matter is thus currently being dealt with together with the SAVA matter.

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, 1988 (as amended). The Competition Commission has to date not
imposed the maximum penalty on any offender.

Orion/Telkom (Standard Bank and Edcon): Competition Tribunal

In April 2003, Orion filed a complaint against Telkom, Standard Bank and Edcon at the Competition

Commission concerning Telkom offering discounts on public switched telecommunication services to
corporate customers. In terms of the rules of the Competition Commission, the Competition
Commission, who acts as an investigator, has one year to investigate the complaint. Since Orion did
not want to wait for the outcome of the investigation, they, simultaneously with the filing of the
complaint, also filed an application against Telkom, Standard Bank and Edcon at the Competition
Tribunal, for an interim order interdicting and restraining Telkom from offering Orion’s corporate
customers reduced rates i.e. the Cellsaver discount plan.

F–102

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

39. Contingencies (continued)

Competition Commission (continued)

Orion/Telkom (Standard Bank and Edcon): Competition Tribunal (continued)

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, 1988 (as amended). The Competition Commission has to date not
imposed the maximum penalty on any offender.

The Competition Commission completed its investigation and decided that there was no prima facie

evidence of any contravention of the Competition Act. Orion however referred the matter to the
Competition Tribunal in terms of section 51 of the Competition Act (which allows for parties to refer
matters to the Competition Tribunal themselves).

Telkom has not yet filed its answering affidavit in the main complaint before the Tribunal and it

appears as if Orion is not actively pursuing this matter any further.

The Internet Service Providers Association (‘ISPA’)

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. The
complaint was served on the Competition Commission during December 2005 and provided to Telkom
in the early part of 2006. 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 on any offender. The complaints deal with the cost of access
to the South African Internet Exchange (‘SAIX’), the prices offered by TelkomInternet, the alleged
delay in provision of facilities to ISP’s and the alleged favourable 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.
Telkom has provided the records requested and no further activity has occurred since.

M-Web and Internet Solutions (‘IS’)

On June 29, 2005, M-Web and IS jointly lodged a complaint with the Competition Commission

against Telkom and also requested interim relief at the Competition Tribunal. The complaint at the
Competition Commission mainly deals with Telkom’s pricing for ADSL retail products and the IP
connect products, the termination of the peering link between Telkom and IS, the wholesale pricing of
SAIX bandwidth for ADSL users of other ISP’s, the architecture of the ADSL access route and the
manner in which ISP’s can only connect to the ESR via IP connect as well as alleged excessive
pricing for bandwidth on the international undersea cable.

F–103

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

39.   Contingencies (continued)

Competition Commission (continued)

M-Web and Internet Solutions (‘IS’) (continued)

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, 1988 (as amended). The Competition Commission has to date not
imposed the maximum penalty on any offender.

The application for interim relief at the Competition Tribunal dealt with allegations that Telkom

should maintain the peering link between IS and Telkom in terms of the current peering agreement,
and demanded that Telkom treat the traffic generated by the ADSL customers of M-Web as traffic
destined for the peering link and that Telkom upgrades the peering link to accommodate the increased
ADSL traffic emanating from M-Web and maintain a maximum of 65% utilisation.

Telkom filed its answering affidavit, and is awaiting IS/M-Web’s replying affidavit. However, Telkom

is exploring options to obviate the complaint. There have been certain commercial undertakings which
have been received favourably, and Telkom has also reduced the prices of many of the ADSL
services and products, which will result in the current issues becoming largely academic. The peering
agreement with IS has also been finalised. To date there has been no further movement on this
matter, either in the filing of a replying affidavit by IS/M-Web in the interim relief application or in the
investigation of the matter by the Competition Commission.

Contingent Asset

Litigation is being instituted for the recovery of certain fees paid by the Vodacom Group. The

information usually required by IAS37 Provisions, Contingent Liabilities and Contingent Assets, is not
disclosed on the grounds that it can be expected to prejudice seriously the outcome of the litigation.
The directors are of the opinion that a claim may be successful and that the amount recovered could
be significant.

Telkom has a contingent asset of R52 million relating to sundry disputes with third parties. No

asset has been recognised for these as the realisation of the income is not virtually certain.

Negative working capital ratio

At each of the financial years ended March 31, 2007, March 31, 2006 and March 31, 2005

Telkom had a negative working capital ratio. A negative working capital ratio arises when current
liabilities are greater than current assets. Current liabilities are intended to be financed from operating
cash flows, new borrowings and borrowings available under existing credit facilities.

40.   Directors’ interest

DD Tabata, one of Telkom’s board members is a director and shareholder of Vuwa Investments

(Proprietary) Limited which acquired a 40% interest in SAIL Group Limited, with effect from
October 1, 2006. SAIL Group Limited is a sports marketing company that does business with Telkom.
Telkom paid R18,682,568 for the period October 1, 2006 to March 31, 2007 for these goods and
services from the SAIL Group. The outstanding creditor’s balance in Telkom at March 31, 2007 was
R151,924. Vodacom paid R599,958,860 for goods and services from the SAIL Group. The outstanding
creditors balance in Vodacom as at March 31, 2007 was R18,951,705. Vuwa Investments is a
consortium member of Amandla Omoya, who has bid to acquire a 10% stake in Vodacom.

F–104

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

40. Directors’ interest (continued)

SL Arnold, DD Tabata, M Mostert, KST Matthews and YR Tenza, five of Telkom’s board members,

are the Government’s representatives on Telkom’s Board of Directors. At March 31, 2007, the
Government held 38.83% (2006: 37.99%; 2005: 37.17%) of Telkom’s shares.

TD Mahloele is the Public Investment Corporation (‘PIC’) representative on Telkom’s Board of

Directors. As at March 31, 2007 the PIC held 15.27% (2006: 15.73%; 2005: 21.16%) of Telkom’s
shares directly.

Beneficial

Non-beneficial

Number of shares

Direct

Indirect

Direct

Indirect

Directors’ shareholding
2007
Non-executive
TF Mosololi

455

–

–

–

Total

455

–

–

–

2006
Non-executive
NE Mtshotshisa

–

–

–

88

TF Mosololi

455

–

–

–

Total

455

–

–

88

2005
Executive
SE Nxasana

367

802

–

267

Non-executive

455

–

–

88

NE Mtshotshisa

–

–

–

88

TF Mosololi

455

–

–

–

Total

822

802

–

355

The directors’ shareholding did not change between the balance sheet date and the date of issue

of the financial statements.

2005

2006

2007

Rm

Rm

Rm

Directors’ emoluments

35

15

7

Executive

For other services

33

12

4

Non-executive

For services as directors

2

3

3

F–105

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

40. Directors’ interest (continued)

Perform-

Fringe and

ance

and other

Management

Fees

Remuneration

bonus

benefits

company

Total

R

R

R

R

R

R

2007
Emoluments per director:
Non-executive

2,641,168

–

–

–

–

2,641,168

NE Mtshotshisa

463,050

–

–

–

–

463,050

SL Arnold

353,719

–

–

–

–

353,719

TCP Chikane

32,670

–

–

–

–

32,670

B du Plessis

213,367

–

–

–

–

213,367

PSC Luthuli

205,417

–

–

–

–

205,417

TD Mahloele

166,667

–

–

–

–

166,667

KST Matthews

109,643

–

–

–

–

109,643

TF Mosololi

214,417

–

–

–

–

214,417

M Mostert

232,417

–

–

–

–

232,417

DD Tabata

175,367

–

–

–

–

175,367

YR Tenza

321,767

–

–

–

–

321,767

PL Zim

152,667

–

–

–

–

152,667

Executive

–

2,272,785

–

1,653,202

–

3,925,987

LRR Molotsane*

–

2,272,785

–

1,653,202

–

3,925,987

Total emoluments – paid by Telkom

2,641,168

2,272,785

–

1,653,202

–

6,567,155

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

– 2,247,587

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

F–106

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

40.   Directors’ interest (continued)

Perform-

Fringe and

ance

and other

Management

Fees

Remuneration

bonus

benefits

company

Total

R

R

R

R

R

R

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

* Included in fringe and other benefits is a pension contribution for LRR Molotsane of R295,462 (2006: R162,597; 2005: RNil),
paid to the Telkom Retirement Fund. The performance bonus and share allocation for the 2007 year is in the process of being
concluded and therefore these amounts have not been disclosed.
+ 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–107

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

41.   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.

Business segment
Consolidated revenue

43,160

47,625

51,619

Fixed-line

31,457

32,749

33,295

To external customers

30,888

32,039

32,540

Intercompany

569

710

755

Mobile

13,657

17,021

20,573

To external customers

12,272

15,586

19,079

Intercompany

1,385

1,435

1,494

Elimination

(1,954)

(2,145)

(2,249)

Other income

280

480

384

Fixed-line

255

430

342

Elimination

(9)

–

–

Mobile

34

50

42

Operating expenses

32,179

33,428

37,533

Fixed-line

23,691

22,937

24,597

Elimination

(1,385)

(1,435)

(1,494)

Mobile

10,451

12,636

15,185

Elimination

(578)

(710)

(755)

Consolidated operating profit

11,261

14,677

14,470

Fixed-line

8,021

10,242

9,040

Elimination

807

725

739

Mobile

3,240

4,435

5,430

Elimination

(807)

(725)

(739)

Consolidated investment income

350

397

235

Fixed-line

1,992

2,583

2,899

Elimination

(1,700)

(2,250)

(2,700)

Mobile

58

64

36

Consolidated finance charges and fair value movements

1,694

1,223

1,125

Fixed-line

1,647

839

856

Mobile

47

384

269

Consolidated taxation

3,082

4,523

4,731

Fixed-line

1,775

2,981

2,813

Mobile

1,307

1,542

1,918

Minority interests

83

139

203

Fixed-line

68

81

94

Mobile

15

58

109

F–108

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

41. Segment information (continued)

Business segment (continued)
Profit attributable to equity holders of Telkom

6,752

9,189

8,646

Fixed-line

6,523

8,924

8,176

Elimination

(893)

(1,525)

(1,961)

Mobile

1,929

2,515

3,170

Elimination

(807)

(725)

(739)

Consolidated assets

50,177

54,306

57,426

Fixed-line

40,206

43,748

45,264

Mobile

11,157

12,262

14,026

Elimination

(1,186)

(1,704)

(1,864)

Investments

2,346

2,963

1,461

Fixed-line

2,240

2,861

1,280

Mobile

106

102

181

Other financial assets

5,074

275

259

Fixed-line

5,039

256

231

Mobile

35

19

28

Total assets

57,597

57,544

59,146

Consolidated liabilities

15,209

15,171

16,076

Fixed-line

10,658

10,409

10,399

Mobile

5,737

6,466

7,541

Elimination

(1,186)

(1,704)

(1,864)

Interest-bearing debt

14,003

11,123

10,364

Fixed-line

12,703

9,889

9,086

Mobile

1,300

1,234

1,278

Other financial liabilities

313

235

104

Fixed-line

313

205

70

Mobile

–

30

34

Tax liabilities

1,711

1,549

594

Fixed-line

1,395

1,234

38

Mobile

316

315

556

Total liabilities

31,236

28,078

27,138

Other segment information
Capital expenditure for property, plant and equipment

4,464

6,310

8,648

Fixed-line

2,820

3,960

5,579

Mobile

1,644

2,350

3,069

F–109

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

41.   Segment information (continued)

Other segment information (continued)

Capital expenditure for intangible assets

1,387

1,196

1,598

Fixed-line

1,284

975

1,059

Mobile

103

221

539

Depreciation and amortisation

5,944

5,714

5,019

Fixed-line

4,522

4,216

3,338

Mobile

1,422

1,498

1,681

Impairment and asset write-offs

295

162

296

Fixed-line

210

188

284

Mobile

85

(26)

12

Intangible assets impairment – Mobile

49

–

–

Workforce reduction expense – Fixed-line

961

88

24

Geographical Segment
Consolidated revenue

43,160

47,625

51,619

South Africa

42,027

46,154

49,558

Other African countries

1,135

1,487

2,099

Eliminations

(2)

(16)

(38)

Consolidated operating profit

11,261

14,677

14,470

South Africa

10,768

14,665

14,366

Other African countries

(88)

131

294

Eliminations

581

(119)

(190)

Consolidated assets

57,597

57,544

59,146

South Africa

56,544

56,479

56,797

Other African countries

1,926

2,015

3,489

Eliminations

(873)

(950)

(1,140)

Capital expenditure for property, plant and equipment and
intangible assets*

5,851

7,506

10,246

South Africa

5,504

7,135

9,459

Other African countries

347

371

787

‘South Africa’, which is also the country of domicile for Telkom, comprises the segment

information relating to Telkom and its South African subsidiaries as well as Vodacom’s South African
based mobile communications network, the segment information of its service providers.

Other African countries comprises Telkom’s subsidiary Africa Online Limited as well as Vodacom’s

mobile communications network in Tanzania, Lesotho, the Democratic Republic of the Congo and
Mozambique.

* The Geographical Segment capital expenditure disclosure has been restated to include capital expenditure on intangible

assets.

F–110

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

42. Related parties

Details of material transactions and balances with related

parties not disclosed separately in the consolidated annual
financial statements were as follows:

With joint venture:
Vodacom Group (Proprietary) Limited
Related party balances
Trade receivables

42

48

61

Trade payables

(250)

(256)

(353)

Related party transactions
Revenue

(569)

(710)

(755)

Expenses

1,385

1,435

1,494

Audit fees

3

3

3

Revenue includes interconnect fees and lease and installation of
transmission lines.
Expenses mostly represent interconnect expenses.

With shareholders:
Government
Related party balances
Trade receivables*

232

247

271

Related party transactions
Revenue*

(2,149)

(2,304)

(2,458)

* The comparatives were restated to include trade receivables and revenue which
were previously excluded.

With entities under common control:
Major public entities
Related party balances
Trade receivables*

47

39

59

Trade payables

(8)

(2)

(6)

* The comparatives were restated to include trade receivables which was previously
excluded.

The outstanding balances are unsecured and will be settled in

cash in the ordinary course of business.
Related party transactions
Revenue*

(494)

(370)

(369)

Expenses

201

172

238

Rent received

(15)

(17)

(29)

Rent paid

52

56

27

* The comparatives were restated to include revenue which was previously excluded.

F–111

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

42.   Related parties (continued)

Key management personnel compensation:
(Including directors’ emoluments)

Related party transactions
Short-term employee benefits*

115

157

176

Post-employment benefits*

5

7

14

Termination benefits

–

12

–

Equity compensation benefits

3

6

8

Other long-term benefits

1

16

27

* The comparatives were restated to include directors’ emoluments of Vodacom which was previously excluded, as 
well as toreclassify certain amounts to other long-term benefits.

Terms and conditions of transactions with related parties

The sales to and purchases from related parties of telecommunication services are made at arms

length 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
related party receivables or payables. Except as indicated above for the year ended March 31, 2007,
the Group has not made any impairment of amounts owed by related parties (2006: RNil; 2005: RNil).
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.

43. Investments in joint ventures

Vodacom Group (Proprietary) Limited (‘Vodacom’)

Telkom holds 5,000 shares of 1c each at cost. This amounts to a 50% shareholding in Vodacom.

Vodacom is an entity that is jointly controlled by its venturers, Telkom and Vodafone Plc 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.

F–112

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

2005

2006

2007

Rm

Rm

Rm

43. Investments in joint ventures (continued)

Vodacom restated its comparatives for the years ended

March 31, 2006 and 2005 (refer to note 2). The Group’s
proportionate share of Vodacom’s assets and liabilities after the
restatement is as follows:

Total assets

11,297

12,384

14,235

Non-current assets

6,944

8,040

10,422

Current assets

4,353

4,344

3,813

Total liabilities and reserves

(11,297)

(12,384)

(14,235)

Reserves

(3,880)

(4,196)

(4,713)

Minority interests

(64)

(142)

(110)

Non-current liabilities

(1,524)

(932)

(1,906)

Current liabilities

(5,829)

(7,114)

(7,506)

The Group’s proportionate share of revenue and expenses is as
follows:
Revenue

13,658

17,021

20,573

Net operating expenses

(10,417)

(12,586)

(15,142)

Profit before net finance charges

3,241

4,435

5,431

Net finance income/(charges)

12

(320)

(233)

Net income before taxation

3,253

4,115

5,198

Taxation

(1,307)

(1,542)

(1,918)

Profit after taxation

1,946

2,573

3,280

Minority interest

(15)

(58)

(109)

Net profit for the year

1,931

2,515

3,171

The Group’s proportionate share of cash flow is as follows:
Cash flow from operating activities

2,075

2,251

2,429

Cash flow from investing activities

(1,687)

(2,395)

(3,292)

Cash flow from financing activities

(98)

(53)

(100)

Net increase/(decrease) in cash and cash equivalents

290

(197)

(963)

Effect of exchange rate on cash and cash equivalents

(3)

(8)

29

Cash and cash equivalent at beginning of year

798

1,085

880

Cash and cash equivalents at end of year

1,085

880

(54)

F–113

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

44. Interest in significant subsidiaries

Country of incorporation: RSA – Republic of South Africa; TZN – Tanzania; LES – Lesotho;

MZ – Mozambique; DRC – Democratic Republic of Congo; MAU – Mauritius.

Nature of business: C – Cellular; S – Satellite; MSC – Management services company;

PROP – Property company; OTH – Other.

*Dormant at March 31, 2007.

Interest in issued

Issued share capital

ordinary share capital

Country of

2005

2006

2007

2005

2006

2007

incorporation

%

%

%

Directory advertising

TDS Directory Operations (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

R25,000,000

R5,000,000

100

100

100

Other

Rossal No 65 (Proprietary) Limited

RSA

R100

R100

R100

100

100

100

Acajou Investments (Proprietary) Limited

RSA

R100

R100

R100

100

100

100

Telkom Media (Proprietary) Limited

RSA

–

–

R100

–

–

100

Africa Online Limited

MAU

–

–

$1,000

–

–

100

The aggregate net profit of the above

six subsidiaries is R564 million
(2006: R471m; 2005: R500m)

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

TZS10,000

TZS10,000

TZS10,000

65

65

65

VM, S.A.R.L. (C)

MZ

USD60,000,000USD60,000,000USD60,000,000

98

98

98

Vodacom Congo (RDC) s.p.r.l. (C)

DRC

USD1,000,000

USD1,000,000

USD1,000,000

51

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

70

Smartcom (Proprietary) Limited (C)

RSA

R1,000

R1,000

R1,000

43.7

43.7

61.7

Cointel VAS (Proprietary) Limited (C)

RSA

–

R10,204

R10,204

–

51

70

F–114

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

44. Interest in significant subsidiaries (continued)

Interest in issued

Issued share capital

ordinary share capital

Country of

2005

2006

2007

2005

2006

2007

incorporation

%

%

%

Other significant subsidiaries of the ww

Group’s Joint Venture

Vodacom Service Provider Holdings

Company (Proprietary) Limited (MSC)

RSA

R1,020

R1,020

R1,020

100

100

100

Vodacom Satellite Services (Proprietary)

Limited (OTH)*

RSA

R100

R100

R100

100

100

100

GSM Cellular (Proprietary)

Limited (OTH)*

RSA

R1,200

R1,200

R1,200

100

100

100

Vodacom Venture No.1 (Proprietary)

Limited (MSC)*

RSA

R810

R810

R810

100

100

100

Vodacom Equipment Company
(Proprietary) Limited (OTH)*

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

R1,000

100

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

Smartcall Smartlife (Proprietary) Limited (OTH)

RSA

–

–

R100

–

–

63

Vodacom Tanzania Limited (Zanzibar) (OTH)*

TZN

TZS10,000

TZS10,000

TZS10,000

100

100

100

Joycell Shops (Proprietary) Limited (OTH)*

RSA

R100

R100

R100

100

100

100

Marble Gold Investments (Proprietary)

Limited (OTH)*

RSA

–

R100

R100

–

100

100

Vodacom Ventures (Proprietary) Limited (OTH)

RSA

–

R120

R120

–

100

100

Indebtedness of Telkom subsidiary companies

Rm

Rm

Rm

Swiftnet (Proprietary) Limited

RSA

4

2

–

Intekom (Proprietary) Limited

RSA

10

3

–

Q-Trunk (Proprietary) Limited

RSA

37

34

30

Rossal No 65 (Proprietary) Limited

RSA

21

–

–

Acajou Investments (Proprietary) Limited

RSA

3

–

–

F–115

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

45.   Subsequent events

Dividends

The Telkom Board declared an annual dividend of R3,197 million or 600 cents per share and a

special dividend of R2,664 million or 500 cents per share on June 13, 2007 payable on July 9, 2007
for shareholders registered on July 6, 2007 which will fully utilise the deferred tax asset on STC
credits and result in an additional STC charge of R733 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 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’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. 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.

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.

The Competition Tribunal has on June 28, 2007 prohibited the proposed merger between BCX

and Telkom.

Multi-links Telecommunications Limited (‘Multi-links’)

Telkom acquired 75% of Multi-links for USD280 million (R1,985 million) effective May 1, 2007.

Multi-links is a Nigerian Private Telecommunications Operator with a Unified Access License providing
fixed, mobile, data, long distance and international telecommunications services throughout Nigeria.
Due to the fact that control of the subsidiary was only obtained after year end, the Group has been
unable to disclose any further information.

VM, S.A.R.L., trading as Vodacom Mozambique

As at March 31, 2007 Vodacom owned 98% of Vodacom Mozambique, and the remaining 2%

was held by a local consortium named Empresa Moçambicana de Telecommunicações (‘EMOTEL’).
Effective April 1, 2007 Vodacom International Limited (Mauritius) sold a portion of its shares to local
investors, with 5% being purchased by Intelec Holdings Limitada and EMOTEL acquiring an additional
3%, leaving Vodacom International Limited (Mauritius) with a 90% interest in Vodacom Mozambique.

Black Economic Empowerment (‘BEE’)

The Vodacom Group is in the process of finalising a R7.5 billion BEE equity deal whereby both

BEE partners and employees will have the opportunity to share in the success of Vodacom South
Africa going forward. The deal is expected to be completed by the end of the 2008 financial year and
it is anticipated to make a significant contribution to the wellbeing of the Vodacom Group and its
employees.

F–116

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

45. Subsequent events (continued)

Wireless Business Solutions (Proprietary) Limited (‘WBS’)

On March 30, 2007 the Vodacom Group entered into an infrastructure agreement with WBS,

whereby WBS appointed the Vodacom Group to design and construct the Wimax network.

Share buy-back

As part of the Group’s commitment to the optimal use of capital, the Telkom Board approved on

June 8, 2007 a share buy-back programme.

M-Web

On June 5, 2007, M-Web brought an application against Telkom for interim relief at the

Competition Tribunal in regards to the manner in which Telkom provides wholesale ADSL internet
connections. M-Web requested the Competition Tribunal to grant an order of interim relief against
Telkom to charge M-Web a wholesale price for the provision of ADSL internet connections which is
not higher than the lowest retail price. M-Web further applied for an order that Telkom implement the
migration of end customers from Telkom PSTS (ADSL access) to M-Web without interruption of the
service. Although Telkom raised the objection that the Competition Tribunal does not have jurisdiction
to hear the matter in its answering affidavit filed at the Competition Tribunal, Telkom has also filed an
application in the High Court of the Transvaal Provincial Division on July 3, 2007 for an order
declaring that the Competition Tribunal does not have jurisdiction to hear the application made to it by
M-Web.

Other matters

The directors are not aware of any other matter or circumstance since the financial year ended

March 31, 2007 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.

46. US GAAP information

Differences between International Financial Reporting Standards and Generally Accepted
Accounting Principles in the United States

The consolidated annual 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, 2007, 2006 and 2005 and net income for each of the
three years ended March 31, 2007, 2006 and 2005 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, 2007 and for the year then ended from South African Rand (‘ZAR’) only as a matter of
convenience at the exchange rate of ZAR7.29 = US$1, the noon buying rate on March 30, 2007, the
last day of business prior to March 31, 2007. 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.

F–117

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.   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 ended March 31, 2007,
2006 and 2005.

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Net income according to IFRS

6,835

9,328

8,849

1,214

US GAAP adjustments – Telkom:
a)    Sale and lease-back/finance lease

94

–

–

–

b) Derivative financial instruments

86

89

99

14

d) Telkom pension fund

–

34

(12)

(2)

d) Post-retirement telephone rebate

–

–

69

9

e) Tax effect of reconciling differences

(68)

(45)

(58)

(8)

e) Additional distribution tax on retained earnings

(624)

(380)

(344)

(47)

e) Capital gains tax on Vodacom investment

(19)

(36)

(86)

(12)

f)

Tax rate change

(33)

33

–

–

g) Income attributable to minority shareholders

(83)

(139)

(203)

(28)

US GAAP adjustments – Vodacom:
b) Derivative financial instruments

4

4

4

–

e) Tax effect of reconciling differences

(1)

8

(47)

(6)

f)

Tax rate change

(4)

4

–

–

h) Business combinations

(2)

–

(4)

–

i)

Impairment reversal

–

(30)

11

1

j)

Inventory write-down

–

–

(9)

(1)

k) Put option fair value revaluation

–

–

125

17

Net income as per US GAAP

6,185

8,870

8,394

1,151

Earnings per share

(Per share amounts in cents)

Basic

1,142.2

1,685.4

1,632.0

223.8

Diluted

1,140.0

1,676.3

1,627.5

223.2

F–118

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46. US GAAP information (continued)

Weighted average number of shares

March 31,

March 31,

March 31,

(Number of shares)

2005

2006

2007

Basic

541,498,547

526,271,093

514,341,282

Diluted

542,537,579

529,152,318

515,763,579

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, 2007,
March 31, 2006 and March 31, 2005.

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Shareholders’ equity according to IFRS

26,361

29,466

32,008

4,391

US GAAP adjustments – Telkom:
b) Derivative financial instruments

(1)

–

–

–

c) Goodwill

66

66

66

9

d) Telkom pension fund

–

34

24

3

d) Telkom retirement fund

–

–

(100)

(14)

d) Post-retirement medical aid

–

–

(1,285)

(176)

d) Post-retirement telephone rebate

–

–

(25)

(3)

e) Tax effect of reconciling differences

–

(12)

511

70

e) Additional distribution tax on retained earnings

(1,537)

(1,917)

(2,261)

(310)

e) Capital gains tax on Vodacom investment

(233)

(269)

(355)

(49)

f)

Tax rate change

(33)

–

–

–

g) Equity attributable to minority shareholders

(220)

(301)

(284)

(39)

US GAAP adjustments – Vodacom:
c) Goodwill

92

92

94

13

e) Tax effect of reconciling differences

(2)

6

(41)

(6)

f)

Tax rate change

(4)

–

–

–

h) Business combinations

–

–

(4)

–

i)

Impairment reversal

–

(30)

(19)

(3)

j)

Inventory write-down

–

–

(9)

(1)

Shareholders’ equity according to US GAAP

24,489

27,135

28,320

3,885

F–119

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.   US GAAP information (continued)

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 accumulated other comprehensive
income accounts, other than adjustments to initially apply SFAS158. The total comprehensive income
for the year amounted to R8,375 million (2006: R8,863 million, 2005: R6,122 million). 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 ended March 31, 2007, March 31, 2006 and March 31, 2005:

Other

Retained

Comprehen-

earnings

sive Income

Balance

Rm

Rm

Rm

Total April 1, 2004

12,425

128

12,553

Change in accounting policy

(12)

–

(12)

Restated balance, April 1, 2004

12,413

128

12,541

Movement in retained earnings

5,579

17,992

Net income per US GAAP

6,185

–

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 SFAS133 to
net income for 12 month period (net of tax of R29 million)

–

(52)

226

Restated balance, March 31, 2005

17,875

65

17,940

Movement in retained earnings

4,069

21,944

Net income per US GAAP

8,870

–

Dividends paid

(4,801)

–

Foreign currency translation adjustment (restated)

–

52

(109)

Release of transitional adjustment on application of SFAS133 to
net income for the 12 month period (net of tax of R33 million)

–

(59)

167

Restated balance, March 31, 2006

21,944

58

22,002

F–120

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

Other

Retained

Comprehen-

earnings

sive Income

Balance

Rm

Rm

Rm

46. US GAAP information (continued)

Comprehensive income (continued)

Movement in retained earnings

3,457

25,401

Net income per US GAAP

8,394

Dividends paid

(4,678)

Share buy-back

(134)

Put option fair value revaluation

(125)

Adjustment to initially apply SFAS158 (net of tax of R545 million)

(932)

(932)

Foreign currency translation adjustment

46

(63)

Release of transitional adjustment on application of SFAS133 to
net income for 12 month period (net of tax of R38 million)

(65)

102

Total March 31, 2007

25,401

(893)

24,508

Movement in shareholders’ equity in accordance with US GAAP is as follows:

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Shareholders’ equity according to US GAAP

Rm

Rm

Rm

US$m

Balance, April 1

20,608

24,489

27,135

3,722

Change in accounting policy

(12)

–

–

–

Restated balance, April 1

20,596

24,489

27,135

3,722

Net income for the year

6,185

8,870

8,394

1,151

Foreign currency translation reserve

(30)

52

46

6

Fair value adjustments – derivatives

(52)

(59)

(65)

(9)

Fair value adjustments – investments

(22)

–

–

–

Dividend declared

(606)

(4,801)

(4,678)

(641)

Purchase of treasury shares

(1,574)

–

–

–

Shares bought back and cancelled

–

(1,502)

(1,596)

(219)

Shares vested and re-issued

68

86

141

20

Business combination

(76)

–

–

–

Put option fair value revaluation

–

–

(125)

(17)

Adjustment to initially apply SFAS158 (net of tax of
R545 million)

–

–

(932)

(128)

Balance, March 31

24,489

27,135

28,320

3,885

F–121

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.   US GAAP information (continued)

US GAAP income statement and balance sheet without proportional consolidation of
Vodacom:

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Income statements as per US GAAP

Operating revenue

30,887

32,035

32,540

4,464

Other income

338

429

341

47

Operating expenses and depreciation

(23,102)

(22,186)

(23,784)

(3,263)

Operating income

8,123

10,278

9,097

1,248

Investment income

292

333

198

27

Net finance costs

(1,569)

(752)

(760)

(104)

Income after financial items

6,846

9,859

8,535

1,171

Equity accounted earnings

1,925

2,500

3,254

446

Taxation

(2,518)

(3,409)

(3,301)

(453)

Minority interests

(68)

(80)

(94)

(13)

Net income

6,185

8,870

8,394

1,151

Balance sheets as per US GAAP

Non-current assets

40,185

41,633

43,588

5,979

Current assets

12,581

10,819

9,072

1,244

Total assets

52,766

52,452

52,660

7,223

Equity

24,489

27,135

28,320

3,885

Minority interests

155

159

173

24

Non-current liabilities

14,521

14,094

10,530

1,444

Current liabilities

13,601

11,064

13,637

1,870

Total equity and liabilities

52,766

52,452

52,660

7,223

F–122

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46. US GAAP information (continued)

US GAAP cash flow statement without proportional consolidation of Vodacom

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Cash flow (excluding equity accounted Vodacom)
Cash flow from operating activities

13,636

7,255

6,926

950

Cash generated from operations

13,615

14,179

13,588

1,864

Income from investments

340

313

405

55

Dividend received

1,567

1,800

2,653

364

Dividend paid

(629)

(4,884)

(4,744)

(651)

Net financing charges paid

(1,142)

(1,093)

(937)

(128)

Taxation paid

(115)

(3,060)

(4,039)

(554)

Cash flow from investing activities

(4,620)

(4,891)

(7,121)

(977)

Cash flow from financing activities

(9,799)

(204)

(2,819)

(386)

Net (decrease)/increase in cash and cash equivalents

(783)

2,160

(3,014)

(413)

Net cash and cash equivalents at beginning of year

1,998

1,215

3,375

463

Net cash and cash equivalents at end of year

1,215

3,375

361

50

Change in accounting policy:

Adoption of SFAS123 (revised 2004) ‘Share-Based Payments’ (‘SFAS123R’)

Under US GAAP, the Group previously accounted for the deferred bonus incentive scheme in

accordance with FIN28 ‘Accounting for Stock Appreciation and Other Variable Stock Option Awards
Plans, An Interpretation of APB Opinions no. 15 and 25’ (‘FIN28’). The interpretation requires
compensation costs to be recognised over the service period, or the vesting period if the service
period is not defined, based on the undiscounted value of the entitlements and the option to use the
intrinsic value method to value the compensation costs.

As of April 1, 2006, the Group adopted SFAS123R, which supercedes FIN28. The standard

requires the compensation costs to be recognised over the service period, usually the vesting period,
and eliminates the use of the intrinsic valuation method.
The impact of the adoption is that the deferred bonus scheme is no longer a reconciling item and a
decrease in opening retained earnings of R12 million (net of tax of R6 million) in the 2005 financial
year.

Reclassification of deferred tax

The Group balance sheet has been restated to reclassify certain deferred tax balances from non-

current to current assets and liabilities in accordance with the requirements of SFAS109.

The following is a description of the significant differences between IFRS and US GAAP as
they apply to the Group:

(a) Sale and lease-back/finance lease

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 was accounted for under US GAAP as capital leases.

F–123

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.  US GAAP information (continued)

(a)  Sale and lease-back/finance lease (continued)

Under the provisions of IAS17, the Group recorded a gain from the sale amounting to

R463 million in 2000 and accounted for the lease-backs as operating leases.

Under US GAAP, SFAS13, the Group determined 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 exceeded 90% of the fair value of these vehicles or the lease term represented 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 were applied to interest expense on the obligation as well as to reduce the principal
amount of the obligation. The resulting capital lease assets were depreciated over their remaining
useful lives. The effect of the US GAAP difference is summarised as follows:

March 31,

2005

Rm

Retained earnings opening balance

(94)

Recognition of deferred profit

92

Depreciation

(40)

Finance costs

(8)

Add back: lease expense

50

Net impact on income statement

94

Retained earnings closing balance

–

Balance sheet

Capital lease asset

17

Opening balance

57

Additions

–

Depreciation

(40)

Capital lease liability

17

Opening balance

59

Additions

–

Lease payments

(50)

Finance charges

8

F–124

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46. US GAAP information (continued)

(a) Sale and lease-back/finance lease (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:

March 31,

March 31,

*

March 31,

2006

2007

2007

Rm

Rm

US$m

Depreciation

(14)

(14)

(2)

Finance costs

(3)

(3)

–

Add back: lease expense

17

17

2

Net impact on income statement for the year

–

–

–

Balance sheet
Capital lease asset

28

14

2

Opening balance

–

28

4

Additions

42

–

–

Depreciation

(14)

(14)

(2)

Capital lease liability

28

14

2

Opening balance

–

28

4

Additions

42

–

–

Lease payments

(17)

(17)

(2)

Finance charges

3

3

–

F–125

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.  US GAAP information (continued)

(a)  Sale and lease-back/finance lease (continued)

The Group’s operating lease commitments under US GAAP as at March 31, 2007 are as follows:

Buildings

Equipment

Vehicles

Total

Rm

Rm

Rm

Rm

2008

152

6

547

705

2009

120

10

–

130

2010

88

7

–

95

2011

58

–

–

58

2012

18

–

–

18

> 5 years

8

–

–

8

Total

444

23

547

1,014

The Group’s finance lease commitments under US GAAP as at March 31, 2007 are as follows:

Buildings

Equipment

Vehicles

Total

Rm

Rm

Rm

Rm

2008

120

5

17

142

2009

126

3

–

129

2010

112

1

–

113

2011

121

1

–

122

2012

128

–

–

128

> 5 years

1,290

–

–

1,290

Total

1,897

10

17

1,924

Unrecognised finance charges

(1,051)

(1)

(3)

(1,055)

Capital lease liability

846

9

14

869

(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 in which IAS39 was initially applied. 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.

F–126

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46. US GAAP information (continued)

(b) Derivative financial instruments (continued)

In the 2007 fiscal year, the Group reclassified from OCI into earnings R65 million (net of tax of

R38 million) (2006: R59 million (net of tax of R33 million); (2005: R52 million (net of tax of R29
million)) as the hedged transaction impacted earnings.

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. Upon adoption, the Group also recorded an adjustment of
R45 million to increase the carrying value of a 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 2007 fiscal year,
the hedged debt instruments has already been fully amortised into earnings (2006: R1 million;
2005: R11 million).

(c) Goodwill

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’ and IFRS 3 which was adopted by the Group from April 1, 2004. From this
date goodwill is no longer amortised.

Under US GAAP, goodwill arising on the acquisition of a foreign entity was translated at the actual

exchange rate at the end of the year. 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. The cumulative equity effect in 2004 amounted to R160 million, which is
the difference that will remain the same as goodwill is also no longer depreciated for IFRS from
April 1, 2004.

(d) Employee benefits

Telkom 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 amortised to the income statement over the remaining
working lives of the employees under US GAAP. The amount recognised under IFRS is R55 million
(2006: R80 million; 2005: RNil), as compared to the amount of R79 million (2006: R114 million;
2005: RNil) that has been recognised under US GAAP.

F–127

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.  US GAAP information (continued)

(d)  Employee benefits (continued)

Telkom pension fund surplus (continued)

In addition, an amount of R2 million relating to an actuarial gain unrecognised under IFRS was

recognised directly to other comprehensive income in terms of SFAS158.

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.

In addition to the differences noted above, SFAS158 requires an employer to recognise the over

funded or under funded status of a defined benefit post-retirement plan (other than a multi-employer
plan) as an asset or liability in its statement of financial position and to recognise changes in that
funded status in the year in which the changes occur through comprehensive income of a business
entity. SFAS158 has been applied for the year ended March 31, 2007.

Telkom pension fund

The net periodic pension costs include the following components:

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Service cost on benefits earned:
Interest and service cost on projected benefit obligations

22

22

22

3

Expected return on plan assets

(22)

(24)

(19)

(3)

Amortisation of transitional obligation

(3)

(3)

(11)

(2)

Amortisation of unrecognised net loss

5

6

62

9

Settlement costs

–

–

(9)

(1)

Net periodic pension cost

2

1

45

6

The status of the pension plan is as follows:
Net funding position

45

(38)

79

11

Unrecognised net transitional asset

(38)

(35)

(24)

(3)

Unrecognised actuarial loss

89

187

22

3

Recognised in other comprehensive income

–

–

2

–

Pension surplus

96

114

79

11

Telkom Retirement fund
The net periodic retirement costs include the following
components:
Service cost on benefits earned:
Interest and service cost on projected benefit
obligations

301

346

312

43

Expected return on plan assets

(338)

(430)

(489)

(67)

Amortisation of transitional obligation

1

1

1

–

Amortisation of unrecognised net loss/(gain)

29

–

(145)

(20)

Net periodic retirement benefit

(7)

(83)

(321)

(44)

F–128

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46. US GAAP information (continued)

(d) Employee benefits (continued)

The status of the retirement plan is as follows:

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Net funding position

457

1,596

1,080

148

Unrecognised net transitional obligation

6

5

4

–

Unrecognised actuarial loss/(gain)

312

(742)

96

13

Recognised in other comprehensive income

–

–

(100)

(13)

Retirement plan surplus

775

859

1,080**

148

** The Telkom Retirement Fund is a defined contribution fund with regards to in-service members. On retirement, an employee

is transferred from a defined contribution plan to a defined benefit plan. Telkom, a guarantor is contingently liable for any
deficit in the Telkom Retirement Fund. Moreover, all the assets, including any potential excess belong to the participants of
the scheme. The Company is unable to benefit from the excess. Accordingly, the Company has only recognised an obligation
for the effects of the delayed recognition criteria of these standards as the funded status of the plan.

Post-retirement medical aid

The net periodic medical aid costs include the following components:

March 31,

*March 31,

2007

2007

Rm

US$m

Service cost on benefits earned:
Interest and service cost on projected benefit obligations

369

51

Expected return on plan assets

(188)

(26)

Amortisation of unrecognised net loss

149

20

Net periodic post-retirement medical aid cost

330

45

The status of the post-retirement medical aid plan is as follows:
Net funding position

(2,405)

(330)

Unrecognised actuarial loss

1,285

176

Recognised in other comprehensive income

(1,285)

(176)

Post-retirement medical aid liability

(2,405)

(330)

Post-retirement telephone rebate

In the current year the Group increased the telephone rebate for pensioners entitled to this benefit

as well as those pensioners who will be entitled to the benefit when they retire. The additional
obligation for the increased rebate amount is treated as a past service cost to the extent that it relates
to prior service by the employees. Under IFRS the past service cost is recognised immediately for
those employees for whom the service has already vested and over the remaining working lives for
the employees who are still in service. Under US GAAP the entire additional cost, including that
relating to pensioners, is amortised over the remaining working lives of the active employees. This
resulted in a difference of R69 million between the past service cost recognised under IFRS compared
to US GAAP recognition of this cost.

F–129

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.  US GAAP information (continued)

(d)  Employee benefits (continued)

The net periodic post-retirement telephone rebate costs include the following components:

March 31,

*March 31,

2007

2007

Rm

US$m

Service cost on benefits earned:
Interest and service cost on projected benefit obligations

23

3

Amortisation of unrecognised net loss

5

1

Amortisation of past service cost

7

1

Net periodic post-retirement telephone rebate cost

35

5

The status of the post-retirement telephone rebate plan is as follows:
Net funding position

(307)

(42)

Unrecognised actuarial loss

8

1

Past service cost

86

12

Recognised in other comprehensive income

(94)

(13)

Post-retirement telephone rebate liability

(307)

(42)

(e)  Taxation

The tax effects of the US GAAP adjustments relating to Telkom’s operations have been calculated

based on a tax rate of 36.89% (2006: 36.89%; 2005: 37.78%).

Telkom is taxed at a corporate tax rate of 29% (2006: 29%; 2005: 30%) on taxable income.

Telkom incurs an additional Secondary Tax on Companies (‘STC’) at a rate of 12.5% (2006: 12.5%;
2005: 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.

F–130

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46. US GAAP information (continued)

(e) Taxation (continued)

The following is the reconciliation of the tax expense computed using the statutory tax rate of 29%

(2006: 29%; 2005: 30%) to the effective rate of 39% (2006: 35%; 2005: 37%)

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Income before tax per US GAAP

6,846

9,859

8,539

1,171

Expected income tax expense at statutory rate

2,054

2,859

2,476

340

Exempt income

(90)

(161)

(20)

(3)

Disallowable expenses

96

61

65

9

Tax rate change

–

(33)

–

–

Tax losses not utilised

8

–

(7)

(1)

Capital gains tax

–

–

105

15

Adjustments due to STC

509

743

637

87

Adjustment on possible CGT – Vodacom earnings

19

36

86

12

Under provision for prior year

(78)

(96)

(41)

(6)

Effective tax

2,518

3,409

3,301

453

Capital gains tax on Vodacom investment

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 (‘CGT’) at a
rate of 29% (2006: 29%; 2005: 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.

Deferred tax

Deferred tax benefits and liabilities are calculated, when applicable, for the differences between

IFRS and US GAAP.

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 loss for IFRS
purposes of R99 million (Group share R49 million) (2006: R101 million benefit (Group share 
R50million)).

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.

F–131

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.  US GAAP information (continued)

(e)  Taxation (continued)

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 R363 million (Group share R182 million) (2006: R279 million (Group share R140 million); 2005:
R109 million (Group share R55 million)) have no effect on the net shareholder’s equity for the current
year.

A reconciliation of the deferred tax balances under IFRS to the amounts determined under US

GAAP, is as follows:

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Net deferred tax liability per IFRS

(435)

(587)

(1,123)

(154)

Vodacom deferred tax balance (equity accounted)

82

152

186

26

Additional distribution tax

(1,537)

(1,917)

(2,261)

(310)

CGT on Vodacom investment

(233)

(269)

(355)

(49)

Tax effect of US GAAP adjustments

–

(12)

511

70

Change in tax rate

(33)

–

–

–

Net deferred tax liability per US GAAP

(2,156)

(2,633)

(3,042)

(417)

Classification of deferred tax

Under IFRS, in terms of IAS12 – Income Taxes, the Group classifies deferred taxes as non-

current assets or non-current liabilities. Under US GAAP, in terms of SFAS109, the Group has
classified deferred tax liabilities and assets into a current amount and non-current amounts. Deferred
tax liabilities and assets are classified as current or non-current based on the classification of the
related asset or liability for financial reporting. Deferred tax liabilities or assets that are not related to
an asset or liability for financial reporting, including deferred tax assets related to loss carry-forwards,
are classified according to the expected reversal date of the temporary differences. The following table
reflects the classification of deferred taxes for the periods presented:

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Current asset

746

775

788

108

Non-current liability

(2,902)

(3,408)

(3,830)

(525)

Net deferred tax liability per US GAAP

(2,156)

(2,633)

(3,042)

(417)

(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 and
March 31, 2007 were recorded at the enacted taxation rate of 29%.

F–132

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46. US GAAP information (continued)

(f) Tax rate change (continued)

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 2007 and 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 shareholders

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) Business combinations

Under IFRS, the Group fair values 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, liabilities assumed

and contingent liabilities, 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 within
the Vodacom Group 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.

F–133

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.  US GAAP information (continued)

(h)  Business combinations (continued)

During the 2007 financial year, the Group acquired non-controlling interests in several of the

Vodacom Group subsidiaries. The Group’s IFRS accounting policy is to account for such transactions
using the ‘parent entity extension method’. Under this method, the assets and liabilities of the
subsidiary were not restated to reflect their fair values at the date of the acquisition. The difference
between the purchase price and the minority interest’s share of the assets and liabilities reflected
within the consolidated balance sheet at the date of the acquisition was therefore reflected as
goodwill. Under US GAAP, these were accounted for as step acquisition of minorities using the
purchase method. The acquired assets and liabilities were recorded at fair value, resulting in
additional amortisation under US GAAP. The minority interest allocation under US GAAP is also
different from that under IFRS.

The acquisition of 100% shareholding in Africa Online Limited as noted in note 36 to the

consolidated annual financial statements has not resulted in a significant US GAAP difference.

(i) Impairment reversal

In 2006, the Group reversed an impairment loss under IFRS, which is not allowed under US

GAAP.

In 2007, the Group recognised an impairment loss under IFRS related to its operations in

Mozambique. Under US GAAP, the Group evaluates the recoverability of long-lived assets, using
undiscounted cash flows and determined that the carrying amount the assets in Mozambique were
recoverable. As a result, the IFRS impairment loss was not recognised under US GAAP.

(j) Inventory write-down

During the 2007 financial year, the Group reversed inventory write downs which had been

recognised in previous years. US GAAP prohibits the reversal of inventory write downs.

(k) Put option fair value revaluation

Under IFRS, the redemption amount of the Congolese Wireless Networks s.p.r.l. put option is

recorded as a liability, with changes in this amount recorded through the consolidated income
statement. Under US GAAP, the obligation under the put option is accounted for by analogy to EITF
D-98 ‘Classification and Measurement of Redeemable Securities,’ with the carrying value of the
minority interest being increased to the redemption amount. The Group has elected to record the
changes in the redemption amount directly in retained earnings.

(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.

F–134

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46. US GAAP information (continued)

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 are reflected in the consolidated financial statements using the equity method. The
following table sets out the abbreviated US GAAP income statement and balance sheet of the Group
joint venture company, Vodacom.

Restated

Restated

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Income statements as per US GAAP
Operating income

6,538

8,869

10,902

1,495

Income after financial items

6,561

8,229

10,688

1,466

Taxes

(2,727)

(3,300)

(3,882)

(532)

Minority interests

(77)

(161)

(252)

(35)

Change in accounting policy

5

5

5

1

Net income for the year

3,762

4,773

6,559

900

Balance sheets as per US GAAP
Non-current assets

14,150

16,286

21,287

2,915

Current assets

8,706

8,689

7,613

1,049

Total assets

22,856

24,975

28,900

3,964

Equity

6,849

7,221

8,225

1,128

Minority interests

166

321

549

75

Non-current liabilities

4,367

3,574

5,364

736

Current liabilities

11,474

13,859

14,762

2,025

Total equity and liabilities

22,856

24,975

28,900

3,964

(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.

F–135

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.   US GAAP information (continued)

(m)  Guarantees (continued)

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 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 derivatives:

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Assets
Maturing within the next twelve months

1,159

154

229

31

Maturing beyond twelve months

112

102

–

–

Liabilities
Maturing within the next twelve months

229

172

57

8

Maturing beyond twelve months

83

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 to the related accounts. 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.

F–136

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46. US GAAP information (continued)

(q) Embedded leases

The Group has lease arrangements that qualify as leases in terms of EITF01-08 ‘Determining

Whether An Arrangement Contains a Lease’. EITF01-08 requires all lease arrangements beginning
April 1, 2004 to be included in the lease assessment. The related IFRS interpretation IFRIC4
‘Determining Whether An Arrangement Contains a Lease’, requires that all lease arrangements that
existed at April 1, 2007 be assessed. The Group therefore has more finance leases under IFRS than it
has under US GAAP. The resultant US GAAP difference is not considered to be material and
therefore a reconciling item has not been recognised under US GAAP.

Additional US GAAP disclosures

Intangible assets

Aggregate amortisation expense for other identifiable intangible assets under US GAAP for the

year ended March 31, 2007 is R536 million (2006: R560 million; 2005: R502 million). The estimated
amortisation expense for the subsequent years ending March 31 is as follows:

March 31,

March 31,

2006

2007

Rm

Rm

2007

418

–

2008

395

333

2009

356

329

2010

279

329

2011

223

323

2012

–

298

The 2005 expected amortisation of intangibles has not been disclosed because it is not practically

available.

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, 2007 balance amount to R4,762 million (2006: R4,291 million, 2005: R4,030 million).

Telkom 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 Group also invested funds in a Guardrisk risk policy which is specifically set aside for

employees infected with the human-immunodeficiency-virus (HIV). The funds will be used for that
purpose only and are therefore not distributable.

F–137

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.  US GAAP information (continued)

Additional US GAAP disclosure (continued)

The following is a reconciliation of retained earnings per US GAAP to the amount of unrestricted

retained earnings:

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Retained earnings per US GAAP

17,875

21,944

25,401

3,484

Share of non-distributable retained earnings in
significant investee

(4,030)

(4,291)

(4,762)

(653)

Cell Captive investments

(517)

(1,233)

(1,471)

(202)

Unrestricted retained earnings under US GAAP

13,328

16,420

19,168

2,629

Statement of income classification items

US GAAP requires the disclosure of certain income statement items not disclosed elsewhere in

the group financial statements.

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Revenues from other services

(26,822)

(27,689)

(27,867)

(3,823)

Income from rentals

(662)

(756)

(691)

(95)

Net sales of tangible products

(194)

(210)

(431)

(59)

Revenue from SA Government

(2,149)

(2,304)

(2,458)

(337)

Revenue from other related parties

(1,060)

(1,076)

(1,093)

(150)

Total operating revenue

(30,887)

(32,035)

(32,540)

(4,464)

Total revenue from services

(30,693)

(31,824)

(32,109)

(4,405)

–  Subscription and connection

(5,168)

(5,595)

(5,855)

(803)

–  Domestic (local and long distance)

(9,323)

(8,915)

(8,106)

(1,112)

–  Fixed to mobile

(7,302)

(7,647)

(7,646)

(1,049)

–  International outgoing

(1,135)

(1,001)

(988)

(136)

–  Interconnection

(1,546)

(1,654)

(1,639)

(225)

–  Data

(5,810)

(6,674)

(7,489)

(1,027)

–  Directories and other

(409)

(338)

(386)

(53)

Revenue from product sales

(194)

(211)

(431)

(59)

Total operating revenue

(30,887)

(32,035)

(32,540)

(4,464)

Costs of services

13,941

12,888

13,059

1,791

Cost of sales related to services

75

83

78

11

Cost of tangible products sold

167

257

492

68

Operating expenses of other income and SG&A

8,162

8,175

9,392

1,288

Operating lease expenses

757

783

763

105

Total operating expense

23,102

22,186

23,784

3,263

Net interest and amortisation of debt expense#

1,276

418

562

77

# Net interest and amortisation of debt expense exclude interest received from debtors of R189m (2006: R135m,

2005: R128m) which for IFRS was classified as Other Income.

F–138

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46. US GAAP information (continued)

Additional US GAAP disclosure (continued)

The prior period revenue disclosures have been restated to correctly reflect the revenue received

from the South African Government and other related parties.

The prior period net interest and amortisation of debt expense has been restated to correctly

reflect the effects of finance costs and fair value adjustments.

Balance Sheet Classification Items

US GAAP requires the disclosure of certain balance sheet items not disclosed elsewhere in the

group financial statements.

March 31,

March 31,

March 31,

*March 31,

2005

2006

2007

2007

Rm

Rm

Rm

US$m

Amounts payable to affiliates

(491)

(520)

(551)

(75)

Trade creditors

(1,944)

(1,751)

(2,247)

(309)

Restructuring liability

(606)

(3)

–

–

Other amounts payable

(1,603)

(1,567)

(1,372)

(188)

Total payable

(4,644)

(3,841)

(4,170)

(572)

Other payables include the following broad categories of payables: Financial instrument payables,

sundry provisions, accruals and VAT payable.

The prior periods balance sheet classification items have been restated to correctly reflect the effects of foreign trade

creditors as Trade Creditors rather than other amounts payable and the amounts payable to controlled companies to Trade
Creditors.

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:

Restructuring provision

Opening balance

97

606

3

–

Movement in provision

961

85

24

3

Workforce reduction payments

(452)

(688)

(27)

(3)

Closing balance restructuring liability

606

3

–

–

F–139

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.   US GAAP information (continued)

US GAAP standards adopted in 2007

•  In November 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. The guidance is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of
SFAS151 did not have a material impact on the Group’s financial position or results of
operations.

• 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. The cost will be recognised over the period during which an employee is
required to provide services in exchange for the award. SFAS123R provides an option when
initially adopting the standard between the modified retrospective method and the modified
prospective method. The impact of the adoption is that the deferred bonus scheme is no longer
a reconciling item and a decrease in opening retained earnings of R12 million (net of tax of
R6 million) in the 2005 financial year.

• In December 2004, the FASB issued SFAS153 ’Exchanges of Non-monetary Assets, an

amendment of APB Opinion No. 29’ (‘SFAS153’). The guidance in Accounting Principles Board
Opinion 29 ‘Accounting for Non-monetary Transactions’ (‘APB29’), 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 has
adopted the provisions of SFAS153 for non-monetary asset exchange transactions entered into
after April 1, 2006. The adoption of SFAS153 has had no material impact on its Group’s
financial position or results of operations.

• In March 2005 the Securities and Exchange Commission (‘SEC’) issued Staff Accounting

Bulletin ‘Share-based Payments’ (‘SAB107’). 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 application of this bulletin has had no impact on the Group’s financial
position or results of operations.

F–140

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46. US GAAP information (continued)

• In May 2005, the FASB issued Statement 154 ‘Accounting Changes and Error Corrections’

(‘SFAS154’). SFAS154 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 in 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. The group has adopted this standard with effect from April 1, 2006. The adoption
of this standard has had no impact on the Group’s financial position or results of operations.

• 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’).The Taskforce reached a
consensus 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 Group adopted this standard with
effect from April 1, 2006. The adoption of EITF05-6 does not have a material impact on the
Group’s consolidated financial position or results of operations.

• 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 has adopted the provisions of this FSP to new plans as from
April 1, 2006. The adoption of this standard has no impact on the Group’s financial position or
results of operations.

• In September 2006, the FASB issued SFAS158 ’Employers’ Accounting for Defined Benefit

Pension and Other Post-retirement Plans’ (‘SFAS158’). This statement requires an employer to
recognise the over funded or under funded status of a defined benefit post-retirement plan
(other than a multi-employer plan) as an asset or liability in its statement of financial position
and to recognise changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity. An employer with publicly traded equity securities is
required to initially recognise the funded status of a defined benefit post-retirement plan and to
provide the required disclosure as of the end of the fiscal year ending after December 15, 2006.
Retrospective application of SFAS158 to any prior period is not permitted. The Group adopted
the provisions of FAS158 at March 31, 2007 and the impact is disclosed in the financial
statements of the Group.

F–141

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.   US GAAP information (continued)

•  In September 2006, the Emerging Issues Task Force issued Issue No 06-9 (EITF 06-9)

‘Reporting a change in (or elimination of) a previously existing difference between the fiscal year
end of a parent company and that of a consolidated subsidiary or equity method investee’. ARB
51 and Opinion 18 allow a parent to have a difference between the parent’s reporting year-end
and the reporting year-end of a consolidated entity or an investor to have a difference between
the reporting year end of the investor and the reporting year end of an equity method investee
to consolidate the results of an entity’s operations. The task force reached a consensus that a
parent or an investor should report a change to a previously existing difference between the
parent’s reporting period and the reporting period of a consolidated entity or between the
reporting period of an investor and the reporting period of an investee in the parent’s or
investor’s consolidated financial statements as a change in accounting principle in accordance
with the provisions of Statement 154. The early adoption of this standard has no material impact
on the Group’s consolidated financial position or results of operations.

• In September 2006, the FASB issued SAB108 ‘Financial statement misstatements’. The

interpretation of this Staff Accounting bulletin expresses the staff’s views regarding the process
of quantifying financial statement misstatements. This Staff Accounting Bulletin provides
guidance on quantifying and evaluating the materiality of unrecognised misstatements. SAB108
requires that a company use both the ‘iron curtain’ and ‘rollover’ approaches when quantifying
misstatement amounts. The determination that an error is material in a current year that
includes prior-year effects may result in the need to correct prior-year financial statements, even
if the misstatement in the prior year or years is considered immaterial. When companies correct
prior year financial statements for immaterial errors, SAB108 does not require previously filed
reports to be amended. Such correction may be made the next time the company files the prior
year financials. The adoption of this standard has not resulted in a material impact in prior and
current year financial statements.

Recently issued and not yet adopted accounting standards

The following new standards are being investigated to determine the possible impact on Group

results:

Standards effective for the March 2008 financial year

• In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155

‘Accounting for Certain Hybrid Financial Instruments’ (‘SFAS155’). SFAS155 allows any hybrid
financial instrument that contains an embedded derivative that otherwise would require
bifurcation under SFAS No. 133 ‘Accounting for Derivative Instruments and Hedging Activities,’
to be carried at fair value in its entirety, with changes in fair value recognised in earnings. In
addition, SFAS155 requires that beneficial interests in securitised financial assets be analysed
to determine whether they are freestanding derivatives or contain an embedded derivative.
SFAS155 also eliminates a prior restriction on the types of passive derivatives that a qualifying
special purpose entity is permitted to hold. SFAS155 is applicable to new or modified financial
instruments in fiscal years beginning after September 15, 2006, though the provisions related to
fair value accounting for hybrid financial instruments can also be applied to existing instruments.
The Group does not expect the adoption of SFAS155 to have a material impact on the
consolidated financial position or results of operations.

F–142

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46. US GAAP information (continued)

• In March 2006, the FASB issued SFAS No. 156 ‘Accounting for Servicing of Financial Assets’

(‘SFAS156’). SFAS156 addresses the accounting for recognised servicing assets and servicing
liabilities related to certain transfers of the servicer’s financial assets and for acquisitions or
assumptions of obligations to service financial assets that do not relate to the financial assets of
the servicer and its related parties. SFAS156 requires that all recognised servicing assets and
servicing liabilities are initially measured at fair value, and subsequently measured at either fair
value or by applying an amortisation method for each class of recognised servicing assets and
servicing liabilities. SFAS 156 is effective in fiscal years beginning after September 15, 2006.
The Group is currently evaluating the potential impact, if any, that the adoption of SFAS156 will
have on the consolidated financial position or results of operations.

• In July 2006, the FASB issued FASB Interpretation No. 48 ‘Accounting for Uncertainty in Income

Taxes – an Interpretation of FASB Statement No. 109’ (‘FIN 48’). FIN48 prescribes a
comprehensive model for how a company should recognise, measure, present, and disclose in
its financial statements uncertain tax positions that it has taken or expects to take on a tax
return. FIN48 is effective for the Group as of April 1, 2007. The Group is currently evaluating the
impact of adopting FIN48 and is unable to estimate the impact at this time, if any, on the
consolidated financial statements.

• EITF 06-2 ‘Accounting for sabbatical leave and other similar benefits pursuant to FASB43,

Accounting for compensated absences’. The EITF concludes that the compensation should be
recognised over a service period where the employee has a right to be compensated for
absence subject to completion of minimum service period, in which benefits do not increase
with years of service and the employee is not required to perform duties for the entity during
absence. The impact of the EITF is still being assessed and it is not expected to have a material
impact on the Group’s financial position and results of operations.

• In June 2006, the FASB ratified the consensus on Emerging Issues Task Force (EITF) Issue No.

06-3, ‘How Taxes Collected from Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement’ (‘EITF06-3’). The scope of EITF06-3 includes any tax
assessed by a governmental authority that is directly imposed on a revenue-producing
transaction between a seller and a customer and may include, but is not limited to, sales, use,
value added, and certain excise taxes. EITF06-3 states that presentation of taxes within the
scope of this EITF on either a gross basis or a net basis is an accounting policy decision which
should be disclosed pursuant to APB No. 22, Disclosure of Accounting Policies. If such taxes
are significant, and are presented on a gross basis, the amounts of those taxes should be
disclosed. The consensus on EITF06-3 will be effective for interim and annual reporting periods
beginning after December 15, 2006. The Group previously disclosed that the Group records
revenues net of value-added taxes and other taxes collected from customers that are remitted
to governmental authorities.

F–143

Notes to the consolidated annual financial statements (continued)

for the three years ended March 31, 2007

46.   US GAAP information (continued)

Standards for financial years beyond 2008

•  In September 2006, the FASB issued SFAS No. 157 ‘Fair Value Measurements’ (‘SFAS157’).

SFAS157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. The
provisions of this standard apply to other accounting pronouncements that require or permit fair
value measurements. SFAS157 becomes effective for the Company on April 1, 2008. Upon
adoption, the provisions of SFAS157 are to be applied prospectively with limited exceptions.
The Group is currently evaluating the potential impact, if any, that the adoption of SFAS157 will
have on the consolidated financial position or results of operations.

•  In February 2007, the FASB issued SFAS159, ‘The Fair Value Option for Financial Assets and

Financial Liabilities’. The standard allows entities to voluntarily choose, at specified election
dates, to measure many financial assets and financial liabilities (as well as certain non-financial
instruments that are similar to financial instruments) at fair value (the ‘fair value option’). The
election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option
is elected for an instrument, the Statement specifies that all subsequent changes in fair value
for that instrument shall be reported in earnings. This Statement is effective as of the beginning
of an entity’s first fiscal year that begins after November 15, 2007.

VODACOM GROUP (PROPRIETARY) LIMITED

CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

FOR THE THREE YEARS ENDED MARCH 31, 2007

CONTENTS

Page

Report of the Independent Auditors

F-145

Consolidated Income Statements

F-146

Consolidated Balance Sheets

F-147

Consolidated Statements of Changes in Equity

F-148

Consolidated Cash Flow Statements

F-149

Notes to the Consolidated Annual Financial Statements

F-150

F-144

F–145

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 at March, 31 2007, 2006 and 2005, and the related
consolidated income statements, consolidated statements of changes in equity and consolidated cash
flow statements for the three years then ended as set out on pages F–146 to F–236. 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 audits.

We conducted our audits in accordance with International Standards on Auditing and 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. The Group is not required to have, nor were we
engaged to perform, an audit of its 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 financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our audit opinion.

In our opinion, the consolidated annual financial statements present fairly, in all material respects,

the financial position of the Group as at March, 31 2007, 2006 and 2005, 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 of South Africa.

Note 23 to the consolidated annual financial statements discloses the adoption of two new

accounting pronouncements. These relate to the adoption of IFRS 8: “Operating Segments” which has
adjusted disclosure of segments reported previously in terms of IAS 14: “Segment Reporting” as well
as the adoption of the revised IAS 21: “The Effects of Changes in Foreign Exchange Rates” which
resulted in all foreign exchange gains and losses on monetary investments in foreign operations being
recognised in equity whereas some were previously recognised in the consolidated income statement.

IFRS vary in certain significant respects from accounting principles generally accepted in the

United States of America. Information relating to the nature and effect of such differences is presented
in Note 45 to the consolidated annual financial statements.

Deloitte & Touche
Registered Auditors

Per PJ Smit
Partner
Johannesburg, South Africa
June 6, 2007

Buildings 1 and 2, Deloitte Place
The Woodlands Office Park Woodlands Drive
Sandton

National Executive: GG Gelink Chief Executive AE Swiegers Chief Operating Officer GM Pinnock
Audit DL Kennedy Tax L Geeringh Consulting MG Crisp Financial Advisory L Bam Strategy
CR Beukman Finance TJ Brown Clients & Markets SJC Sibisi Public Sector and Corporate Social
Responsibility NT Mtoba Chairman of the Board J Rhynes Deputy Chairman of the Board

A full list of partners and directors is available on request.

VODACOM GROUP (PROPRIETARY) LIMITED

CONSOLIDATED INCOME STATEMENTS

FOR THE THREE YEARS ENDED MARCH 31, 2007

F-146

Notes

2005

Restated

Rm

2006

Restated

Rm

2007

Rm

REVENUE

1

27,315.3

34,042.5

41,146.4

OTHER OPERATING INCOME

63.8

125.1

119.8

DIRECT NETWORK OPERATING COST

2

(14,617.8)

(18,297.2)

(22,439.8)

DEPRECIATION

8

(2,413.6)

(2,651.6)

(2,901.8)

STAFF EXPENSES

(1,652.9)

(2,042.1)

(2,372.5)

MARKETING AND ADVERTISING EXPENSES

(767.3)

(976.9)

(1,146.4)

OTHER OPERATING EXPENSES

(751.3)

(1,042.7)

(1,063.6)

AMORTISATION OF INTANGIBLE ASSETS

9

(429.6)

(344.2)

(459.4)

IMPAIRMENT OF ASSETS

3

(268.4)

52.8

(22.9)

PROFIT FROM OPERATIONS

4

6,478.2

8,865.7

10,859.8

INTEREST, DIVIDENDS AND OTHER
FINANCIAL INCOME

5

622.9

611.7

1,336.2

FINANCE COSTS

6

(599.6)

(1,250.9)

(1,800.0)

PROFIT BEFORE TAXATION

6,501.5

8,226.5

10,396.0

TAXATION

7

(2,613.3)

(3,083.7)

(3,836.0)

NET PROFIT

3,888.2

5,142.8

6,560.0

ATTRIBUTABLE TO:

EQUITY SHAREHOLDERS

3,857.4

5,026.1

6,342.4

MINORITY INTERESTS

30.8

116.7

217.6

2005

R

2006

R

2007

R

BASIC AND DILUTED EARNINGS PER
SHARE

32

385,740

502,610

634,240

DIVIDEND PER SHARE

32

340,000

450,000

540,000

VODACOM GROUP (PROPRIETARY) LIMITED

CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2007

F-147

Notes

2005

Restated

Rm

2006

Restated

Rm

2007

Rm

ASSETS

NON-CURRENT ASSETS

13,888.4

16,079.2

20,844.3

Property, plant and equipment

8

11,576.9

13,386.6

17,073.2

Intangible assets

9

1,644.3

1,954.9

2,700.3

Financial assets

10

93.3

92.1

209.5

Deferred taxation

11

308.1

297.6

386.1

Deferred cost

236.9

311.2

396.4

Lease assets

28.9

36.8

78.8

CURRENT ASSETS

8,706.4

8,688.6

7,625.9

Deferred cost

428.3

451.8

574.8

Short-term financial assets

10

187.1

149.3

207.5

Inventory

12

479.5

454.3

364.3

Trade and other receivables

13

3,621.4

4,487.1

5,707.9

Cash and cash equivalents

31

3,990.1

3,146.1

771.4

TOTAL ASSETS

22,594.8

24,767.8

28,470.2

EQUITY AND LIABILITIES

Ordinary share capital

14

*

*

*

Retained earnings

8,059.1

8,583.0

9,523.2

Non-distributable reserves

15

(299.9)

(194.0)                            (97.4)

Equity attributable to equity holders of the parent

7,759.2

8,389.0

9,425.8

Minority interests

16

128.7

283.3                             221.2

Total equity

7,887.9

8,672.3

9,647.0

NON-CURRENT LIABILITIES

3,233.1

2,236.6

3,812.1

Interest bearing debt

18

2,213.5

819.2

2,051.4

Non-interest bearing debt

19

-

-

3.0

Deferred taxation

11

472.1

602.3

757.3

Deferred revenue

240.7

320.3

412.3

Provisions

20

184.4

372.3

377.5

Other non-current liabilities

21

122.4

122.5

210.6

CURRENT LIABILITIES

11,473.8

13,858.9

15,011.1

Trade and other payables

22

4,830.8

5,104.7

6,874.4

Deferred revenue

1,411.4

1,604.5

1,904.8

Taxation payable

632.6

630.2

1,112.7

Non-interest bearing debt

19

4.3

4.3

-

Short-term interest bearing debt

18

381.6

1,645.5

501.0

Short-term provisions

20

595.0

623.0

741.8

Dividends payable

1,800.0

2,800.0

2,990.0

Derivative financial liabilities

39

1.0

60.9

7.2

Bank borrowings

31

1,817.1

1,385.8

879.2

TOTAL EQUITY AND LIABILITIES

22,594.8

24,767.8

28,470.2

* Share capital R100

VODACOM GROUP (PROPRIETARY) LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE THREE YEARS ENDED MARCH 31, 2007

F-148

Attributable to equity shareholders

Notes

Share

capital

Rm

Retained

earnings

Rm

Non-

distributable

reserves

Rm

Total

Rm

Minority

interests

Rm               Rm

Total

equity

BALANCE AT MARCH 31, 2004

*

7,836.1

(324.9)        7,511.2

93.0

7,604.2

Net profit for the year

-

3,857.4

-

3,857.4

30.8

3,888.2

Dividends declared

16,32

-

(3,400.0)

-

(3,400.0)

(3.8)     (3,403.8)

Contingency reserve

15

-

(1.0)

1.0

-

-

-

Acquired reserves from the
minorities of Vodacom Congo (RDC)
s.p.r.l.

15,30

-

(233.4)

82.1

(151.3)

-

(151.3)

Business combinations and other
acquisitions

16,29

-

-

-

-

10.1

10.1

Revaluation of available-for-sale
investments

15,16

-

-

0.2

0.2

0.1

0.3

Net gains and losses not recognised
in the income statement

15,16

Foreign currency translation

-

-

(58.3)

(58.3)

(1.5)

(59.8)

BALANCE AT MARCH 31, 2005 –
RESTATED

23

*

8,059.1

(299.9)

7,759.2

128.7

7,887.9

Net profit for the year

-

5,026.1

-

5,026.1

116.7

5,142.8

Dividends declared

16,32

-

(4,500.0)

-

(4,500.0)

(0.9) (4,500.9)

Contingency reserve

15

-

(2.2)

2.2

-

-

-

Business combinations and other
acquisitions

16,29

-

-

-

-

46.5

46.5

Minority shares of VM, S.A.R.L.

-

-

-

-

8.0

8.0

Revaluation of available-for-sale
investments

15,16

-

-

(0.2)

(0.2)

(0.1)

(0.3)

Net gains and losses not recognised
in the income statement

15,16

Foreign currency translation

-

-

103.9

103.9

(15.6)

88.3

BALANCE AT MARCH 31, 2006 -
RESTATED

23

*

8,583.0

(194.0)

8,389.0

283.3

8,672.3

Net profit for the year

-

6,342.4

-

6,342.4

217.6

6,560.0

Dividends declared

16,32

-

(5,400.0)

-

(5,400.0)

(170.8) (5,570.8)

Contingency reserve

15

-

(2.2)

2.2

-

-

-

Business combinations and other
acquisitions

16,29

-

-

-

-

(136.4)

(136.4)

Net gains and losses not recognised
in the income statement

15,16

Foreign currency translation

-

-

94.4

94.4

27.5

121.9

BALANCE AT MARCH 31, 2007

*

9,523.2

(97.4)

9,425.8

221.2

9,647.0

* Share capital R100

VODACOM GROUP (PROPRIETARY) LIMITED

CONSOLIDATED CASH FLOW STATEMENTS

FOR THE THREE YEARS ENDED MARCH 31, 2007

F-149

Notes

2005

Restated

Rm

2006

Restated

Rm

2007

Rm

CASH FLOW FROM OPERATING ACTIVITIES

Cash receipts from customers

27,078.8

33,132.7

40,380.0

Cash paid to suppliers and employees

(17,066.8)

(22,042.4)

(26,513.9)

CASH GENERATED FROM OPERATIONS

24

10,012.0

11,090.3

13,866.1

Finance costs paid

25

(259.2)

(446.4)

(1,358.8)

Interest, dividends and other financial income
received

26

246.8

338.6

1,035.1

Taxation paid

27

(2,744.4)

(2,980.3)

(3,303.3)

Dividends paid – equity shareholders

(3,100.0)

(3,500.0)

(5,300.0)

Dividends paid – minority shareholders

(5.2)

(0.9)

(80.8)

NET CASH FLOWS FROM OPERATING
ACTIVITIES

4,150.0

4,501.3

4,858.3

CASH FLOW FROM INVESTING ACTIVITIES

Additions to property, plant and equipment
and intangible assets

28

(3,253.4)

(4,788.4)

(5,955.3)

Proceeds on disposal of property, plant and
equipment and intangible assets

20.1

31.2

98.3

Business combinations and other acquisitions

29

(289.8)

(0.1)

(591.2)

Acquired cash from Vodacom Congo (RDC)
s.p.r.l.

30

12.9

-

-

Other investing activities

136.0

(33.5)

(135.7)

NET CASH FLOWS UTILISED IN INVESTING
ACTIVITIES

(3,374.2)

(4,790.8)

(6,583.9)

CASH FLOW FROM FINANCING ACTIVITIES

Non-interest bearing debt incurred

-

-

3.0

Interest bearing debt incurred

1,165.3

32.3

6.0

Interest bearing debt repaid

(1,332.3)

(89.7)

(141.3)

Finance lease capital repaid

(28.1)

(50.2)

(67.7)

NET CASH FLOWS UTILISED IN FINANCING
ACTIVITIES

(195.1)

(107.6)

(200.0)

NET (DECREASE)/INCREASE IN CASH AND
CASH EQUIVALENTS

580.7

(397.1)

(1,925.6)

Cash and cash equivalents at the beginning of
the year

1,597.7

2,173.0

1,760.3

Effect of foreign exchange rate changes

(5.4)

(15.6)

57.5

(BANK BORROWINGS)/CASH AND CASH
EQUIVALENTS AT THE END OF THE YEAR

31

2,173.0

1,760.3

(107.8)

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-150

I.

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 or at amortised cost.
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:

II. 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, 2007.

Minority interests are separately presented in the consolidated balance sheets and 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 Business combinations

º

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: Non-
current Assets Held for Sale and Discontinued Operations (“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.

º

DISPOSALS

On subsequent disposal, the profit or loss on disposal is the difference between the selling price and the
carrying value of net assets and liabilities disposed of, adjusted for any related carrying amount of goodwill in
accordance with the Group’s accounting policies.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-151

A.    CONSOLIDATION (CONTINUED)

A.3     Subsidiaries

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.

Inter-company 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.

Minority shareholders are treated as equity participants and, therefore, all acquisitions of minority interest by the
Group in subsidiary companies are accounted for using the parent entity extension method. Under this method, the
assets and liabilities of the subsidiary are not restated to reflect their fair values at the date of the acquisition. The
difference between the purchase price and the minority interest’s share of the assets and liabilities reflected within
the consolidated balance sheet at the date of the acquisition is therefore reflected as goodwill.

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.

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. 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.

The Group’s proportionate share of inter-company 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 live. 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.

Properties in the course of construction for production, rental or administrative purposes, or for purposes not yet
determined, are carried at cost, less any recognised impairment loss. Depreciation commences when the assets are
ready for their intended use.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-152

B.     PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

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.

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.

Property, plant and equipment acquired in exchange for a non-monetary asset or assets is measured at fair value unless
the exchange transaction lacks commercial substance or the fair value of neither the asset received nor the asset given
up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of
the asset given up.

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
accreted 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:

º

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.

º

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.

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.

º

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, liabilities and contingent 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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-153

D.      INTANGIBLE ASSETS (CONTINUED)

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.

º

LICENCES

Licences, which are acquired, other than through a business combination, 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.

º

CUSTOMER BASES

Cost of contract customer bases, prepaid customer bases and internet service provider customer bases
acquired, other than through a business combination, 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.

º

TRADEMARKS AND PATENTS

Purchased trademarks and patents acquired, other than through business combinations, are capitalised at cost
and amortised over their estimated useful lives. Expenditure incurred to develop, maintain and renew
trademarks and patents internally generated is recognised as an expense in the period incurred.

º

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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-154

F.     FOREIGN CURRENCIES (CONTINUED)

F.2      Foreign operations

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.

All gains and losses on the translation of equity loans to foreign entities that are intended to be permanent, whether
they are denominated in one of the entities functional currencies or in a third currency, are recognised in equity.

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.

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     Deferred taxation

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 or 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 Group 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.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the
asset 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. The measurement of deferred tax assets and liabilities reflects the tax
consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or
settle the carrying amount of its assets and liabilities.

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 the prevailing rate 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 amount
recoverable based on the reserves available for distribution.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-155

H.     EMPLOYEE BENEFITS

H.1      Post-employment benefits

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
through profit and loss in the year in which they arise.

H.3 Accumulative termination benefits

Accumulative termination benefits are payable whenever:

º

an employee’s employment is terminated before the normal retirement date, or

º

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 Compensation benefits

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 regards to the useful life of the customer base.
The estimates and assumptions are based on past experience.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-156

I.

REVENUE RECOGNITION (CONTINUED)

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 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.

º

Revenue from the handset is recognised when the product is delivered, limited to the amount of cash
received.

º

Monthly service revenue received from the customer is recognised in the period in which the service is
delivered.

º

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.

º

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.

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 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.

º

Revenue from the SIM-card, representing activation fees, is recognised over the average useful life of a
prepaid customer.

º

Airtime revenue is recognised on the usage basis. Unused airtime is deferred in full.

º

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

Data revenue

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

Equipment sales

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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-157

I.

REVENUE RECOGNITION (CONTINUED)

I.5     Other revenue and income

º

INTERCONNECT AND INTERNATIONAL REVENUE

Interconnect and international revenue is recognised on the usage basis.

º

DIVIDENDS

Dividends from investments or subsidiaries are recognised when the right to receive payment has been
established.

º

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.2     Group as lessee

º

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 of the asset
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.

º

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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-158

J.      LEASES (CONTINUED)

J.3     Group as lessor

º

FINANCE LEASES

Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group’ 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.

º

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 sheets. 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 on initial recognition as debt or equity
or compound 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.

Financial guarantee contracts are recognised initially at fair value and subsequently at the higher of the amount
determined in accordance with IAS 37: Provisions, Contingent Liabilities and Contingent Assets or the amount
initially recognised less, when appropriate, cumulative amortisation recognised in accordance with
IAS 18: Revenue.

L.2 Financial assets

The Group’s principal financial assets other than derivatives are investments, trade and other receivables and bank
and cash balances:

º

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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-159

L.     FINANCIAL INSTRUMENTS - OTHER THAN DERIVATIVES (CONTINUED)

L.2     Financial assets (continued)

º

INVESTMENTS (CONTINUED)

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 statements. These investments are included in non-current assets unless
management intends to dispose of the investments within twelve months of the balance sheet date.

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 statements. These investments are classified as current assets if they are
either held-for-trading or are expected to be realised within twelve months of the balance sheet date.

Held-to-maturity investments carried at amortised costs, using the effective interest rate method 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.

º

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 statements.

º

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      Financial liabilities

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:

º

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.

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 statements as an interest
expense.

º

TRADE AND OTHER PAYABLES

Trade and other payables are stated at their cost.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-160

L.     FINANCIAL INSTRUMENTS - OTHER THAN DERIVATIVES (CONTINUED)

L.3     Financial liabilities (continued)

º

PUT OPTION LIABILITIES

A contract that contains an obligation for the Group to purchase its own equity instruments for cash or another
financial asset gives rise to a financial liability and is accounted for at the present value of the redemption
amount. On initial recognition its fair value is reclassified directly from equity. Subsequent changes in the
liability are included in profit and loss. On expiry or exercise of the option the carrying value of the liability is
reclassified directly to equity.

º

DIVIDENDS PAYABLE

Dividends payable are stated at amounts declared.

º

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.

º

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 statements.

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
statements.

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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-161

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 assets 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 pre-tax 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. For the purpose of impairment testing, goodwill is allocated to the cash-generating units expected to benefit
from the synergies of the combination. 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 are 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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-162

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.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 Contingency reserve

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 statements, 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 event sponsorships
are expensed over the duration of the event.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-163

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 over 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.

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.

V. OPERATING SEGMENTS

The Group discloses its operating segments according to the entity components regularly reviewed by the chief operating
decision maker. The components comprise of geographical operating segments located in South Africa and non-South
African countries.

Segment information is prepared in conformity with the measure that is reported to the chief operating decision maker.
These values have been reconciled to the consolidated financial statements. The measure reported by the Group is in
accordance with the accounting policies adopted for preparing and presenting the consolidated financial statements.

Segment revenue excludes Value Added Taxation and includes intergroup revenue. Net revenue represents segment
revenue from which intergroup 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. 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.

Capital expenditure in property, plant and equipment and intangible assets has been allocated to the segments to which it
relates.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-164

2005

Rm

2006

Rm

2007

Rm

1.    REVENUE

Airtime and access

16,190.8

20,085.8

23,707.5

Data revenue

1,340.5

2,037.6

3,341.7

Interconnect revenue

5,923.6

6,696.8

7,835.6

Equipment sales

2,687.3

3,985.6

4,699.1

International airtime

886.8

971.2

1,305.8

Other

286.3

265.5

256.7

27,315.3

34,042.5                   41,146.4

2.    DIRECT NETWORK OPERATING COST

Airtime and access

(4,953.7)

(5,596.0)

(6,929.0)

Data expenditure

(220.6)

(320.0)

(531.3)

Interconnect cost

(3,405.7)

(4,312.2)                  (5,179.9)

Equipment cost

(2,979.0)

(4,173.9)                  (5,022.8)

International airtime cost

(246.8)

(322.1)                    (456.2)

Regulatory fees

(670.3)

(812.1)                    (979.7)

Network operational expenses *

(1,393.8)

(1,781.0)                 (2,248.1)

Other

(747.9)

(979.9)                 (1,092.8)

(14,617.8)

(18,297.2)               (22,439.8)

* Network operational expenses include transmission rental, site costs and site maintenance.

3.    IMPAIRMENT OF ASSETS

Intangible assets

(97.5)

(0.1)

(0.3)

Goodwill

-

-

(0.2)

Licences

(97.5)

-

-

Computer software

-

(0.1)

(0.1)

Property, plant and equipment

(170.9)

52.9                          (22.6)

Infrastructure

(142.3)

59.9

(17.9)

Information services

(23.3)

(5.6)

(3.7)

Motor vehicles

(2.4)

(0.3)

(0.3)

Furniture and office equipment

(1.6)

(0.5)

(0.3)

Leasehold improvements

(0.6)

(0.3)

(0.1)

Other assets

(0.7)

(0.3)

(0.3)

(Impairment recognised)/Impairment reversed

(268.4)

52.8

(22.9)

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, 2007, 2006 and 2005. The fair value of
the assets was obtained from a knowledgeable, willing party on an arm’s length basis, 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 in the 2006 financial year related to an
increase in the fair value of infrastructure assets due to exchange rate fluctuations.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-165

2005

Rm

2006

Rm

2007

Rm

4.     PROFIT FROM OPERATIONS

The profit from operations is arrived at after taking the following
income/(expenditure) into account:

Net profit/(loss) on disposal of property, plant and equipment and
intangible assets

1.8

(26.8)

26.9

Loss on disposal of property, plant and equipment and
intangible assets

(6.7)

(27.5)

(30.3)

Profit on disposal of property, plant and equipment and
intangible assets

8.5

0.7

57.2

Profit on disposal of shares in subsidiary

-

-

17.4

Auditor’s remuneration – audit fees

(8.3)

(14.9)

(16.6)

Current year audit fees

(7.8)

(14.0)

(16.2)

Prior year under-provision for audit fees

(0.1)

(0.8)

(0.2)

Telkom costs

(4.6)

(4.8)

(6.1)

Telkom recovery

4.6

4.8

6.1

Expenses

(0.4)

(0.1)

(0.2)

Auditor’s remuneration – other services

(2.5)

(2.1)

(0.6)

Professional fees for consultancy services

(78.4)

(112.2)

(147.1)

Operating lease rentals

(613.1)

(870.7)

(1,259.1)

GSM transmission and data lines (Note 34)

(544.3)

(787.9)                     (965.8)

Office accommodation

(43.4)

(47.6)                       (65.1)

Other accommodation

(24.5)

(33.0)                     (223.4)

Office equipment

(0.9)

(1.1)                         (0.2)

Motor vehicles

-

(1.1)                         (4.6)

Staff expenses - pension and provident fund contributions

(74.9)

(89.3)

(97.4)

Pension fund contributions

(70.7)

(76.4)

(84.7)

Provident fund contributions

(4.2)

(12.9)

(12.7)

(Increase)/Decrease in provision for obsolete inventory (Note 12)

17.5

(15.9)

(18.3)

Decrease/(Increase) in provision for doubtful receivables
(Note 13)

(11.3)

6.0

15.8

Bad debts written off

(52.2)

(42.3)

(94.8)

Marketing and advertising expenses include broadcasting, branding, publications and sponsorship expenditure.

Other operating expenses include accommodation costs, auditor’s remuneration, consultancy fees, information
technology costs, insurance, office administration costs, sales and distribution costs, social economic investment costs,
subsistence and travel costs and transport costs.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-166

4.     PROFIT FROM OPERATIONS (CONTINUED)

Insurance activities

The Group offers a range of insurance contracts to its customers providing protection against specified risks associated
with the ownership of a cell phone. 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 inter-company 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 R28.8 million (2006: R52.5 million;
2005: R19.5 million) underwriting profit included in profit from operations:

2005

Rm

2006

Rm

2007

Rm

Net earned premiums

89.7

112.7

131.6

Gross claims incurred

(45.6)

(51.7)

(67.4)

Net reinsurance (expense)/income

(11.6)

10.7

(11.6)

Net operating expenses

(13.0)

(19.2)

(23.8)

Underwriting profit

19.5

52.5

28.8

5.    INTEREST, DIVIDENDS AND OTHER FINANCIAL INCOME

Banks and loans

93.6

89.4

30.6

Income from investments at fair value through profit and loss

8.0

7.8

10.4

Other interest income

15.8

19.7

23.2

Gain on foreign exchange contract revaluation

155.1

211.2

617.9

Gain on foreign liability and asset revaluation

318.4

266.4

640.9

Interest rate swap interest

11.6

13.0

10.2

Interest rate swap revaluation

20.4

4.2

2.9

Dividends received – unlisted investment

-

-

0.1

622.9

611.7

1,336.2

6.    FINANCE COSTS

Bank overdraft

(39.1)

(15.2)

(131.4)

Finance leases

(127.3)

(121.6)

(112.3)

Funding loans

(32.2)

(73.8)

(89.4)

Interest on minority shareholder loan *

(7.2)

(8.1)

(9.7)

Other finance costs

(24.2)

(30.6)

(26.3)

Interest rate swap interest

(5.5)

-

-

Interest rate swap revaluation

(11.3)

(10.8)

(12.8)

Loss on foreign exchange contract revaluation

(143.4)

(471.8)

(150.2)

Loss on foreign liability and asset revaluation

(209.4)

(519.0)

(1,018.6)

Put option liability revaluation (Note 22)

-

-

(249.3)

(599.6)

(1,250.9)

(1,800.0)

*

This amount of R9.7 million (2006: R8.1 million; 2005: R7.2 million) relates to notional interest on the loan from
Caspian Construction Company Limited and Planetel Communications Limited, that was re-measured at amortised
cost, at an effective interest rate of LIBOR plus 5%, for which no consideration has been recorded.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-167

2005

Rm

2006

Rm

2007

Rm

7.     TAXATION

South African normal taxation

(2,082.6)

(2,375.6)

(3,058.7)

Current year

(2,091.3)

(2,337.9)                   (3,063.7)

Prior year over/(under) provision

8.7

(37.7)

5.0

Deferred taxation

36.0

(136.2)

44.0

Current year

35.2

(177.0)

45.3

Prior year (under)/over provision

(6.3)

40.8                           (1.3)

Taxation rate change *

7.1

-

-

Secondary taxation on companies – current year

(429.4)

(562.5)                      (692.7)

Foreign taxation

(13.4)

(29.8)

(34.3)

Current year

(13.3)

(29.4)

(34.0)

Prior year under provision

(0.1)

(0.4)

(0.3)

Foreign deferred taxation

(123.9)

20.4

(94.3)

Current year

(75.2)

43.5

(135.4)

Prior year under/(over) provision

(48.7)

(22.0)

41.1

Taxation rate change #

-

(1.1)

-

(2,613.3)

(3,083.7)

(3,836.0)

2005

Rm

2005

%

2006

Rm

2006

%

2007

Rm

2007

%

Reconciliation of rate of taxation

Normal taxation on profit before taxation

1,950.5

30.0

2,385.7

29.0

3,014.9

29.0

Adjusted for:

Disallowed expenditure

131.3

2.0

135.6

1.7

205.8

2.0

Unrecognised taxation asset

118.8

1.8

149.9

1.8

86.5

0.9

Functional vs local reporting currency

(153.6)

(2.4)

45.3

0.6

(226.8)

(2.2)

Revaluation of tax base of qualifying assets

80.7

1.2

(181.6)

(2.2)

98.6

0.9

Translation to US$

61.8

1.0

(16.8)

(0.2)

95.7

0.9

Secondary taxation on companies

429.4

6.7

562.5

6.9

692.7

6.7

Secondary taxation on companies credits

(3.8)

-

-

-

3.8

-

Prior year (over)/under provision

46.4

0.7

19.3

0.2

(44.5)

(0.4)

Foreign taxation rate differences

(30.8)

(0.5)

(15.6)

(0.2)

(48.6)

(0.5)

Taxation rate change * #

(7.1)

(0.1)

1.1

-

-

-

Foreign taxation

5.7

0.1

8.7

0.1

10.4

0.1

Taxation not payable due to tax concession

-

-

-

-

(81.2)

(0.8)

Foreign controlled entity passive income imputed

8.6

0.1

17.8

0.2

27.9

0.3

Business combination contingent purchase
consideration

-

-

(20.6)

(0.3)

-

-

Utilisation of investment deductions

(10.2)

(0.2)

0.2

-

-

-

Utilisation of taxation loss

(12.6)

(0.2)

(6.9)

(0.1)

-

-

Exempt income

(0.1)

-

(1.1)

-

-

-

Other adjustments

(1.7)

-

0.2

-

0.8

-

2,613.3

40.2

3,083.7

37.5

3,836.0

36.9

* 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 with effect 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 with effect from the 2007 financial year.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-168

8.     PROPERTY, PLANT AND EQUIPMENT

2005

Cost

Rm

Accumulated

depreciation

and

impairment

Rm

Net book

value

Rm

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 and office equipment

234.5

(180.3)

54.2

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

Cost

Rm

Accumulated

depreciation

and

impairment

Rm

Net book

value

Rm

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 and office equipment

251.3

(203.0)

48.3

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

2007

Cost

Rm

Accumulated

depreciation

and

impairment

Rm

Net book

value

Rm

Land and buildings

1,277.9

(135.4)

1,142.5

Infrastructure

26,788.9

(12,084.6)

14,704.3

Information services

1,924.0

(1,248.5)

675.5

Community services

127.2

(72.3)

54.9

Motor vehicles

192.7

(103.6)

89.1

Furniture and office equipment

335.9

(233.0)

102.9

Leasehold improvements

538.2

(276.5)

261.7

Other assets

74.3

(32.0)

42.3

31,259.1

(14,185.9)

17,073.2

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-169

8.    PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

Reconciliation 2005

Land and
buildings

Rm

Infra-

structure

Rm

Information

services

Rm

Community

services

Rm

Motor

vehicles

Rm

Furniture &

office

equipment

Rm

Leasehold

improvements

Rm

Other

assets

Rm

Total

Rm

Opening balance

831.4

9,060.1

760.4

28.4

51.2

60.6

97.2

23.2

10,912.5

Acquired from the
minorities of Vodacom
Congo (RDC) s.p.r.l.

4.5

457.9

115.4

-

4.0

4.8

7.7

2.0

596.3

Transfer from
investment properties

9.9

-

-

-

-

-

-

-

9.9

Additions

21.7

2,781.7

371.5

1.3

35.2

17.4

37.9

21.7

3,288.4

Disposals

-

(10.8)

(3.0)

-

(2.2)

(0.6)

(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)

(26.8)

(40.0)

(16.3)

(2,413.6)

Business combinations

-

-

4.9

-

-

0.1

-

-

5.0

Impairments (Note 3)

-

(142.3)

(23.3)

-

(2.4)

(1.6)

(0.6)

(0.7)

(170.9)

Transfer to intangible
assets/Asset category
transfer (Note 9)

-

(364.9)

(330.7)

-

-

-

-

-

(695.6)

Closing balance

848.8

9,889.7

572.0

18.9

64.4

54.2

102.0

26.9

11,576.9

Reconciliation 2006

Land and
buildings

Rm

Infra-

structure

Rm

Information

services

Rm

Community

services

Rm

Motor

vehicles

Rm

Furniture &

office

equipment

Rm

Leasehold

improvements

Rm

Other

assets

Rm

Total

Rm

Opening balance

848.8

9,889.7

572.0

18.9

64.4

54.2

102.0

26.9

11,576.9

Reclassified to finance
lease receivables

-

-

-

-

(12.0)

-

-

-

(12.0)

Additions

98.2

4,237.9

237.2

16.1

27.1

23.0

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)

(24.9)

(22.0)

(8.5)

(2,651.6)

Business combinations

-

-

1.7

-

-

-

-

-

1.7

Impairments (Note 3)

-

59.9

(5.6)

-

(0.3)

(0.5)

(0.3)

(0.3)

52.9

Transfer from intangible
assets / Asset category
transfer (Note 9)

-

270.1

(234.4)

-

-

(2.2)

12.5

(16.4)

29.6

Closing balance

928.9

11,630.6

523.5

41.9

63.6

48.3

146.5

3.3

13,386.6

Reconciliation 2007

Land and
buildings

Rm

Infra-

structure

Rm

Information

services

Rm

Community

services

Rm

Motor

vehicles

Rm

Furniture &

office

equipment

Rm

Leasehold

improvements

Rm

Other

assets

Rm

Total

Rm

Opening balance

928.9

11,630.6

523.5

41.9

63.6

48.3

146.5

3.3

13,386.6

Additions

214.3

5,239.2

302.3

19.6

41.3

71.9

208.3

40.2

6,137.1

Disposals

(1.3)

(60.5)

(4.0)

(0.1)

(5.1)

(0.2)

-

-

(71.2)

Foreign currency
translation

4.0

479.9

12.8

-

3.2

2.0

4.0

0.6

506.5

Depreciation

(21.5)

(2,580.0)

(181.2)

(6.5)

(13.6)

(29.8)

(67.6)

(1.6)

(2,901.8)

Business combinations

-

2.4

-

-

0.2

3.0

-

-

5.6

Impairments (Note 3)

-

(17.9)

(3.7)

-

(0.3)

(0.3)

(0.1)

(0.3)

(22.6)

Transfer from intangible
assets / Asset category
transfer (Note 9)

18.1

10.6

25.8

-

(0.2)

8.0

(29.4)

0.1

33.0

Closing balance

1,142.5

14,704.3

675.5

54.9

89.1

102.9

261.7

42.3

17,073.2

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-170

8.

PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

2005

Net book

value

Rm

2006

Net book

value

Rm

2007

Net book

value

Rm

Freehold land and buildings

Portions 859, 847, 827 and 828 of the farm Randjesfontein No.
405, Midrand, RSA

37.5

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

Portion 8 of erf 1606, New Germany, Pietermaritzburg, RSA

0.5

0.5

0.5

1046 Mama Yemo Avenue, Lubumbashi, Province De Katanga,
DRC

0.9

1.0

1.2

Kinshasa Building (Justice), 292 Justice Avenue, Gombe,
Kinshasa, DRC

8.6

8.3

24.9

MSC Building, Maseru West, Lesotho

0.7

0.6

0.6

Stand 13, 14 and 15, Eastwood Road, Dunkeld West, RSA

14.4

14.1

14.1

6195 Boulevard du 30 Juin, Kinshasa, Kinshasa, DRC

7.6

7.4

8.5

Portions 878 and 879 of the farm Randjesfontein No. 405,
Midrand, RSA

10.7

52.5

75.9

Erf 2102, Silverton, Ext 54, RSA

-

33.9

22.4

Portion 751 of the farm Randjesfontein No. 405, Midrand, RSA

-

14.6

159.5

Holding 191, Erand Agricultural Holdings Ext 1, RSA

-

7.6

7.0

MSC, Vodacom Hatfield, iParioli, RSA

-

-

0.5

Erf 911, Hawthorne Road, Framesby, Port Elizabeth, RSA

-

-

8.8

Erf 498, Hurlingham Ext 5 Township, RSA

-

-

2.1

Holding 179, Erand Agricultural Holdings Ext 1, RSA

-

-

7.7

Portion 1 of Plot 37, Estoire Settlement, Bloemfontein, Free State
(MSC), RSA

-

-

4.6

Portion 787 of the farm Randjesfontein No.405, Midrand, RSA

6.2

Portion 8 of erf 18, Atholl Township, RSA

-

-

9.2

Portion 807 of the farm Randjesfontein No. 405, Midrand, RSA

-

-

5.1

Portion 827 and 828 of the farm Randjesfontein No. 405,
Midrand, RSA

-

-

12.3

Balance carried forward

82.6

179.7

410.3

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-171

8.

PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

2005

Net book

value

Rm

2006

Net book

value

Rm

2007

Net book

value

Rm

Balance brought forward

82.6

179.7

410.3

Leasehold land and buildings

Portion 827, 828, 847 and 859 of the farm Randjesfontein No.
405, Midrand, RSA

262.4

256.8

251.1

Portion 769 of the farm Randjesfontein No. 405, RSA

156.8

154.3

151.6

Stand 34083, Bellville, City of Tygerberg, RSA

104.7

103.3

101.7

Erf 5259 and 5260, Montague Gardens, RSA

93.3

91.8

90.2

Portion 748 of the farm Randjesfontein No. 405, Midrand, RSA

85.5

83.9

82.2

Portion 791 of the farm Randjesfontein No. 405, Midrand, RSA

49.7

45.9

41.9

Erf 33153, Belville, Cape Town, RSA

10.1

9.9

9.7

43 Kwale Road, Dar es Salaam, Tanzania *

3.7

3.3

3.8

766.2

749.2

732.2

Total freehold and leasehold land and buildings

848.8

928.9

1,142.5

Debt is collateralised over leasehold land and buildings and the fair value of the lease liability is R786.3 million
(2006: R911.5 million; 2005: R956.8 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 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

2 - 10 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

4 - 5 years

- Office equipment

4 years

* The land and building is held under a 99 year lease.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-172

8.

PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

The Group is required to measure the residual value of an item of property, plant and equipment. Management has

determined that radio, intelligent networks, transmission, switching, information services, billing and administration, value
added services, sim centres and community services categories of property, plant and equipment have no active market
and the value of the asset at the end of its life would therefore be nil or insignificant.

The above categories are not exhaustive and will depend on the existence of an active market for the asset. The Group

ensures that proper documentation exists to support the non-existence of an active market. For assets with an active
market, confirmation of residual values is received from third parties.

During the current financial year the Group reviewed the estimated useful lives and residual values of property, plant and
equipment. The review resulted in a reduction of R 14.7 million in the current year’s depreciation charge.

9. INTANGIBLE ASSETS

2005

Cost

Rm

Accumulated

amortisation

and

impairment

Rm

Net book

value

Rm

Goodwill

932.1

(518.6)

413.5

Licences

338.0

(211.4)

126.6

Trademarks and patents

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

Cost

Rm

Accumulated

amortisation

and

impairment

Rm

Net book

value

Rm

Goodwill

1,002.0

(518.1)

483.9

Licences

306.3

(186.6)

119.7

Trademarks and patents

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

2007

Cost

Rm

Accumulated

amortisation

and

impairment

Rm

Net book

value

Rm

Goodwill

1,455.8

(524.6)

931.2

Licences

439.0

(229.2)

209.8

Trademarks and patents

390.4

(169.8)

220.6

Customer bases

919.3

(760.3)

159.0

Computer software

2,827.5

(1,647.8)

1,179.7

6,032.0

(3,331.7)

2,700.3

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-173

9.      INTANGIBLE ASSETS (CONTINUED)

Reconciliation
2005

Goodwill

Rm

Licences

Rm

Trademarks &

patents

Rm

Customer

bases

Rm

Computer

software

Rm

Total

Rm

Opening balance

344.3

181.6

173.5

303.3

-

-

1,002.7

Acquired from the
minorities of Vodacom
Congo (RDC) s.p.r.l.

51.3

50.6

-

-

-

101.9

Additions

-

-

-

-

205.4

205.4

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

Impairment of assets
(Note 3)

-

(97.5)

-

-

-

(97.5)

Transfer from property,
plant and equipment
(Note 8)

-

-

-

-

695.6

695.6

Closing balance

413.5

126.6

130.9

269.8

703.5

1,644.3

Reconciliation
2006

Goodwill

Rm

Licences

Rm

Trademarks &

patents

Rm

Customer

bases

Rm

Computer

software

Rm

Total

Rm

Opening balance

413.5

126.6

130.9

269.8

703.5

1,644.3

Contingent purchase
consideration

36.2

-

-

-

-

36.2

Additions

-

3.3

-

-

438.8

442.1

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

Impairment of assets
(Note 3)

(0.1)

(0.1)

Transfer to property,
plant and equipment
(Note 8)

-

-

-

-

(29.6)

(29.6)

Closing balance

483.9

119.7

257.9

162.9

930.5

1,954.9

Reconciliation
2007

Goodwill

Rm

Licences

Rm

Trademarks &

patents

Rm

Customer

bases

Rm

Computer

software

Rm

Total

Rm

Opening balance

483.9

119.7

257.9

162.9

930.5

1,954.9

Additions

372.2

93.9

-

-

611.2

1,077.3

Disposals

-

-

-

-

(0.2)

(0.2)

Foreign currency
translation

19.0

16.6

-

(0.4)

13.0

48.2

Amortisation

-

(20.4)

(37.3)

(60.0)

(341.7)

(459.4)

Business combinations

56.3

-

-

56.5

-

112.8

Impairment of assets
(Note 3)

(0.2)

-

-

-

(0.1)

(0.3)

Transfers from
Property, plant and
equipment (Note 8)

-

-

-

-

(33.0)

(33.0)

Closing balance

931.2

209.8

220.6

159.0

1,179.7

2,700.3

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-174

9.    INTANGIBLE ASSETS (CONTINUED)

The estimated useful lives of intangible assets are currently as follows:

- Mobile licences

5 – 30 years

- Contract and prepaid mobile customers

36 – 96 months

- Trademarks and patents

10 – 15 years

- Computer software

2 - 8 years

- Internet service provider subscribers

3 years

The company uses the following indicators to determine useful lives:

- Expected usage of the asset
- Expected physical wear and tear
- Technical or commercial obsolescence

The largest components of individual material intangibles relates to licences and trademarks and patents of the Group that
have estimated remaining useful lives of between 12 to 17 years and 9 years to 11 years respectively as at
March 31, 2007. The licence and other intangible assets of Vodacom Tanzania Limited are pledged as security for the
project finance funding obtained (Note 18).

10. FINANCIAL ASSETS

2005

Short-term

portion

Rm

2005

Long-term

portion

Rm

2005

Total

Rm

2006

Short-term

portion

Rm

2006

Long-term

portion

Rm

2006

Total

Rm

Loans and receivables (Note 10.1)

-

93.3

93.3

-

92.1

92.1

Investments at fair value through
profit and loss (Note 10.2)

101.1

-

101.1

111.7

-

111.7

Available-for-sale investments
(Note 10.3)

16.8

-

16.8

-

-

-

Derivative financial assets
(Note 10.4)

69.2

-

69.2

37.6

-

37.6

187.1

93.3

280.4

149.3

92.1

241.4

2007

Short-term

portion

Rm

2007

Long-term

portion

Rm

2007

Total

Rm

Loans and receivables (Note 10.1)

16.2

114.4

130.6

Investments at fair value through
profit and loss (Note 10.2)

135.7

-

135.7

Available-for-sale investments
(Note 10.3)

-

80.8

80.8

Derivative financial assets
(Note 10.4)

55.6

-

55.6

Other investments (Note 10.5)

-

14.3

14.3

207.5

209.5

417.0

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-175

10.     FINANCIAL ASSETS (CONTINUED)

10.1  Loans and receivables

2005

Rm

2006

Rm

2007

Rm

Planetel Communications Limited

42.7

42.1

49.6

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 18).

Caspian Construction Company Limited

50.6

50.0

58.8

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 18).

Sekha-Metsi Investment Consortium Limited

-

-

16.2

The loan was advanced to Sekha-Metsi Investment
Consortium Limited and bears interest at South African
overdraft interest rates plus a margin of 2%. Interest is
payable monthly in arrears. The loan is repayable on
demand when Sekha-Metsi Investment Consortium Limited
is able to obtain a loan externally. Sekha-Metsi Investment
Consortium Limited have pledged their shares in Sekha-
Metsi Enterprises (Proprietary) Limited as security for the
loan.

Number Portability Company (Proprietary) Limited

-

-

6.0

The shareholder loan made to Number Portability Company
(Proprietary) Limited (“NPC”) for an amount of R6.0 million
at March 2007, is subordinated and ranks behind the claims
of all creditors of NPC for repayment until such time as the
assets of NPC fairly valued exceed its liabilities and in such
case, the loan shall cease to be subordinated to the extent
that the assets of NPC exceed its liabilities from time to
time. The shareholder loan bears interest at the maximum
rate of the prevailing South African prime rate of 10.5% or a
lesser rate determined by a resolution past by majority vote
of the board at a duly constituted meeting of such board.

93.3

92.1

130.6

Less: Short-term portion of loans and receivables

Sekha-Metsi Investment Consortium Limited

-

-

(16.2)

Long-term portion of loans and receivables

93.3

92.1

114.4

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-176

10.    FINANCIAL ASSETS (CONTINUED)

10.2  Investments at fair value through profit and loss

10.2.1  Investments held for trading

2005

Maturity

period

Interest rate

Market value

Rm

0 – 12 months

7.3% - 8.5%

101.1

Details of the maturity periods and interest rates of
the money market investments at year end are as
follows:

Less: Short-term portion of investments held for
trading

(101.1)

Long-term portion of investments held for trading

-

2006

Maturity

period

Interest rate

Market value

Rm

0 – 12 months

5.6% - 7.3%

111.7

Details of the maturity periods and interest rates of
the money market investments at year end are as
follows:

Less: Short-term portion of investments held for
trading

(111.7)

Long-term portion of investments held for trading

-

2007

Maturity

period

Interest rate

Market value

Rm

0 – 12 months

6.5% - 9.4%

135.7

Details of the maturity periods and interest rates of
the money market investments at year end are as
follows:

Less: Short-term portion of investments held for
trading

(135.7)

Long-term portion of investments held for trading

-

10.3 Available-for-sale investments

2005

Rm

2006

Rm

2007

Rm

Listed investment – SAGE shares

16.8

-

-

9,090,909 ordinary shares of R0.01 each

Unlisted Investment – WBS Holdings (Proprietary) Limited

-

-

80.8

2,500 ordinary shares of R0.01 each

16.8

-

80.8

Less: Short-term portion of available-for-sale

Listed investment – SAGE shares

(16.8)

-

-

Long-term portion of available-for-sale

-

-

80.8

Directors’ valuation of unlisted investments are not materially different from the carrying amount of the investments.

10.4 Derivative financial assets

2005

Rm

2006

Rm

2007

Rm

Interest rate swap asset (Note 39)

44.2

37.6

27.7

Foreign currency derivative asset (Note 39)

25.0

-

27.9

69.2

37.6

55.6

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-177

10.   FINANCIAL ASSETS (CONTINUED)

10.5  Other investments

2005

Rm

2006

Rm

2007

Rm

Other investments

-

-

14.3

The Group purchased a 10% equity stake in G-Mobile
Holdings Limited and a 25.93% equity stake in Gogga
Tracking Solutions (Proprietary) Limited. The investee
companies also granted the Group an option to increase the
investments (Note 39).

Long-term portion of other investments

-

-

14.3

Other investments are carried at cost and reflect the directors’ valuations of these investments.

10.6  Maturity of financial assets

2008

Rm

2009

Rm

2010

Rm

2011

Rm

2012

Rm

2013

onwards

Rm

Total

Rm

Loans and receivables

16.2

108.4

-

-

-

6.0

130.6

Investments at fair value
through profit and loss

135.7

-

-

-

-

-

135.7

Derivative financial assets

55.6

-

-

-

-

-

55.6

Available-for-sale
investments

-

-

-

-

-

80.8

80.8

Other investments

-

-

-

-

-

14.3

14.3

207.5

108.4

-

-

-

101.1

417.0

The fair value of the Group’s investments is estimated at R417.0 million (2006: R241.4 million; 2005: R280.4 million).

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-178

11.   DEFERRED TAXATION

2005

Rm

2006

Rm

2007

Rm

Deferred taxation assets

308.1

297.6

386.1

Deferred taxation liabilities

(472.1)

(602.3)

(757.3)

(164.0)

(304.7)

(371.2)

11.1  Components

Capital allowances

(1,086.6)

(1,243.6)

(1,626.2)

Foreign equity revaluation reserves

11.9

12.6

4.5

Remeasurement of shareholder loans liabilities

(21.7)

(19.5)

(16.8)

Remeasurement of shareholder loans assets

36.4

32.5

29.5

Taxation losses

278.8

223.1

232.5

Provisions and deferred income

634.1

797.2

1,006.0

Prepayments and other allowances

(24.2)

10.8

(84.9)

Customer bases

(77.0)

(46.7)

(53.4)

Trademarks and patents

(33.4)

(56.4)

(47.9)

Fair value adjustment of properties

(2.2)

(2.0)                         (2.0)

Foreign exchange

89.0

(22.9)

180.9

Secondary taxation on companies credits

3.8

3.8

-

Other

27.1

6.4

6.6

(164.0)

(304.7)

(371.2)

11.2  Reconciliation

Balance at the beginning of the year

(132.3)

(164.0)

(304.7)

Deferred taxation – Income statement expense (Note 7)

(87.9)

(115.8)

(50.3)

Foreign equity revaluation reserve

(0.1)

0.7

(8.1)

Acquired from the minorities of Vodacom Congo (RDC) s.p.r.l.

96.3

-

-

Business combinations

Acquisition of customer base

(41.7)

-

(17.5)

Acquisition of trademark and patents

-

(35.8)

-

Acquisition of subsidiary

1.7

-

-

Foreign exchange differences on consolidation of foreign
subsidiaries

-

10.2

9.3

Other

-

-

0.1

Balance at the end of the year

(164.0)

(304.7)

(371.2)

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 undistributed earnings which is payable when it declares dividends to its shareholders, as the
taxation will only be payable once the dividends are declared.

Deferred tax is not raised at a rate other than the normal taxation rate as the intention of the Group is to hold assets for
use and not for resale.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-179

11.    DEFERRED TAXATION (CONTINUED)

11.3  Utilisation of taxation losses

2005

Rm

2006

Rm

2007

Rm

Opening taxation loss

1,187.1

1,194.8

1,538.7

Foreign exchange movement on opening taxation loss

(8.1)

(142.3)

104.5

Acquired from the minorities of Vodacom Congo (RDC) s.p.r.l.

158.0

-

-

Prior year (under)/over statement

72.9

24.3

(129.7)

Current year taxation loss (utilised)/created

(215.1)

461.9

(300.8)

Closing taxation loss

1,194.8

1,538.7

1,212.7

Utilised to reduce net deferred taxation liability

(839.6)

(662.3)

(78.4)

Deferred taxation at 40%

(268.7)

(244.1)

-

Deferred taxation at 32%

-

-

(78.4)

Deferred taxation at 30%

(570.9)

(418.2)

-

Taxation losses available to reduce deferred taxation

355.2

876.4

1,134.3

There are estimated unused taxation losses to the value of R1,134.3 million (2006: R876.4 million; 2005: R355.2 million)
available to reduce the net deferred taxation liability. The effect of this would be a R363.0 million (2006: R279.4 million; 2005:
R109.3 million) reduction in the net deferred taxation liability for the year to R8.2 million (2006: R25.3 million; 2005: R54.7
million).

The growth of the Group following its geographical expansion into other African countries over the past few years has made
the estimation and judgement required in recognising and measuring deferred taxation balances 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 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
consolidated income statement and current taxation payments.

12.  INVENTORY

2005

Rm

2006

Rm

2007

Rm

Merchandise

438.4

397.5

287.3

Other inventory

41.1

56.8

77.0

479.5

454.3

364.3

Inventory carried at net realisable value

289.8

215.1

163.1

12.1  Inventory valuation allowance included above

Balance at the beginning of the year

(78.9)

(62.8)

(78.0)

Foreign exchange movement on opening balance

-

0.7

(1.3)

(Charged to)/Reversed from costs and expenses

17.5

(15.9)

(18.3)

Business combinations

(1.4)

-

-

Balance at the end of the year

(62.8)

(78.0)

(97.6)

The cost of inventories recognised as an expense during the period is reflected as equipment costs (Note 2).

The cost of inventories recognised as an expense includes R35.7 million (2006: R6.9 million; 2005: Rnil) in respect of
write downs of inventory to net realisable value, and has been reduced by R18.6 million (2006: R2.3 million; 2005: Rnil)

in respect of the reversal of such write downs. Previous write downs have been reversed as a result of increased sale
prices in certain markets.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-180

13.  TRADE AND OTHER RECEIVABLES

2005

Rm

2006

Rm

2007

Rm

Trade receivables

3,316.5

4,097.2

5,211.5

Prepayments

185.3

205.2

192.3

Value added taxation

69.0

88.1

147.7

Interest income receivable

35.7

41.5

51.3

Lease assets

-

13.1

32.9

Other

14.9

42.0

72.2

3,621.4

4,487.1

5,707.9

13.1  Doubtful receivable allowance included above

Balance at the beginning of the year

(75.6)

(94.0)

(85.1)

Foreign exchange movement on opening balance

(0.2)

2.9

(6.1)

Reversed from/(Charged to) costs and expenses

(11.3)

6.0

15.8

Business combinations

(6.9)

-

-

Balance at the end of the year

(94.0)

(85.1)

(75.4)

13.2  Finance leases

Within one year

Rm

Between two

and five years

Rm

After five years

Rm

Total

Rm

Staff benefits

6.0

6.2

-

12.2

Computers

26.9

37.5

-

64.4

Present value of minimum lease payments

32.9

43.7

-

76.6

The Group provides motor vehicles to certain of its executives. These executives may retain these assets at the end of
the lease period, normally between three and four years. In terms of IAS 17: Leases (“IAS 17”), 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 provides laptop or desktop computers to customers who enter into certain contract agreements. The
customers retain these computers at the end of the contract period. In terms of IAS 17, these arrangements are
regarded as finance leases and accounted for, using the effective interest rate method. The interest rate inherent in
these leases is currently between zero and 0.08% per annum.

The long-term portion of R43.7 million is reflected as part of lease assets on the consolidated balance sheet.

14. ORDINARY SHARE CAPITAL

2005

R

2006

R

2007

R

Authorised

100,000 ordinary shares of R0.01 each

1,000

1,000

1,000

Issued

10,000 ordinary shares of R0.01 each

100

100

100

The unissued share capital is not under the control of the Board of Directors.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-181

15.  NON-DISTRIBUTABLE RESERVES

2005

Rm

2006

Rm

2007

Rm

Foreign currency translation reserve (Note 15.1)

(323.7)

(225.5)

(123.0)

Taxation on foreign currency translation reserve (Note 15.1)

12.3

18.0

9.9

Contingency reserve (Note 15.2)

11.3

13.5

15.7

Revaluation of available-for-sale investments (Note 15.3)

0.2

-

-

(299.9)

(194.0)

(97.4)

Reconciliation

Balance at the beginning of the year

(324.9)

(299.9)

(194.0)

Foreign currency translation reserve

23.8

103.9

94.4

Acquisition of Vodacom Congo (RDC) s.p.r.l. (Note 30)

82.1

-

-

Foreign currency translation for the year

(58.6)

98.2

102.5

Taxation for the year

0.3

5.7

(8.1)

Other non-distributable reserves

Transferred from distributable reserves – contingency reserve

1.0

2.2

2.2

Revaluation of available-for-sale investments

0.2

(0.2)

-

Balance at the end of the year

(299.9)

(194.0)

(97.4)

15.1  Foreign currency translation reserve and 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.

Deferred taxation and normal taxation on the foreign currency translation reserve relates only to the translation of equity
loans advanced to foreign subsidiaries.

15.2  Contingency reserve

In terms of the Short-term Insurance Act of 1998 the Group’s cell captive partner, Nova Risk Partners Limited is required
to recognise 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.

15.3 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 10).

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-182

16.    MINORITY INTERESTS

2005

Rm

2006

Rm

2007

Rm

Distributable reserves

187.8

358.1

268.5

Non-distributable reserves

(59.1)

(74.8)

(47.3)

128.7

283.3

221.2

Reconciliation

Balance at the beginning of the year

93.0

128.7

283.3

Profit allocated to minority interest

30.8

116.7

217.6

Foreign currency translation reserve

(1.5)

(15.6)

27.5

Revaluation of available-for-sale investments

0.1

(0.1)

-

Business combinations and other acquisitions

10.1

46.5

(136.4)

Minority shares of VM, S.A.R.L.

-

8.0

-

Dividend to minority shareholders

(3.8)

(0.9)

(170.8)

Balance at the end of the year

128.7

283.3

221.2

17. ANALYSIS OF RECOGNISED INCOME AND EXPENSES – RESTATED

(Loss)/Gain on revaluation of available-for-sale
investment

0.3

(0.3)

-

Foreign currency translation reserve

(59.8)

88.3

121.9

NET PROFIT/(LOSS) RECOGNISED DIRECTLY IN
EQUITY

(59.5)

88.0

121.9

Net profit for the year

3,888.2

5,142.8

6,560.0

TOTAL RECOGNISED INCOME AND EXPENSE
FOR THE YEAR

3,828.7

5,230.8

6,681.9

ATTRIBUTABLE TO:

Equity shareholders

3,799.3

5,129.8

6,436.8

Minority interests

29.4

101.0

245.1

18. INTEREST-BEARING DEBT

2005

Short-term

portion

Rm

2005

Long-term

portion

Rm

2005

Total

Rm

2006

Short-term

portion

Rm

2006

Long-term

portion

Rm

2006

Total

Rm

Finance leases (Note 18.1)

50.5

807.2

857.7

79.2

728.3

807.5

Funding loans (Note 18.2)

323.7

1,406.3

1,730.0

1,527.3

90.9

1,618.2

Other short-term loans
(Note 18.3)

7.4

-

7.4

39.0

-

39.0

381.6

2,213.5

2,595.1

1,645.5

819.2

2,464.7

2007

Short-term

portion

Rm

2007

Long-term

portion

Rm

2007

Total

Rm

Finance leases (Note 18.1)

113.6

615.0

728.6

Funding loans (Note 18.2)

365.5

1,436.4

1,801.9

Other short-term loans (Note 18.3)

21.9

-

21.9

501.0

2,051.4

2,552.4

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-183

18.    INTEREST-BEARING DEBT (CONTINUED)

18.1  Finance leases

2005

Rm

2006

Rm

2007

Rm

Vodacom (Proprietary) Limited

574.9

537.7

479.7

The finance leases are collateralised by various land and buildings
with a book value of R477.3 million (2006: R489.1 million; 2005:
R500.1 million), bearing interest at fixed effective interest rates of
between 12.1% and 16.9% per annum and are repayable between
1 and 6 years. The residual payment on settlement date is R144.4
million.

Vodacom Service Provider Company (Proprietary) Limited

282.8

269.8

248.9

The finance lease is collateralised by land and buildings with a
book value of R251.1 million (2006: R256.8 million; 2005: R262.4
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.

857.7

807.5

728.6

Less: Short-term portion of finance leases

Vodacom (Proprietary) Limited

(37.6)

(58.3)

(83.0)

Vodacom Service Provider Company (Proprietary) Limited

(12.9)

(20.9)

(30.6)

Short-term portion of finance leases

(50.5)

(79.2)

(113.6)

Long-term portion of finance leases

807.2

728.3

615.0

The fair value of the Group’s finance lease liability is R786.3 million (2006: R911.5 million; 2005: R956.8 million).

Repayment of finance leases:

2008

Rm

2009

Rm

2010

Rm

2011

Rm

2012

Rm

2013

onwards

Rm

Total

Rm

Future minimum
lease payments *

211.7

271.2

153.6

200.6

98.7

82.1

1,017.9

Finance costs

(98.1)

(76.9)

(55.1)

(39.0)

(15.2)

(5.0)

(289.3)

Net present value

113.6

194.3

98.5

161.6

83.5

77.1

728.6

* Future minimum lease payments include residual payments at the end of the lease term.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-184

18.    INTEREST-BEARING DEBT (CONTINUED)

18.2   Funding Loans

2005

Rm

2006

Rm

2007

Rm

Planetel Communications Limited

38.5

41.6

53.5

The shareholder loan of US$8.4 million (2006: US$8.4 million;
2005: 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 re-measured at amortised cost at an effective
interest rate of LIBOR plus 5% (Note 10) during the 2003
financial year. The gain on re-measurement was included in
equity.

Caspian Construction Company Limited

45.7

49.3

63.6

The shareholder loan of US$10.0 million (2006: US$10.0
million; 2005: 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 re-measured at amortised cost
at an effective interest rate of LIBOR plus 5% (Note 10) during
the 2003 financial year. The gain on re-measurement was
included in equity.

Project finance funding to Vodacom Tanzania Limited

285.1

184.0

94.9

The drawn down portions of the project finance funding from
external parties include the following:

(a)

Netherlands Development Finance Company of

US$3.8 million (2006: US$7.6 million; 2005:
US$10.1 million);

(b)     Deutsche Investitions- und Entwicklungsgesellschaft

mbH of €3.9 million (2006: €7.8 million; 2005: €10.4
million);

(c) Standard Corporate and Merchant Bank of

US$4.0 million (2006: US$8.0 million; 2005:
US$12.0 million);

(d) Barclays Bank (Local Syndicate Tanzania) TSH nil

(2006: TSH5,703.8 million; 2005: TSH10,968.8 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 14.4% per annum and will be fully repaid
by March 2008.

Balance carried forward

369.3

274.9

212.0

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-185

18.    INTEREST-BEARING DEBT (CONTINUED)

18.2  Funding loans (continued)

2005

2006

2007

Balance brought forward

369.3

274.9

212.0

Term loan to Vodacom International Limited

1,128.8

1,114.4

1,311.9

The loan provided by Standard Bank Plc and RMB
International (Dublin) Limited that amounts to US$180.0 million
(2006: US$180.0 million; 2005: US$180.0 million) is
collateralised by guarantees provided by the Group. The loan,
originally repayable on July 19, 2006, was refinanced during
the current period. The loan is now repayable on July 26, 2009
and bears interest at an effective interest rate of LIBOR plus
0.35%.

Preference shares issued by Vodacom Congo (RDC) s.p.r.l.

231.9

228.9

269.5

The preference shares of US$37.0 million (2006: US$37.0
million; 2005: US$37.0 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.

Sekha-Metsi Investment Consortium Limited

The shareholder loan bears no interest and is repayable in 10
equal 6 monthly instalments commencing on September 30,
2006. Effective April 1, 2007 the repayment terms changed to
4 equal 6 monthly instalments. The loan was remeasured at
amortised cost at a fixed effective interest rate of 13.7% during
the current financial period. The gain on re-measurement is
included in equity.

-

-

2.5

Number Portability Company (Proprietary) Limited

The Group’s share of the shareholders loan provided,
amounted to R6.0 million at March 31, 2007. The shareholder
loan is subordinated and bears interest at the maximum rate of
the prevailing South African prime rate of 10.5%, or a lesser
rate determined by the board of Number Portability Company
(Proprietary) Limited.

-

-

6.0

1,730.0

1,618.2

1,801.9

Less: Short-term portion of funding loans

Project finance funding to Vodacom Tanzania Limited

(91.8)

(184.0)

(94.9)

Term loan to Vodacom International Limited

-

(1,114.4)

-

Preference shares issued by Vodacom Congo (RDC) s.p.r.l.

(231.9)

(228.9)

(269.5)

Sekha-Metsi Investment Consortium Limited

-

-

(1.1)

Short-term portion of funding loans

(323.7)

(1,527.3)

(365.5)

Long-term portion of funding loans

1,406.3

90.9

1,436.4

The carrying value of the Group’s funding loan liability approximates its fair value.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-186

18.   INTEREST-BEARING DEBT (CONTINUED)

18.3   Other short-term loans

2005

Rm

2006

Rm

2007

Rm

Vodacom Congo (RDC) s.p.r.l.

6.3

37.1

21.9

The short-term facilities amount to US$3.0 million
(2006: US$6.0 million; 2005: US$1.0 million). US$1.0 million of
these facilities bears interest at 18% per annum with no fixed
repayment terms. US$2.0 million of these facilities is
repayable on June 30, 2007 and bears interest at LIBOR plus
6% per annum.

Other

1.1

1.9

-

7.4

39.0

21.9

The fair value of the Group’s short-term loans is R21.9 million (2006: R39.0 million; 2005: R7.4 million).

18.4  Repayment of interest bearing debt

2008

Rm

2009

Rm

2010

Rm

2011

Rm

2012

Rm

2013

onwards

Rm

Total

Rm

Finance leases

Vodacom
(Proprietary) Limited

83.0

151.6

41.4

86.9

39.7

77.1

479.7

Vodacom Service
Provider Company
(Proprietary) Limited

30.6

42.7

57.1

74.7

43.8

-

248.9

Funding loans

Planetel
Communications
Limited

-

53.5

-

-

-

-

53.5

Caspian Construction
Company Limited

-

63.6

-

-

-

-

63.6

Project finance
funding to Vodacom
Tanzania Limited

94.9

-

-

-

-

-

94.9

Term loan to
Vodacom
International Limited

-

-

1,311.9

-

-

-

1,311.9

Preference shares
issued by Vodacom
Congo (RDC) s.p.r.l.

269.5

-

-

-

-

-

269.5

Sekha-Metsi
Investment
Consortium Limited

1.1

1.4

-

-

-

2.5

Mobile Number
Portability Company
(Proprietary) Limited

-

-

-

-

-

6.0

6.0

Other short-term
loans

21.9

-

-

-

-

21.9

501.0

312.8

1,410.4

161.6

83.5

83.1

2,552.4

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-187

19.   NON-INTEREST BEARING DEBT

2005

Rm

2006

Rm

2007

Rm

Sekha-Metsi Investment Consortium Limited

4.3

4.3

-

The minority shareholder’s loan was previously uncollateralised
and no repayment terms were determined. During the 2007
financial year the loan became repayable (Note 18).

Minority shareholders of Smartcom (Proprietary) Limited

-

-

3.0

The minority shareholder’s loan amounting to R3.0 million is
unsecured, bears no interest and no repayment terms have
been arranged.

4.3

4.3

3.0

Less: Short-term portion of non-interest bearing debt

Sekha-Metsi Investment Consortium Limited

(4.3)

(4.3)

-

Long-term portion of non-interest bearing debt

-

-

3.0

The fair value of the Group’s non-interest bearing debt approximates its fair value.

20. PROVISIONS

2005

Rm

2006

Rm

2007

Rm

Deferred bonus incentive provision (Note 20.1)

423.9

452.4 500.7

Bonus provision (Note 20.2)

203.1

279.8 330.6

Leave pay provision (Note 20.3)

58.3

70.8 90.9

Warranty provision (Note 20.4)

28.2

32.8

-

Long-term incentive provision (Note 20.5)

-

122.1

161.2

Other (Note 20.6)

65.9

37.4

35.9

779.4

995.3

1,119.3

Timing of Provisions

Within one year

595.0

623.0

741.8

After one year

184.4

372.3

377.5

779.4

995.3

1,119.3

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-188

20.    PROVISIONS (CONTINUED)

Reconciliation
2005

Deferred

bonus

incentive

provision

Rm

Bonus

provision

Rm

Leave pay

provision

Rm

Warranty

provision

Rm

Long-term

incentive

provision

Rm

Other

Rm

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

Deferred

bonus

incentive

provision

Rm

Bonus

provision

Rm

Leave pay

provision

Rm

Warranty

provision

Rm

Long-term

incentive

provision

Rm

Other

Rm

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

Reconciliation
2007

Deferred

bonus

incentive

provision

Rm

Bonus

provision

Rm

Leave pay

provision

Rm

Warranty

provision

Rm

Long-term

incentive

provision

Rm

Other

Rm

Balance at the beginning of the
year

452.4

279.8

70.8

32.8

122.1

37.4

Provision created

191.6

380.2

24.7

-

39.1

29.2

Provision utilised

(143.3)

(329.4)

(4.6)

(32.8)

-

(30.7)

Balance at the end of the year

500.7

330.6

90.9

-

161.2

35.9

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-189

20.    PROVISIONS (CONTINUED)

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 records 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.

20.1   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.

20.2   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.

20.3   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.

20.4   Warranty provision

The warranty provision covered manufacturing defects in the second year of warranty on handsets sold to customers.
The estimate was based on claims notified and past experience. The suppliers of the various handsets will assume
responsibility for the second year warranty subsequent to March 31, 2007 and accordingly there is no remaining
provision.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-190

20.    PROVISIONS (CONTINUED)

20.5   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.

2005

Rm

2006

Rm

2007

Rm

Net liability at beginning of year

-

-

122.1

Interest cost

-

6.5

9.6

Current service cost

-

9.1

17.6

Recognised actuarial losses

-

123.4

13.3

Net cost

-

139.0

162.6

Total benefit payments

-

(16.9)

(1.4)

Net liability at end of year

-

122.1

161.2

Key assumptions:

General inflation rate (%)

-

4.7

5.1

Discount rate (%)

-

7.4

8.0

Salary inflation (%)

-

5.7

6.1

Valuation date

-

March 31,

2006

March 31,

2007

20.6   Other

Other provisions for the Group include provisions for advertising support payments received from suppliers of handsets
and various other smaller provisions. The advertising provision represents the advertising expenditure not yet incurred
or claimed by the Group or external service providers.

21.    OTHER NON-CURRENT LIABILITIES

2005

Rm

2006

Rm

2007

Rm

Operating lease liability (Note 21.1)

122.4

122.5

150.4

Licence obligation (Note 21.2)

-

-

90.7

122.4

122.5

241.1

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-191

21.   OTHER NON-CURRENT LIABILITIES (CONTINUED)

2005

Rm

2006

Rm

2007

Rm

21.1 Operating lease liability

122.4

122.5

150.4

The value of the Group’s operating lease liability is
R150.4 million (2006: R122.5 million; 2005: R122.4 million). The
liability is due to the recognition of the operating lease expense
on a straight line basis over the lease term (Note 34).

21.2 Licence obligation

-

-

90.7

On December, 9 2004, ICASA amended the Vodacom South
Africa licence to allow for access to the 1800 Megahertz
frequency spectrum band and the 3G radio spectrum band.

The costs to the Group for the 1800 Megahertz frequency
spectrum band obligations is estimated at R68.8 million. The net
present value, at a discount rate of 8%, over three years,
amounts to R59.1 million.

The cost to the Group for the 3G radio spectrum band
obligations is estimated at R36.8 million. The net present value,
at a discount rate of 8%, over three years amounts to R31.6
million.

122.4

122.5

241.1

Less: Short-term portion of other non-current liabilities

Operating lease liability

-

-

(0.3)

Licence obligation

-

-

(30.2)

Short-term portion of other non-current liabilities*

-

-

(30.5)

Long-term portion of other non-current liabilities

122.4

122.5

210.6

* The short-term portion of other non-current liabilities is included in the trade and other payables note (Note 22).

22. TRADE AND OTHER PAYABLES

2005

Rm

2006

Rm

2007

Rm

Trade payables

3,466.8

3,315.4

4,021.3

Capital expenditure creditors

1,089.9

1,478.7

2,274.9

Value added taxation

91.6

100.3

121.9

Sundry accruals

75.4

89.4

110.8

Revenue charged in advance

67.2

64.2

34.2

Interest accrual

39.9

56.7

62.0

Put option liability #

-

-

249.3

4,830.8

5,104.7

6,874.4

# The obligation to settle the Congolese Wireless Networks s.p.r.l. put option (Note 39) in cash gives rise to an obligation

which represents a financial liability. The value of the liability amounted to Rnil million as at March 31, 2006 and 2005.
During the current financial year the liability was re-measured through the consolidated income statement.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-192

23.   CHANGES IN ACCOUNTING POLICIES

Reconciliation
2006

Balance as

previously

reported

Rm

Foreign

Exchange

Difference

Rm

Balance

as

restated

Rm

Income statement

Interest, dividends and other financial income

(659.3)

47.6

(611.7)

Finance costs

1,318.2

(67.3)

1,250.9

Taxation

3,077.8

5.9

3,083.7

Net profit (profit after taxation)

(5,129.0)

(13.8)

(5,142.8)

Retained earnings (opening balance)

(8,057.2)

(1.9)

(8,059.1)

Balance sheet

Equity

Retained earnings

(8,567.3)

(15.7)

(8,583.0)

Non-distributable reserves

178.3

15.7

194.0

The Group changed some of its accounting policies as detailed below on adoption of the following standards:

º

IAS 21 (revised): The Effects of Changes in Foreign Exchange Rates (“IAS 21”)

º

IFRS 8: Operating Segments (“IFRS 8”)

The table above reflects the effect on comparative figures of the adoption of the revised IAS 21, while Note 42 reflects
the requirements of IFRS 8.

23.1 Foreign exchange differences

The Group adopted the revised IAS 21 in the current financial year. All foreign exchange gains and losses on a monetary
investment in a foreign operation previously recognised in the consolidated income statement are now recognised in
equity. The accounting treatment is no longer dependent on the currency of the monetary item or which entity within the
Group makes the loan to the foreign entity. The change in accounting policy affected the Group’s results but not cash
flow information for the years ended March 31, 2006 and March 31, 2005.

23.2 Operating segments

The Group early adopted IFRS 8 in the current financial year. Operating segments are defined as components of an
entity for which separate financial information is available that is evaluated regularly by the chief operating decision
maker in the allocation of resources and in performance assessment. The operating segments currently reported under
IFRS 8 are comparable to the previously reported primary segments under IAS 14: Segment Reporting.

Reconciliation
2005

Balance as

previously

reported

Rm

Foreign

Exchange

Difference

Rm

Balance

as

restated

Rm

Income statement

Interest, dividends and other financial income

(662.8)

39.9

(622.9)

Finance costs

641.7

(42.1)

599.6

Taxation

2,613.0

0.3

2,613.3

Net profit (profit after taxation)

(3,886.3)

(1.9)

(3,888.2)

Balance sheet

Equity

Retained earnings

(8,057.2)

(1.9)

(8,059.1)

Non-distributable reserves

298.0

1.9

299.9

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-193

24.   CASH GENERATED FROM OPERATIONS

2005

Rm

2006

Rm

2007

Rm

Profit from operations

6,478.2

8,865.7

10,859.8

Adjusted for:

Depreciation of property, plant and equipment and amortisation
of intangible assets (Notes 8 and 9)

2,843.2

2,995.8

3,361.2

Net (profit)/loss on disposal of property, plant and equipment and
intangible assets

(1.8)

26.8

(26.9)

Impairment of assets (Note 3)

268.4

(52.8)

22.9

Profit on sale of shares in a subsidiary

-

-

(17.4)

Other non-cash flow items

52.2

42.3

97.0

Cash flow from operations before working capital changes

9,640.2

11,877.8

14,296.6

Increase in trade and other receivables

(330.1)

(1,035.0)

(838.8)

Decrease/(Increase) in inventory

(161.1)

16.8

84.8

Increase in trade and other payables and provisions

863.0

230.7

323.5

Cash generated from operations

10,012.0

11,090.3

13,866.1

25. FINANCE COSTS PAID

Finance costs per the income statement

(599.6)

(1,250.9)

(1,800.0)

Interest accrual at the beginning of the year

(14.2)

(39.9)

(56.7)

Interest accrual at the end of the year

39.9

56.7

62.0

Unrealised losses on foreign exchange contract revaluation

126.8

411.7

13.8

Unrealised losses on foreign liability and asset revaluation

169.4

350.3

122.6

Unrealised losses on interest rate swap valuation

11.3

10.8

12.8

Other non-cash flow items

7.2

14.9

37.4

Unrealised put option liability revaluation (Note 22)

-

-

249.3

(259.2)

(446.4)

(1,358.8)

26.    INTEREST, DIVIDENDS AND OTHER FINANCIAL INCOME RECEIVED

Interest, dividends and other financial income per the income
statement

622.9

611.7

1,336.2

Interest income receivable at the beginning of the year

18.9

35.7

41.5

Interest income receivable at the end of the year

(35.7)

(41.5)

(51.3)

Guarantee fees accrual at the beginning of the year

13.1

-

-

Elimination on consolidation of Vodacom Congo (RDC) s.p.r.l.

(13.1)

-

-

-

Unrealised gain on foreign exchange contract revaluation

(120.5)

(117.1)

(34.4)

Unrealised gain on foreign liability and asset revaluation

(218.4)

(146.0)

(231.0)

Unrealised gain on interest rate swap revaluation

(20.4)

(4.2)

(2.9)

Other non-cash flow items

-

-

(23.0)

246.8

338.6

1,035.1

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-194

27.   TAXATION PAID

2005

Rm

2006

Rm

2007

Rm

Taxation per the income statement

(2,613.3)

(3,083.7)

(3,836.0)

Taxation payable at the beginning of the year

(852.0)

(632.6)

(630.2)

Taxation payable at the end of the year

632.6

630.2

1,112.7

Deferred taxation at the beginning of the year

(132.3)

(164.0)

(304.7)

Deferred taxation at the end of the year

164.0

304.7

371.2

Business combination – deferred taxation

(40.0)

(35.8)

(17.5)

Business combination – taxation payable

-

(15.2)

-

Exchange difference on consolidation of foreign subsidiary

-

10.4

9.3

Movement due to foreign equity revaluation reserve

0.3

5.7

(8.1)

Acquired from the minorities of Vodacom Congo (RDC) s.p.r.l.

96.3

-

-

(2,744.4)

(2,980.3)

(3,303.3)

28.   ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS

Additions to property, plant and equipment and intangible assets
(Note 8 and Note 9)

(3,493.8)

(5,141.5)

(7,214.4)

Increase in capital expenditure related creditors (Note 22)

240.4

353.1

796.2

Licence obligation (Note 21)

-

-

90.7

Less: Goodwill acquired through increase in shareholding of
existing subsidiaries

Smartphone SP (Proprietary) Limited (Note 29.2.1)

-

-

313.2

Smartcom (Proprietary) Limited (Note 29.2.2)

-

-

8.2

Cointel V.A.S. (Proprietary) Limited (Note 29.2.3)

-

-

90.9

Goodwill allocated to Smartphone SP (Proprietary) Limited’s
minority shareholders

-

-

(40.1)

(3,253.4)

(4,788.4)

(5,955.3)

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-195

29.   BUSINESS COMBINATIONS AND OTHER ACQUISITIONS

2005

Rm

2006

Rm

2007

Rm

Business combinations (Note 29.1)

(289.8)

(0.1)

(101.2)

Other acquisitions (Note 29.2)

-

-

(490.0)

(289.8)

(0.1)

(591.2)

29.1   Business combinations

InterConnect s.p.r.l (Note 29.1.1)

-

-

(21.2)

Africell Cellular Services (Proprietary) Limited (Note 29.1.2)

-

-

(80.0)

Tiscali (Proprietary) Limited (Note 29.1.3)

(40.1)

0.3

-

Cointel V.A.S. (Proprietary) Limited (Note 29.1.4)

-

(0.4)

-

Smartphone SP (Proprietary) Limited and subsidiaries
(Note 29.1.5)

(233.8)

-

-

Smartcom (Proprietary) Limited (Note 29.1.6)

(15.9)

-

-

(289.8)

(0.1)

(101.2)

29.1.1   InterConnect s.p.r.l

Effective November 1, 2006 the Group acquired the internet
service provider business of InterConnect s.p.r.l. The fair values
of the assets and liabilities acquired were preliminarily
determined as follows:

Fair value of net assets acquired

-

-

(8.6)

Property, plant and equipment

-

-

2.5

Intangible assets

-

-

9.7

Inventory

-

-

0.3

Deferred taxation liability

-

-

(3.9)

Goodwill

-

-

(12.6)

Purchase price

-

-

(21.2)

The initial purchase price of R21.2 million (US$2.8 million) (excluding capitalised costs) was paid on November 1, 2006.

Revenue amounting to R8.2 million (US$1.2 million) and net profit of R2.8 million (US$0.4 million) are included in the
2007 year results. It is impracticable to disclose the impact of the consolidated revenue and consolidated net profit for the
full year.

The goodwill related to the acquisition represents future synergies and are allocated to the Democratic Republic of
Congo cash-generating unit.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-196

29.    BUSINESS COMBINATIONS AND OTHER ACQUISITIONS (CONTINUED)

29.1  Business combinations (continued)

2005

Rm

2006

Rm

2007

Rm

29.1.2   Africell Cellular Services (Proprietary) Limited

Effective October 1, 2006 the Group acquired the cellular
business of Africell Cellular Services (Proprietary) Limited. The
fair value of the assets and liabilities acquired were preliminary
determined as follows:

Fair value of net assets acquired

-

-

(36.3)

Property, plant and equipment

-

-

3.1

Intangible assets

-

-

46.8

Deferred taxation liability (including taxation effect on
intangible assets)

-

-

(13.6)

Goodwill

-

-

(43.7)

Purchase price

-

-

(80.0)

The customer base was not previously recorded in the accounting records of Africell Cellular Services (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 in South Africa. It is impracticable to disclose the
revenue and profit of the business that is included in the current 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 this reason stated it is also not practicable to determine the impact on revenue and profits of the
Group for a full year.

29.1.3 Tiscali (Proprietary) Limited

2005

Rm

2006

Rm

2007

Rm

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 in South Africa. 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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-197

29.    BUSINESS COMBINATIONS AND OTHER ACQUISITIONS (CONTINUED)

29.1   Business combinations (continued)

2005

Rm

2006

Rm

2007

Rm

29.1.4   Cointel V.A.S. (Proprietary) Limited

On August 1, 2005, the Group acquired a 51% interest in the
equity of Cointel V.A.S. (Proprietary) Limited. The fair value of
the assets and liabilities acquired were determined by the Group
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
intangible assets)

-

(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

-

Non-current liabilities

-

(1.2)

-

Current liabilities

-

(140.5)

-

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 were included in the 2006 year results. Restated
consolidated revenue would have amounted to R34,062.5 million and restated consolidated net profit to R5,153.2 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.

29.1.5   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, at
the time, had a 100% shareholding in Stand 13 Eastwood Road Dunkeld (Proprietary) Limited and 52% in Ithuba
Smartcall (Proprietary) Limited.

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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-198

29.    BUSINESS COMBINATIONS AND OTHER ACQUISITIONS (CONTINUED)

29.1   Business combinations (continued)

2005

Rm

2006

Rm

2007

Rm

29.1.6   Smartcom (Proprietary) Limited

On April 16, 2004, the Group acquired an 85.75% interest in the
equity of Smartcom (Proprietary) Limited through its then 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

-

-

Intangible assets

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
intangible assets)

(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 in South Africa.

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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-199

29.   BUSINESS COMBINATIONS AND OTHER ACQUISITIONS (CONTINUED)

2005

Rm

2006

Rm

2007

Rm

29.2   Other acquisitions

Smartphone SP (Proprietary) Limited and subsidiaries
(Note 29.2.1)

-

-

(333.9)

Smartcom (Proprietary) Limited (Note 29.2.2)

-

-

(9.1)

Cointel V.A.S. (Proprietary) Limited (Note 29.2.3)

-

-

(147.0)

-

-

(490.0)

29.2.1   Smartphone SP (Proprietary) Limited and subsidiaries

On August 30, 2006, the Group acquired a further 19% interest
in the equity of Smartphone SP (Proprietary) Limited, which had
a 85.75% shareholding in Smartcom (Proprietary) Limited at the
time, 100% shareholding in Stand 13 Eastwood Road Dunkeld
(Proprietary) Limited and 52% shareholding in Ithuba Smartcall
(Proprietary) Limited. The acquisition was accounted for using
the parent entity extension method.

Minority interest acquired

-

-

21.5

Goodwill

-

-

313.2

Purchase price (including capitalised costs)

-

-

334.7

Capitalised cost payable

-

-

(0.8)

Cash consideration

-

-

333.9

The purchase price of R333.9 million was paid in three tranches on October 3, 2006, January 16, 2007 and
March 26, 2007. Capitalised costs of R0.8 million were still outstanding as at March 31, 2007. The outstanding amount
accrued interest at 7.6% per annum from September 21, 2006 up to the date of payment.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-200

29.   BUSINESS COMBINATIONS AND OTHER ACQUISITIONS (CONTINUED)

29.2   Other acquisitions (continued)

29.2.2   Smartcom (Proprietary) Limited

2005

Rm

2006

Rm

2007

Rm

On September 13, 2006, the Group increased its interest in
Smartcom (Proprietary) Limited to 88% by acquiring an additional
2.25% interest through its 70% owned subsidiary, Smartphone SP
(Proprietary) Limited. The acquisition was accounted for using the
parent entity extension method.

Minority interest

-

-

0.9

Goodwill

-

-

8.2

Purchase price

-

-

9.1

The purchase price of R9.1 million was paid in two instalments on February 21, 2007 and March 26, 2007.

29.2.3   Cointel V.A.S. (Proprietary) Limited

2005

Rm

2006

Rm

2007

Rm

On October 4, 2006 the Group increased its interest to 100% by
acquiring 49% from the minority shareholders.

The purchase price of R147.0 million was paid on October 18,
2006. The acquisition was accounted for using the parent entity
extension method.

Minority interest

-

-

56.5

Goodwill

-

-

90.9

Purchase price (including capitalised costs)

-

-

147.4

Capitalised cost payable

-

-

(0.4)

Cash consideration

-

-

147.0

On October 9, 2006, Smartphone SP (Proprietary) Limited, acquired 100% shareholding of Cointel V.A.S. (Proprietary)
Limited from Vodacom Group (Proprietary) Limited for R300.0 million.

As a result of the sale of Cointel V.A.S (Proprietary) Limited from Vodacom Group (Proprietary) Limited to Smartphone
SP (Proprietary) Limited, R38.0 million goodwill was realised, which resulted in the realisation of R17.4 million profit on
consolidation.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-201

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. During
the 2005 financial year the shareholders’ agreement was amended to remove some of the participative rights of the
minorities, resulting in Vodacom Congo 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
April 1, 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:

As at

April 1, 2004
Rm

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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-202

31.    CASH AND CASH EQUIVALENTS AT END OF YEAR

2005

Rm

2006

Rm

2007

Rm

Bank and cash balances

2,990.1

3,146.1

771.4

Short-term bank deposits

1,000.0

-

-

Bank borrowings *

(1,817.1)

(1,385.8)

(879.2)

2,173.0

1,760.3

(107.8)

* Bank borrowings are regarded as part of the Group’s integral cash management system.

The short-term bank deposits at the end of March 31, 2005 earned interest at an effective interest rate of 7.4% and
matured on April 1, 2005.

32. EARNINGS AND DIVIDEND PER SHARE

32.1 Basic and diluted earnings per share

2005

R

2006

R

2007

R

The calculation of basic earnings per ordinary share was based
on earnings of R5,012.3 million (2005: R3,855.5 million) at
March 31, 2006 and 10,000 issued ordinary shares
(2005: 10,000) at March 31, 2006. The following adjustments
were made:

385,550

501,230

Foreign exchange gain on monetary investment in foreign
operation

190

1,380

Earnings per share – restated

385,740

502,610

The calculation of basic earnings per ordinary share is based on
earnings of R6,342.4 million (2006: R5,026.1 million;
2005: R3,857.4 million) and 10,000 issued ordinary shares
(2006: 10,000; 2005: 10,000).

385,740

502,610

634,240

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 R5,400.0 million (2006: R4,500.0
million; 2005: R3,400.0 million) and 10,000 issued ordinary shares
(2006: 10,000; 2005: 10,000). The dividends were declared as
follows:

Declared March 14, 2007 to shareholders registered on
April 2, 2007 and paid on April 4, 2007 (Final)

-

-

290,000

Declared September 7, 2006 to shareholders registered on
October 2, 2006 and paid on October 4, 2006 (Interim)

-

-

250,000

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 shareholders registered on
October 1, 2004 and paid on October 1, 2004 (Interim)

160,000

-

-

340,000

450,000

540,000

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-203

33.    CAPITAL COMMITMENTS

2005

Rm

2006

Rm

2007

Rm

Capital expenditure contracted for at the balance sheet date but
not yet incurred is as follows:

Vodacom (Proprietary) Limited

1,272.2

709.1

747.6

Vodacom Congo (RDC) s.p.r.l.

62.2

99.5

209.7

Vodacom Tanzania Limited

37.1

201.2

56.7

Vodacom Service Provider Company (Proprietary) Limited

18.0

16.9

14.8

Vodacom Group (Proprietary) Limited

0.3

222.9

120.7

VM, S.A.R.L.

78.0

34.2

32.0

1,467.8

1,283.8

1,181.5

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

3,268.0

4,872.3

4,916.7

Vodacom Tanzania Limited

332.1

650.6

889.3

Vodacom Congo (RDC) s.p.r.l.

283.8

293.4

660.0

Vodacom Service Provider Company (Proprietary) Limited

138.8

164.7

277.7

Vodacom Lesotho (Proprietary) Limited

16.2

24.9

48.5

Vodacom Group (Proprietary) Limited

88.8

111.7

50.7

VM, S.A.R.L.

281.4

71.7

259.4

Smartphone SP (Proprietary) Limited

3.7

15.2

12.2

Cointel V.A.S. (Proprietary) Limited

-

2.2

4.1

Skyprops 134 (Proprietary) Limited

-

-

16.6

4,412.8

6,206.7

7,135.2

The capital expenditure of the Group will be financed through internal cash generation, extended supplier credit and
bank credit.

34.    OTHER COMMITMENTS

2005

Rm

2006

Rm

2007

Rm

Operating leases (Note 34.1)

5,841.7

6,277.8

2,182.8

Sport and marketing contracts (Note 34.2)

624.9

1,133.7

881.7

Site rentals (Note 34.3)

811.6

567.8

582.4

7,278.2

7,979.3

3,646.9

Within one

year

Rm

Between

two and

five years

Rm

After five

years

Rm

Total

Rm

34.1   Operating leases

Transmission and data lines GSM

163.2

456.3

75.6

695.1

Accommodation

134.1                  585.8

747.7

1,467.6

Other operating leases

9.2                    10.6

0.3

20.1

306.5

1,052.7

823.6

2,182.8

The remaining average lease term for transmission and data lines is 5 years with a fixed price escalation clause per annum
and various options to renew between 1 and 5 years. The remaining average lease term and escalation rate for office
accommodation is 8 years and 12% per annum respectively with an option to renew for a further period. The remaining
average lease term and escalation rate for other accommodation is between 3 and 5 years and 10% per annum.

34.2   Sport and marketing contracts

327.7

550.7

3.3

881.7

34.3   Site rentals

142.2

392.6

47.6

582.4

The significant remaining average lease term for site rentals is 5 years and the lease escalates annually on the
anniversary date using fixed or consumer price index rates with an option to renew on the same terms and conditions.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-204

34.  OTHER COMMITMENTS (CONTINUED)

34.4   Service providers

Service provider agreements with the Group’s independent service providers were extended for a further period of five
years during the 2006 financial year.

34.5 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 licensee excluding discounts, Value
Added Taxation and other direct taxes derived from customers of the licensee for the provision to them of the service, less
net interconnect fees and bad debts actually incurred.

34.6 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 R249.8 million (2006: R175.2 million; 2005: R17.0 million).

34.7 Retention incentives

The Group has committed a maximum of R651.9 million (2006: 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 recognised the liability, as no
legal obligation exists, since the customers have not yet entered into new contracts.

34.8 Activation bonuses

The Group has a potential liability in respect of activation bonuses payable related to starter packs sold which have not yet
been validated. The exposure is estimated at approximately R7.8 million (2006: R8.9 million; 2005: R6.0 million).

34.9 Activation commissions

The Group has a commitment to a maximum of R115.6 million (2006: R141.7 million; 2005: R22.6 million) in terms of
activation commissions on gross prepaid connections in excess of the legal liability recorded in the financial statements.

34.10 Transmission and data lines

Effective April 1, 2006 most contractual obligations for transmission and data line links were migrated from the interconnect
agreements to new BTS and Broadband agreements. No commitment amounts for future periods have been disclosed, as
the existing agreements are cancellable on 30 days notice. The Group’s commitment to Telkom SA Limited in respect of
transmission line rentals of R914.9 million per annum may be adjusted downwards in the future depending on the Group’s
self-provisioning capabilities and the availability of alternative transmission players in the market place from whom the
Group may source transmission on a competitive basis and as a result no future commitments are disclosed in Note 34.1.

35. CONTINGENCIES

2005

Rm

2006

Rm

2007

Rm

Various legal matters

4.9

5.0

7.6

35.1 Negative working capital ratio
For financial years ended 2007, 2006 and 2005 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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-205

35.   CONTINGENCIES (CONTINUED)

35.2   Universal Service Obligation
The Group has a potential liability in respect of the 1800 MHz Universal Service Obligation in terms of the distribution
costs relating to 2.5 million SIM cards.

35.3   Equity investment

Vodacom Ventures (Proprietary) Limited has acquired a 35% equity stake in a company for R12.3 million, which is subject
to Competition Commission approval.

35.4   Various legal contingencies
The Group is involved in various legal cases of which the outcome is uncertain and of which the timing and amount
cannot be reliably measured.

35.5   Taxation
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 the exposure, if any, that the Group may incur.

35.6 Contingent asset
Litigation is being instituted for the recovery of certain fees paid by the Group. The information usually required by
IAS 37: Provisions, Contingent Liabilities and Contingent Assets, is not disclosed on the grounds that it can be expected
to prejudice seriously the outcome of the litigation. The directors are of the opinion that a claim may be successful and
that the amount recovered could be significant.

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 R84.7 million (2006: R76.4 million; 2005: R70.7 million).
Current contributions to the provident fund amounted to R12.7 million (2006: R12.9 million; 2005: R4.2 million). South
African funds are governed by the Pension Funds Act of 1956.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-206

37.   EVENTS SUBSEQUENT TO YEAR END

The directors are not aware of any matter or circumstance arising since the end of the financial year, not otherwise dealt
with in the consolidated annual financial statements, which significantly affects the financial position of the company as at
March 31, 2007 or the results of its operations or cash flows for the year ended, other than the following:

37.1   Wireless Business Solutions (Proprietary) Limited

On March 30, 2007 the Group entered into an infrastructure agreement with Wireless Business Solutions (Proprietary)
Limited (“WBS”), whereby WBS appointed the Group to design and construct the WiMax network.

37.2 VM, S.A.R.L., trading as Vodacom Mozambique

As at March 31, 2007 Vodacom owned 98% of Vodacom Mozambique, and the remaining 2% was held by a local
consortium named Empresa Moçambicana de Telecommunicações S.A.R.L. (“EMOTEL”). Effective April 1, 2007
Vodacom International Limited sold a portion of its shares to local investors, with 5% being purchased by Intelec Holdings
Limitada and EMOTEL acquiring an additional 3%, leaving Vodacom International Limited with a 90% interest in Vodacom
Mozambique.

37.3 Black economic empowerment (“BEE”)

The Group is in the process of finalising a R7.5 billion BEE equity deal whereby both BEE partners and employees will
have the opportunity to share in the success of Vodacom South Africa going forward. The deal is expected to be
completed by the end of the 2008 financial year and it is anticipated to make a significant contribution to the well being of
the Group and its employees.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-207

38     RELATED PARTY TRANSACTIONS

38.1   Balances with related parties

Related party transactions occur within the Group. Details of transactions entered into are as follows:

2005

Rm

2006

Rm

2007

Rm

Included in accounts receivable

Telkom SA Limited – Interconnect

487.9

509.7

699.3

Telkom SA Limited – Other

11.7

6.3

6.9

Vodafone Group Plc and subsidiaries

22.7

12.7

20.9

Included in accounts payable

Telkom SA Limited – Interconnect

(74.0)

(85.3)

(80.1)

Telkom SA Limited – Other

(9.6)

(16.5)

(41.3)

Vodafone Group Plc and subsidiaries

(20.3)

(3.7)

(6.4)

Vodafone Telecommunications Investment SA Limited

-

(0.1)

-

WBS Holdings (Proprietary) Limited

-

-

(8.0)

Dividends payable

Telkom SA Limited

(900.0)

(1,400.0)

(1,450.0)

Vodafone Holdings (SA) (Proprietary) Limited

(630.0)

(980.0)

(867.1)

Vodafone Telecommunications Investment SA Limited

(270.0)

(420.0)

(582.9)

These outstanding balances are unsecured and will be settled in cash in the ordinary course of business. No guarantees
or provision for doubtful debts have been recognised.

38.2   Transactions with related parties

2005

Rm

2006

Rm

2007

Rm

Telkom SA Limited and subsidiaries (Entity with joint control over

the Group)

(82.0)

(798.5)

(1,221.3)

Audit fees recovered

4.6

4.8

6.1

Cellular usage

33.1

37.0

45.6

Installation of transmission lines

(49.9)

(93.4)

(67.6)

Interconnect expense

(465.3)

(464.3)

(468.2)

Interconnect income

2,728.2

2,817.8

2,908.4

Interest paid – commercial

-

(0.1)

(0.1)

Lease of transmission lines

(511.9)

(752.1)

(839.0)

Other

-

4.8

(75.4)

Site costs

(19.9)

(26.3)

(30.9)

Telephone landline usage

(33.6)

(26.7)

(14.9)

Site rental income

7.6

10.8

14.7

Telkom prepaid vouchers

(74.9)

(60.8)

*

Dividend payable

(900.0)

(1,400.0)

(1,450.0)

Dividend paid

(800.0)

(850.0)

(1,250.0)

* Less than R50 000

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-208

38.    RELATED PARTY TRANSACTIONS (CONTINUED)

2005

Rm

2006

Rm

2007

Rm

38.2   Transactions with related parties (continued)

Vodafone Group Plc and subsidiaries

(14.9)

(192.0)

(338.2)

Roaming income

65.5

73.6

108.4

Roaming expense

(63.4)

(90.6)

(188.9)

Global alliance agreement

(17.0)

(175.2)

(249.8)

Secondee cost recovery

-

0.2

0.4

Other

-

-

(8.3)

Vodafone Holdings (SA) (Proprietary) Limited
(Entity with joint control over the Group)

(1,190.0)

(1,575.0)

(1,614.6)

Dividend payable

(630.0)

(980.0)

(867.1)

Dividend paid

(560.0)

(595.0)

(747.5)

Vodafone Telecommunications Investment SA Limited

(515.1)

(679.8)

(1,085.4)

Dividend payable

(270.0)

(420.0)

(582.9)

Dividend paid

(240.0)

(255.0)

(502.5)

Interest payments

(4.3)

(1.9)

-

Facility fees

(0.8)

(0.9)

-

Aircraft charter fees

-

(2.0)

-

Transactions with entities in which related parties have an
interest.

-

(20.3)

(40.6)

During the current year the Group acquired a 10% shareholding in WBS Holdings (Proprietary) Limited for
R80.8 million, a company in which a family member of a Group director has significant influence.

38.3   Key management personnel compensation (excluding directors’ emoluments)

2005

Rm

2006

Rm

2007

Rm

Key management personnel remuneration

(29.7)

(56.0)

(83.1)

Salaries and restraint of trade payments

(9.9)

(17.1)

(32.7)

Fringe benefits

(0.8)

(0.6)

(0.8)

Bonuses and incentives

(16.7)

(30.6)

(37.6)

Long-term benefits

-

(7.6)

(12.0)

Other

(2.3)

(0.1)

-

Included in key management personnel’s remuneration

(1.4)

(2.2)

(3.8)

Pension fund employer contributions

(0.7)

(1.2)

(1.7)

Provident fund employer contributions

(0.3)

(0.6)

(1.7)

Medical aid employer contributions

(0.4)

(0.4)

(0.4)

Key management include Chief Officers and Group Executives.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-209

38.   RELATED PARTY TRANSACTIONS (CONTINUED)

2005

Rm

2006

Rm

2007

Rm

38.4   Directors’ emoluments

Directors’ remuneration

(52.8)

(96.7)

(76.7)

Executive directors – fees as directors: salaries and restraint of
trade payments

(21.4)

(35.6)

(16.3)

Executive directors – fees as directors: fringe benefits

(0.8)

(0.7)

(1.2)

Executive directors – fees as directors: bonuses and
incentives

(30.0)

(46.2)

(48.5)

Executive directors – long term benefits

-

(13.6)

(8.5)

Non-executive directors – fees as directors

(0.6)

(0.6)

(2.2)

Included in directors’ remuneration

(2.2)

(4.2)

(15.8)

Pension fund employer contributions

(0.8)

(0.5)

(8.3)

Provident fund employer contributions

(1.2)

(3.5)

(7.3)

Medical aid employer contributions

(0.2)

(0.2)

(0.2)

Directors’ remuneration and emoluments paid and accrued by:

(52.8)

(96.7)

(76.7)

Vodacom Group (Proprietary) Limited

(37.0)

(77.1)

(64.8)

Subsidiaries

(15.8)

(19.6)

(11.9)

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 co-ordinating 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 arms 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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-210

39.    FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)

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:

2005

Rm

2006

Rm

2007

Rm

Foreign currency asset

To buy

25.0

-

27.8

To sell

-

-

0.1

25.0

-

27.9

Foreign currency liability

To buy

-

(60.9)

(6.9)

To sell

(1.0)

-

(0.3)

(1.0)

(60.9)

(7.2)

Forward contracts to buy foreign currency

Foreign

contract value

Mil

Forward value

Rm

Fair value

Rm

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)

2007

United States Dollar

32.0

240.5

(6.9)

Euro

187.2

1,815.0

21.2

Pound Sterling

32.3

457.3

6.6

Swiss Franc

0.2

1.3

*

Australian Dollar

*

0.3

*

2,514.4

20.9

Forward value represents the foreign contract value multiplied by the contracted forward exchange rate.

* Amounts less than R50 000

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-211

39.    FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)

39.1   Foreign currency management (continued)

Forward contracts to sell foreign currency

Foreign

contract value

Mil

Forward value

Rm

Fair value

Rm

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

*

2007

United States Dollar

*

0.2

*

Euro

4.4

43.2

0.1

Pound Sterling

3.9

55.7

(0.3)

99.1

(0.2)

Forward value represents the foreign contract value multiplied by the contracted forward exchange rate.
* Amounts less than R50 000

The Group has various monetary assets and liabilities in currencies other than the Group’s functional currencies. The
following table represents the net currency exposure of the Group according to the different functional currencies of each
entity within the Group.

2005

South

African

Rand

Rm

Euro

Rm

Pound

Sterling

Rm

United

States

Dollar

Rm

Congolese

Franc

Rm

Swiss

Franc

Rm

Other

Rm

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)

-

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-212

39.    FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)

39.1   Foreign currency management (continued)

2006

South

African

Rand

Rm

Euro

Rm

Pound

Sterling

Rm

United

States

Dollar

Rm

Congolese

Franc

Rm

Swiss

Franc

Rm

Other

Rm

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)

38.0

Tanzanian Shilling

4.7

(13.6)

-

106.9

-

-

-

Mozambican Meticals

(0.2)

-

-

-

-

-

-

(51.4)

(890.3)

(330.4)

151.9

(11.4)

(0.3)

37.2

2007

South

African

Rand

Rm

Euro

Rm

Pound

Sterling

Rm

United

States

Dollar

Rm

Congolese

Franc

Rm

Swiss

Franc

Rm

Other

Rm

Net foreign currency
monetary assets/(liabilities)

Functional currency of
company operation

South African Rand

-

(1,387.0)

(331.4)

(102.2)

-

(0.3)

2.4

United States Dollar

51.5

(49.9)

0.1

-

(3.2)

(0.4)

(30.8)

Tanzanian Shilling

3.4

10.9

-

21.0

-

-

-

Mozambican Meticals

(976.1)

(0.3)

-

(296.4)

-

-

-

(921.2)       (1,426.3)

(331.3)

(377.6)

(3.2)

(0.7)

(28.4)

39.2   Interest rate risk management

The Group’s interest rate profile consists 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:

Financial liabilities

2005

Rm

2006

Rm

2007

Rm

Loans and bank borrowings at fixed rates of interest

(1,283.7)

(1,134.5)

(1,184.5)

Bank borrowings linked to South African prime rates

(1,752.0)

(1,361.8)

(823.5)

Bank borrowings linked to Lesotho prime rates

(15.5)

(7.5)

(3.0)

Loans linked to LIBOR

(1,276.5)

(1,286.2)

(1,382.8)

Loans linked to EURIBOR

(84.3)

(58.6)

(37.9)

Bank borrowings linked to money market rates

(0.2)

-

-

(4,412.2)

(3,848.6)

(3,431.7)

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-213

39.    FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)

39.2   Interest rate risk management (continued)

Financial assets

2005

Rm

2006

Rm

2007

Rm

Investments and bank deposits at fixed rates of interest

1,177.1

168.1

194.2

Investments and bank deposits linked to money market rates

2,017.5

471.0

537.0

Investments and bank deposits linked to South African prime

rates

829.1

2,603.1

180.5

Interest rate swaps linked to BA rate

44.2

37.6

27.7

Loans and bank deposits linked to LIBOR

154.4

94.2

126.0

Bank deposits linked to Lesotho prime rates

6.4

13.5

-

4,228.7

3,387.5

1,065.4

Maturity of financial instruments exposed to interest rate risk

Financial liabilities

2008

Rm

2009

Rm

2010

Rm

2011

Rm

2012

Rm

2013

onwards

Rm

Total

Rm

Linked to fixed rates

(445.0)

(195.7)

(98.5)

(161.6)

(83.5)

(200.2)        (1,184.5)

Linked to South African prime
rates

(823.5)

-

-

-

-

-

(823.5)

Linked to Lesotho prime rates

(3.0)

-

-

-

-

-

(3.0)

Loans linked to LIBOR

(70.9)

-        (1,311.9)

-

-

-        (1,382.8)

Linked to EURIBOR

(37.9)

-

-

-

-

-

(37.9)

(1,380.3)

(195.7)        (1,410.4)

(161.6)

(83.5)

(200.2)        (3,431.7)

Financial assets

2008

Rm

2009

Rm

2010

Rm

2011

Rm

2012

Rm

2013

onwards

Rm

Total

Rm

Linked to fixed rates

194.2

-

-

-

-

-

194.2

Linked to money market rates

537.0

-

-

-

-

-

537.0

Linked to South African prime
rates

174.5

-

-

-

-

6.0

180.5

Interest rate swaps linked to
BA rate

22.6

5.1

-

-

-

-

27.7

Loans linked to LIBOR

17.6

-

-

-

108.4

-

126.0

945.9

5.1

-

-

108.4

6.0

1,065.4

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-214

39.    FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)

39.2   Interest rate risk management (continued)

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, 2007 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.

2005

Rm

2006

Rm

2007

Rm

Fair value of interest rate swap asset

44.2

37.6

27.7

The fair value of the interest rate swap asset is represented by a notional principal amount of R198.5 million (2006:
R217.7 million; 2005: R229.7 million) at a weighted average floating interest rate of 11.45% NACM (2006: 9.3% NACM;
2005: 10.0% NACM).

39.3 Credit risk management

Financial assets, which potentially subject the Group to concentrations of credit risk, consist principally of cash, short-
term deposits, foreign exchange contracts, investments 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, spread it’s 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 Telephone Networks (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 sheets 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 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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-215

39.    FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)

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, 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.

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”) had a call option for a period of four years following the commencement date,
August 23, 2003. The call option had a nil value at March 31, 2007, 2006 and 2005 and was replaced with a new option,
effective April 1, 2007.

In terms of the new shareholders’ agreement, effective April 1, 2007, the Group’s minority shareholders in VM, S.A.R.L.,
Empresa Moçambicana De Telecommunicaçòes S.A.R.L. (“EMOTEL”) and Intelec Holdings Limitada (“Intelec”) have a
option for a period of five years following the commencement date, April 1, 2007. In terms of the option, Emotel and
Intelec shall be entitled to acquire such numbers of further shares in and proportionate claims in and against
VM, S.A.R.L. as will result in Emotel and Intelec each holding and beneficially owning, in aggregate together with their
shareholding in VM, S.A.R.L. as at April 1, 2007, 10% of the issued share capital, after the exercise of the option. The
option can only be exercised in a single transaction and after all obligations to Vodacom International Limited have been
fully discharged. The option price is specified in the shareholders’ agreement.

39.8 Smartphone SP (Proprietary) Limited put option

In terms of the shareholders’ agreement amended during the current financial year, 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 current and previous put options had a nil value at March 31,
2007, 2006 and 2005 as the conditions set out in the agreement were not met.

39.9 Smartcom (Proprietary) Limited put option

In terms of the amended 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 the average service provider discount provided by Vodacom (Proprietary) Limited to its other
service providers. The current and previous put options had a nil value at March 31, 2007, 2006 and 2005 as the
conditions set out in the agreement were not met.

39.10 Congolese Wireless Network s.p.r.l. (“CWN”) put option

In terms of a shareholders agreement, the minority shareholder 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 put option has a nil value as at March 31, 2007, 2006 and 2005. The option liability had a value of R249.3 million
(2006: Rnil; 2005: Rnil) as at March 31, 2007 (Note 22).

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-216

39.    FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)

39.11   The Somnium Family Trust (“the Trust”) call option

The Somnium Family Trust granted Vodacom Ventures (Proprietary) Limited a call option to purchase such number of
shares in Gogga Tracking Solutions (Proprietary) Limited from the Trust totalling 23% of the issued share capital of the
company on the date upon which the option is exercised. The option will lapse after 36 months following the month in
which the triggering event occurs. The option price is specified in the shareholders agreement. The option had a nil value
at March 31, 2007.

39.12   WBS Holdings (Proprietary) Limited call option

The Group has purchased a 10% equity stake in WBS Holdings (Proprietary) Limited effective January 31, 2007.
WBS Holdings (Proprietary) Limited has on the same date granted the Group an option to subscribe in such number of
further shares as will result in the Group holding and beneficially owning, in aggregate 25.5% of the total issued ordinary
share capital of the company after the exercise of the option. The option can be exercised by the Group until
September 14, 2007, subject to the fulfilment of the conditions precedent as set out in the sales of shares and option
agreement. The option had a nil value at March 31, 2007.

39.13   G-Mobile Holdings Limited

G-Mobile Holdings Limited granted to Vodacom Ventures (Proprietary) Limited an irrevocable call option to subscribe for
such number of further shares as will result in Vodacom Ventures (Proprietary) Limited holding and beneficially owning,
in aggregate together with the subscription shares 26% of the total issued share capital of G-Mobile Holding Limited after
the exercise of the option at a specified price. The option had a nil value at March 31, 2007.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-217

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 V.A.S. (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 values in use calculations use cash flow projections based on financial
budgets approved by management covering a ten year period and discount rates of between 12.5% and 13.7% in Rand
terms. The terminal growth rate applicable is 4.5%. 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 ten year period and a discount rate of 17.2% in US Dollar terms. Cash flows beyond this period have been
extrapolated using annual nominal growth rates of 7%. 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 ten
year period and a discount rate of 15% in US Dollar terms.The terminal growth rate applicable is 8.4%. 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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-218

40.   GOODWILL IMPAIRMENT TEST (CONTINUED)

March 31, 2007

South Africa

Democratic Republic of

Congo

Tanzania

Rm

Rm

Rm

Carrying amount of
goodwill

790.1

132.9

8.2

Key assumption

Expected customer base

Expected customer base

Expected customer base

Basis for
determining
value(s) assigned to
key assumptions

Closing customer base in
the period immediately
preceding the budget
period increased for
expected growth.

Closing customer base in
the period immediately
preceding the budget
period increased for
expected growth.

Closing customer base in
the period immediately
preceding the budget
period increased for
expected growth.

Value assigned to key
assumption reflects past
experience, except for
potential growth. Growth
is based on market
expectation.

Value assigned to key
assumption reflects past
experience, except for
potential growth. Growth
is based on market
expectation.

Value assigned to key
assumption reflects past
experience, except for
potential growth. Growth
is based on market
expectation.

Key assumption

ARPU

ARPU

ARPU

Basis for
determining value(s)
assigned to key
assumptions

Closing customer base in
the period immediately
preceding the budget
period increased for
expected growth.

Closing customer base in
the period immediately
preceding the budget
period increased for
expected growth.

Closing customer base in
the period immediately
preceding the budget
period increased for
expected growth.

Value assigned to key
assumption reflects past
experience. Growth is
based on expected market
forces and external
sources of information.

Value assigned to key
assumption reflects past
experience. Growth is
based on expected market
forces and external
sources of information.

Value assigned to key
assumption reflects past
experience. Growth is
based on expected market
forces and external
sources of information.

Key assumption

Gross margin

Gross margin

Gross margin

Basis for
determining value(s)
assigned to key
assumptions

Average gross margin
achieved in period
immediately before the
budget period, increased
for expected efficiency
improvements.

Average gross margin
achieved in period
immediately before the
budget period, increased
for expected efficiency
improvements.

Average gross margin
achieved in period
immediately before the
budget period, increased
for expected efficiency
improvements.

Value assigned to key
assumption reflects past
experience, except for
efficiency improvements.

Value assigned to key
assumption reflects past
experience, except for
efficiency improvements.

Value assigned to key
assumption reflects past
experience, except for
efficiency improvements.

Key assumption

Capital expenditure

Capital expenditure

Capital expenditure

Basis for
determining value(s)
assigned to key
assumptions

Total capital expenditure
achieved in period
immediately before the
budget period, adjusted
for expected network
coverage roll out.

Total capital expenditure
achieved in period
immediately before the
budget period, adjusted
for expected network
coverage roll out.

Total capital expenditure
achieved in period
immediately before the
budget period, adjusted
for expected network
coverage roll out.

Value assigned based on
managements expected
network coverage roll out.

Value assigned based on
managements expected
network coverage roll out.

Value assigned based on
managements expected
network coverage roll out.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-219

40.   GOODWILL IMPAIRMENT TEST (CONTINUED)

Key assumptions

South Africa

Democratic Republic of
Congo

Tanzania

Key assumption

ZAR/USD exchange rate
during the budget period

ZAR/TZS and USD/TZS
exchange rates during the
budget period

Basis for
determining value(s)
assigned to key
assumptions

Average market forward
exchange rate over the
budget period.

Average market forward
exchange rate over the
budget period.

Value assigned to key
assumption is consistent
with external sources of
information.

Value assigned to key
assumption is consistent
with external sources of
information.

41.    UNDRAWN BORROWING FACILITIES AND GUARANTEES

41.1   Rand denominated facilities and guarantees

The Group has Rand denominated credit facilities totalling R4,989.0 million with R816.0 million utilised at
March 31, 2007. The facilities that are uncommitted, 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

2005

Rm

2006

Rm

2007

Rm

Vodacom (Proprietary) Limited All guarantees less than

R2.0 million.

Various

2.8

2.6

2.7

Vodacom Service Provider
Company (Proprietary) Limited

All guarantees less than

R2.0 million.

Various

3.0

2.8

2.6

Vodacom Service Provider
Company (Proprietary) Limited

Guarantee in respect of
receipt by independent
intermediaries of
premiums on behalf of
short-term insurers and
Lloyd’s underwriters, and
relating to short-term
insurance business
carried on in South Africa.
Terminates on
May 31, 2007.

SA
Insurance
Association
for benefit of
insurers

17.8

21.1

27.0

Smartcom (Proprietary) Limited

Guarantees for salary
bank account and debit
orders.

Various

3.0

2.9

3.2

Cointel VAS (Proprietary)
Limited

Guarantees for operating
lease and debit orders.

Various

-

-

1.5

Vodacom (Proprietary) Limited

Letter of undertaking in
respect of land.

Attorneys

-

-

6.8

26.6

29.4

43.8

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-220

41.   UNDRAWN BORROWING FACILITIES AND GUARANTEES (CONTINUED)

41.2   Foreign denominated facilities and guarantees

The following foreign denominated facilities are in place:

As at

March 31,

2007

Million

As at

March 31,

2007

Million

Company

Details

Total facility

Utilised

Vodacom Tanzania Limited

Project finance

US$13.0

US$13.0

Vodacom International Limited

Revolving term loan

US$180.0

US$180.0

Vodacom Congo (RDC) s.p.r.l.

Various

US$17.0

US$5.1

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

The following foreign denominated guarantees have been issued:

Guarantor/Issuer

Details

Beneficiary

Currency

2005

Rm

2006

Rm

2007

Rm

Nedbank Limited on
behalf of Vodacom
(Proprietary) Limited

Unsecured standby
letters of credit

Alcatel CIT

€nil
(2006:
€11.4 million;
2005:
€40.7 million)

330.0

85.7

-

Vodacom Group
(Proprietary) Limited

Guarantees issued
for the obligations of
Vodacom
International
Limited’s term loan
facility * #

Standard Bank
Plc and RMB
International
(Dublin)
Limited

US$180.0 million
(2006:
US$180.0 million;
2005: US$nil)

1,128.8

1,114.4

1,311.9

Vodacom
International Limited

Guarantees issued
for the obligations of
Vodacom Congo
(RDC) s.p.r.l. *

Alcatel CIT

€nil
(2006:
€5.0 million;
2005:
€5.0 million)

121.6

37.6

-

1,580.4

1,237.7 1,311.9

* Foreign denominated guarantees amounting to R1,311.9 million (2006: R1,152.0 million; 2005: R1,189.6 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.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-221

42.    SEGMENTAL INFORMATION

Vodacom’s reportable segments are geographical business units that offer comparable business products and services
however they are separately managed because the mobile telecommunication and data communication business is
located in South Africa and non South African countries.

Vodacom has six reportable segments: South Africa, Tanzania, Mozambique, Lesotho, Democratic Republic of the
Congo, and Other. The segments offer a variety of telecommunication and data communication services as well as
equipment sales.

"Other" comprises of the holding companies of the Group.

"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.

“Tanzania”, “Mozambique”, “Lesotho”, and “Democratic Republic of the Congo” comprise the segment information
relating to the non South African based cellular networks.

Segment results and segment assets have been adjusted for the changes in accounting policies reflected in Note 23.

Reconciliations of reportable segments

2005

Rm

2006

Rm

2007

Rm

Segment results

Management operating profit for reportable segments

6,978.7

8,980.6

10,983.0

Amortisation of licences, trademarks and patents and customer
bases

(232.1)

(167.7)

(117.7)

Impairment of assets

(268.4)

52.8

(22.9)

Profit on sale of shares in subsidiary

-

-

17.4

Profit from operations

6,478.2

8,865.7

10,859.8

Net finance (cost)/income

23.3

(639.2)

(463.8)

Interest, dividend and other financial income

622.9

611.7

1,336.2

Finance costs

(599.6)

(1,250.9)

(1,800.0)

Profit before taxation

6,501.5

8,226.5

10,396.0

Taxation

(2,613.3)

(3,083.7)

(3,836.0)

Net profit

3,888.2

5,142.8

6,560.0

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-222

42.   SEGMENTAL INFORMATION (CONTINUED)

2005

Other

Rm

South
Africa

Rm

Tanzania

Rm

Mozambique

Rm

Lesotho

Rm

DRC

Rm

Elimination

Rm

Total

Rm

Segment revenue

256.7

25,045.6

958.5

103.4

136.9

1,074.7

-

27,575.8

Inter-segment revenue

(256.7)

(0.8)

-

-

(3.0)

-

-

(260.5)

External customers segment revenue

-

25,044.8

958.5

103.4

133.9

1,074.7

-

27,315.3

Airtime and access

-

14,809.3

692.9

47.0

96.3

545.3

-

16,190.8

Data revenue

-

1,245.5

74.2

2.5

8.8

9.5

-

1,340.5

Interconnect revenue

-

5,469.7

153.3

39.6

22.1

238.9

-

5,923.6

Equipment sales

-

2,591.2

12.3

1.7

4.7

77.4

-

2,687.3

International airtime

-

651.6

24.9

12.4

1.8

196.1

-

886.8

Other

-

277.5

0.9

0.2

0.2

7.5

-

286.3

Management operating profit/(loss)

58.1

6,838.5

183.9

(182.8)

24.6

56.4

-

6,978.7

Net finance income/(cost)

3,779.1

602.4

(61.6)

77.9

(2.9)

(169.0)

(4,202.6)

23.3

Taxation

(543.9)

(1,937.9)

(71.6)

(5.8)

(8.7)

(45.4)

-

(2,613.3)

Net profit/(loss)

1,779.3

5,215.6

49.8

(377.9)

12.9

(164.6)

(2,626.9)

3,888.2

Other material non-cash items included in segment
profit/(loss):

Depreciation and amortisation

(3.9)

(2,376.7)

(161.3)

(75.3)

(23.6)

(202.4)

-

(2,843.2)

Impairments of assets recognised

-

-

-

(268.4)

-

-

-

(268.4)

Assets

Reportable segment assets

10,979.8

19,409.5

1,416.6

532.4

111.1

1,936.3

(11,790.9)

22,594.8

Included in reportable segment assets :

Additions to property, plant and equipment and
intangible assets

23.2

2,776.8

233.6

114.9

9.8

335.5

-

3,493.8

Non-current assets other than financial
instruments and deferred taxation

9.6

9,460.8

1,107.3

425.1

88.2

1,570.2

825.8

13,487.0

Liabilities

Reportable segment liabilities

(5,717.5)

(14,545.7)

(787.0)

(989.4)

(51.3)

(1,934.9)

9,318.9

(14,706.9)

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-223

42.   SEGMENTAL INFORMATION (CONTINUED)

2006

Other

Rm

South
Africa

Rm

Tanzania

Rm

Mozambique

Rm

Lesotho

Rm

DRC

Rm

Eliminations

Rm

Total

Rm

Segment revenue

274.2

31,089.8

1,311.8

158.3

170.1

1,334.2

-

34,338.4

Inter-segment revenue

(274.2)

(8.5)

(5.2)

(5.3)

(1.6)

(1.1)

-

(295.9)

External customers segment revenue

-

31,081.3

1,306.6

153.0

168.5

1,333.1

-

34,042.5

Airtime and access

-

18,169.2

988.9

71.8

120.9

735.0

-
-

20,085.8

Data revenue

-

1,884.8

108.0

3.5

15.8

25.5

-

2,037.6

Interconnect revenue

-

6,141.6

188.0

57.5

26.5

283.2

-

6,696.8

Equipment sales

-

3,902.4

5.4

0.4

4.2

73.2

-

3,985.6

International airtime

-

720.8

14.3

19.5

0.7

215.9

-

971.2

Other

-

262.5

2.0

0.3

0.4

0.3

-

265.5

Management operating profit/(loss)

(23.3)

8,762.9

263.6

(196.8)

50.9

123.3

-

8,980.6

Net finance income/(cost)

8,306.0

(357.7)

(86.1)

(364.4)

(0.1)

(237.4)

(7,899.5)

(639.2)

Taxation

(679.8)

(2,403.4)

(31.5)

-

(18.3)

49.3

-

(3,083.7)

Net profit/(loss)

7,226.3

5,842.0

140.6

(508.5)

32.4

(71.4)

(7,518.6)

5,142.8

Other material non-cash items included in segment
profit/(loss):

Depreciation and amortisation

(2.8)

(2,451.5)

(201.5)

(68.2)

(16.0)

(255.8)

-

(2,995.8)

Impairments of assets reversed

-

-

-

52.8

-

-

-

52.8

Assets

Reportable segment assets

14,391.1

20,642.0

1,348.6

527.2

136.8

1,992.9

(14,270.8)

24,767.8

Included in reportable segment assets :

Additions to property, plant and equipment and
intangible assets

16.5

4,383.0

321.5

121.4

25.9

273.2

-

5,141.5

Non-current assets other than financial instruments
and deferred taxation

55.7

11,902.1

950.1

396.4

101.4

1,563.4

720.4

15,689.5

Liabilities

Reportable segment liabilities

(6,108.1)

(17,292.4)

(613.1)

(1,030.3)

(52.1)

(2,527.9)

11,528.4

(16,095.5)

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-224

42.   SEGMENTAL INFORMATION (CONTINUED)

2007

Other

Rm

South
Africa

Rm

Tanzania

Rm

Mozambique

Rm

Lesotho

Rm

DRC

Rm

Eliminations

Rm

Total

Rm

Segment revenue

388.4

37,050.2

1,729.3

269.0

227.5

1,914.4

-

41,578.8

Inter-segment revenue

(388.4)

(11.6)

(7.4)

(10.0)

(2.1)

(12.9)

-

(432.4)

External customers segment revenue

-

37,038.6

1,721.9

259.0

225.4

1,901.5

-

41,146.4

Airtime and access

-

21,045.3

1,282.4

131.6

165.3

1,082.9

-

23,707.5

Data revenue

-

3,112.9

146.5

8.1

22.5

51.7

-

3,341.7

Interconnect revenue

-

7,058.0

257.8

80.1

31.7

408.0

-

7,835.6

Equipment sales

-

4,604.9

19.4

4.4

4.2

66.2

-

4,699.1

International airtime

-

961.8

15.4

34.6

1.3

292.7

-

1,305.8

Other

-

255.7

0.4

0.2

0.4

-

-

256.7

Management operating profit/(loss)

46.8

10,383.6

347.0

(154.1)

74.9

284.8

-

10,983.0

Net finance income/(cost)

3,346.4

(475.3)

(43.6)

34.5

(0.8)

(287.8)

(3,037.2)

(463.8)

Taxation

(799.2)

(2,922.0)

(112.1)

(42.0)

(18.9)

58.2

-

(3,836.0)

Net profit/(loss)

2,102.9

6,870.4

190.7

(184.4)

55.2

47.4

(2,522.2)

6,560.0

Other material non-cash items included in segment
profit/(loss):

Depreciation and amortisation

(2.2)

(2,688.6)

(237.8)

(84.8)

(22.1)

(325.7)

-

(3,361.2)

Impairments of assets

-

-

-

(22.9)

-

-

-

(22.9)

Assets

Reportable segment assets

13,183.2

23,207.0

2,424.4

690.9

169.5

2,692.0

(13,896.8)

28,470.2

Included in reportable segment assets :

Additions to property, plant and equipment and
intangible assets

182.3

5,458.3

957.6

85.2

25.0

506.0

-

7,214.4

Non-current assets other than financial instruments
and deferred taxation

230.1

14,949.8

1,864.9

459.4

104.3

2,036.1

604.1

20,248.7

Liabilities

Reportable segment liabilities

(7,693.4)

(16,746.1)

(1,123.0)

(1,261.2)

(66.2)

(3,272.7)

11,339.4

(18,823.2)

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-225

43.    INTERESTS 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; DRC – Democratic Republic of the
Congo; MAU – Mauritius; C – Cellular; MSC – Management services company; PROP – Property company;
OTH - Other

* Dormant as at March 31, 2007.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-226

43.   INTERESTS IN SUBSIDIARIES (CONTINUED)

Issued share sapital

Interest in issued ordinary

share capital

Country of

incorporation

2005

2006

2007

2005

%

2006

%

2007

%

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

TZS10,000

TZS10,000

TZS10,000

65

65

65

VM, S.A.R.L. (C)

MZ

US$60,000,000 US$60,000,000US$60,000,000

98

98

98

Vodacom Congo (RDC)
s.p.r.l(C)

DRC

US$1,000,000

US$1,000,000 US$1,000,000

51

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

70

Smartcom (Proprietary)
Limited (C)

RSA

R1,000

R1,000

R1,000

43.7

43.7

61.7

Cointel V.A.S. (Proprietary)
Limited (C)

RSA

-

R10,204

R10,204

-

51

70

Other

VSP Holdings (Proprietary)
Limited (MSC)

RSA

R1,020

R1,020

R1,020

100

100

100

Vodacom Satellite Services
(Proprietary) Limited (OTH)*

RSA

R100

R100

R100

100

100

100

GSM Cellular (Proprietary)
Limited (OTH) *

RSA

R1,200

R1,200

R1,200

100

100

100

Vodacom Venture No. 1
(Proprietary) Limited (MSC) *

RSA

R810

R810

R810

100

100

100

Vodacom Equipment
Company (Proprietary)
Limited (OTH) *

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

R1,000

100

100

100

Stand 13 Eastwood Road
Dunkeld West (Proprietary)
Limited (PROP)

RSA

R100

R100

R100

51

51

70

Ithuba Smartcall (Proprietary)
Limited (OTH)

RSA

R100

R100

R100

26.5

26.5

36.4

Smartcall Smartlife
(Proprietary) Limited (OTH)

RSA

-

-

R100

-

-

63.0

Vodacom Tanzania Limited
(Zanzibar) (OTH) *

TZN

TZS10,000

TZS10,000

TZS10,000

100

100

100

Joycell Shops (Proprietary)
Limited (OTH) *

RSA

R100

R100

R100

100

100

100

Marble Gold Investments
(Proprietary) Limited (OTH) *

RSA

-

R100

R100

-

100

100

Vodacom Ventures
(Proprietary) Limited (OTH)

RSA

-

R120

R120

-

100

100

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-227

44.    INTERESTS IN JOINT VENTURES

The introduction of Mobile Number Portability (“MNP”) as mandated by the Independent Communications Authority of
South Africa in terms of Section 96 of the Telecommunications Act of 1996 was set for commencement, July 1, 2006. In
response to the introduction of MNP it was necessary for the formation of a company to provide all the services
necessary to allow the existing three incumbent mobile operators to offer MNP.

National Porting Company (Proprietary) Limited was formed for the express purpose of providing all the necessary
services required for MNP by Vodacom, MTN and Cell C.

National Porting Company (Proprietary) Limited is owned equally by all three operators and they contributed the required
necessary financial resources directly proportional to their shareholding. MNP was officially launched on November 10,
2006.

Effective September 20, 2006, Vodacom (Proprietary) Limited acquired a 33.3% stake in National Porting Company
(Proprietary) Limited by acquiring 100 shares for R1. Each shareholder advanced to National Porting Company
(Proprietary) Limited funding by way of shareholders loans. As at March 31, 2007 the shareholder loan balance was
R6.0 million (Note 18).

National

Porting

Company

(Proprietary)

Limited

Interest held

33%

Rm

The Group’s proportionate share of assets and liabilities:

Property, plant and equipment

*

Intangible assets

6.3

Current assets

2.2

Total assets

8.5

Long-term liabilities

(6.0)

Inter company creditors

(3.0)

Current liabilities

(0.6)

Net liabilities

(9.6)

The Group’s proportionate share of revenue and expenditure:

Revenue

0.4

Loss before taxation

(1.1)

Taxation

-

Net loss

(1.1)

The Group’s proportionate share of cash flows:

Net cash flows from operating activities

(1.0)

Net cash flows utilised in investing activities

(7.0)

Net cash flows from financing activities

9.0

Net cash flow

1.0

The Group’s proportionate share of contingent liabilities and

capital commitments:

Contingent liabilities

-

Capital commitments

-

* Amounts less than R50 000

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-228

45.   US GAAP INFORMATION

The consolidated annual financial statements have been prepared in accordance with IFRS, which differs in certain
respects from accounting principles generally accepted in the United States of America (“US GAAP”). The Group
adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised): Share-Based Payments
(“SFAS 123(R)”) as of April 1, 2006 on a modified retrospective basis. The reconciliations below reflect the impacts of
this change in accounting principle. Further information regarding this change is presented in note (a) below. 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:

Notes

2005

Rm

2006

Rm

2007

Rm

Net profit as reported in accordance with IFRS – restated

3,888.2

5,142.8

6,560.0

Attributable to minority interests

(j)

(30.8)

(116.7)

(217.6)

Net profit attributable to equity shareholders

3,857.4

5,026.1

6,342.4

Adjustments increasing/(decreasing) net profit:

Business combinations

(m)

(4.8)

-

(7.2)

Derivative financial instruments

7.8

7.8

7.8

Income taxation – other differences

(f)

(98.7)

(201.1)

(37.9)

Impairment

(k)

-

(59.9)

22.8

Inventory write down reversal

(n)

-

-

(18.6)

Put option revaluation

(o)

-

-

249.3

Net profit in accordance with US GAAP – as adjusted

3,761.7

4,772.9

6,558.6

Total equity as reported in accordance with IFRS –
restated

7,887.9

8,672.3

9,647.0

Attributable to minority interests

(j)

(128.7)

(283.3)

(221.2)

Equity attributable to equity holders of the parent

7,759.2

8,389.0

9,425.8

Adjustments increasing/(decreasing) shareholders’ equity:

Business combination

(m)

-

-

(7.2)

Goodwill – amortisation of taxation rate difference

(f)

(17.7)

(17.7)

(17.7)

Goodwill – non-amortisation

(b)

194.6

194.6

194.6

Goodwill – accumulated translation differences

(c)

(10.3)

(10.6)

(6.0)

Income taxation – other differences

(f)

(1,076.0)

(1,274.2)

(1,309.2)

Inventory write down reversal

(n)

-

-

(18.6)

Impairment

(k)

-

(59.9)

(37.1)

Shareholders’ equity in accordance with US GAAP – as
adjusted

6,849.8

7,221.2

8,224.6

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-229

45.    US GAAP INFORMATION (CONTINUED)

SUMMARY OF DIFFERENCES BETWEEN IFRS AND US GAAP

Notes

2005

Rm

2006

Rm

2007

Rm

Movements in shareholders’ equity in accordance with US GAAP

Balance at beginning of the year – as previously reported

6,727.9

6,881.7

-

Adjustments (Note 45 a)

(22.3)

(31.9)

-

Balance at beginning of the year – restated

6,705.6

6,849.8

7,221.2

Net profit for the year

3,761.7

4,772.9

6,558.6

Dividends declared

(3,400.0)

(4,500.0)

(5,400.0)

Foreign currency translation reserve adjustment

(61.4)

103.4

99.0

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)

(4.9)

(4.9)

Put option liability revaluation

-

-

(249.3)

Balance at end of the year

6,849.8

7,221.2

8,224.6

(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 the Group previously accounted for the deferred bonus incentive scheme, 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 (“FIN 28*”), whereby compensation costs were recognised over the service period or the vesting
period if the service period was not defined, based upon the undiscounted value of the entitlements.

In 2007, the Group changed its accounting policy related to the accounting for the deferred bonus scheme. The Group
adopted SFAS 123(R) as of April 1, 2006 on a modified retrospective basis. While SFAS 123(R) only addresses stock
based compensation; it also superseded FIN 28, which the Group had been applying by analogy. Accordingly, the Group
changed its accounting policy to align its US GAAP accounting with the IFRS treatment.

The impact of this change in accounting policy decreased net profit with R3.7 million and R9.6 million for the years ended
March 2006 and 2005, respectively.

(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.

A reconciliation of goodwill reported under IFRS at the balance sheet date to the amounts determined under US GAAP is
as follows:

2005

Rm

2006

Rm

2007

Rm

Included in total goodwill reported under IFRS

413.5

483.9

931.2

Goodwill not amortised under US GAAP

205.0

205.0

205.0

Business combination (Note 45 m)

136.0

136.0

28.1

Additional goodwill – income taxation rate change (Note 45 f)

71.5

50.5

71.9

Translation difference on goodwill balance

(10.3)

(10.6)

(6.0)

As adjusted under US GAAP

815.7

864.8

1,230.2

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-230

45.   US GAAP INFORMATION (CONTINUED)

(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).

(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, 2007 R7.8 million (2006: R7.8 million;
2005: 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 (“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, 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% was used for all taxation amounts (prior to
the calculation of STC) until the change in the taxation law became enacted during the Group’s fiscal year ended
March 31, 2006. 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% (2006: 36.89%; 2005: 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: Foreign Currency
Translation (“SFAS 52”) are remeasured from local currency into the functional currency using historical exchange rates
and that result from either changes in exchanges rates or indexing for taxation purposes. The functional currency of
Vodacom Congo (RDC) s.p.r.l. is the USD and it benefits from indexing for local Democratic Republic of the Congo
taxation purposes which gives rise to a deferred taxation loss for IFRS purposes of R98.5 million at March 31, 2007
(2006: R100.9 million benefit), that is not recognised under US GAAP.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-231

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%
(2006: 36.89%; 2005: 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:

2005

Rm

2006

Rm

2007

Rm

Net deferred taxation liabilities:

As reported under IFRS

164.0

304.7

371.2

Additional temporary differences (Note 45 d)

38.9

37.7

136.4

Business combination (Note 45 m)

(62.4)

(41.0)

12.7

Income taxation – other difference (Note 45 f)

1,165.2

1,342.4

1,398.8

As adjusted under US GAAP

1,305.7

1,643.8

1,919.1

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 R363.0 million (2006: R279.4 million;
2005: R109.3 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, 2007, 2006 and 2005 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 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.
In 2007 the Group proportionately consolidated National Porting Company (Proprietary) Limited (“NPC”). The summarised
financial statement information for NPC relating to the Group’s pro rata interest is set out in Note 44. Under US GAAP, the
Group’s share of losses of NPC does not exceed the carrying amount of the investment in the joint venture.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-232

45.   US GAAP INFORMATION (CONTINUED)

(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 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 in the shareholders’ equity reconciliation.

(k) Impairment

In 2006, the Group reversed an impairment loss under IFRS, which is not allowed under US GAAP.

In 2007, the Group recognised an impairment loss under IFRS related to its operations in Mozambique. Under US GAAP,
the Group evaluates the recoverability of long-lived assets, using undiscounted cash flows and determined that the
carrying amount of the assets in Mozambique were recoverable. As a result, the IFRS impairment loss was not
recognised under US GAAP.

(l) Comprehensive income

Comprehensive income under US GAAP and accumulated other comprehensive income balances under US GAAP are
summarised as follows:

2005

Rm

2006

Rm

2007

Rm

Net income under US GAAP

3,761.7

4,772.9

6,558.6

Other comprehensive income /(loss):

Foreign currency translation adjustment

(61.4)

103.4 99.0

Gain on derivatives - reclassified to earnings net of tax

(4.8)

(4.9) (4.9)

Other comprehensive income/(loss)

(66.2)

98.5 94.1

Comprehensive income

3,695.5

4,871.4 6,652.7

Accumulated other comprehensive income balances:

Cumulative foreign currency translation adjustments

(408.2)

(304.8)

(205.8)

Cumulative effect adjustment of adoption of SFAS 133

18.0

13.1

8.2

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-233

45.   US GAAP INFORMATION (CONTINUED)

(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, liabilities assumed and contingent liabilities,
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.

During the 2007 financial year, the Group acquired non-controlling interests in several of its subsidiaries. The Group’s
IFRS accounting policy is to account for such transactions using the “parent entity extension method”. Under this method,
the assets and liabilities of the subsidiary were not restated to reflect their fair values at the date of the acquisition. The
difference between the purchase price and the minority interest’s share of the assets and liabilities reflected within the
consolidated balance sheet at the date of the acquisition was therefore reflected as goodwill. Under US GAAP, these
were accounted for using the purchase method. The acquired assets and liabilities were recorded at fair value, resulting in
additional amortisation under US GAAP. The minority interest allocation under US GAAP is also difference from that under
IFRS.

(n) Inventory write-downs

During the 2007 financial year, the Group reversed inventory write downs which had been recognised in previous years.
US GAAP prohibits the reversal of inventory write downs

(o) Put option revaluation

Under IFRS, the redemption amount of the Congolese Wireless Networks s.p.r.l. put option (Note 39) is recorded as a
liability, with changes in this amount recorded through the consolidated income statement. Under US GAAP, the
obligation under the put option is accounted for by analogy to EITF D-98: Classification and Measurement of Redeemable
Securities (“EITF D-98”) with the carrying value of the minority interest being increased to the redemption amount. The
Group has elected to record the changes in the redemption amount directly in retained earnings.

(p) Revenue recognition

Under US GAAP, the Group applies Emerging Issues Task Force (“EITF”) No. 00-21: Revenue Arrangements with
Multiple Deliverables (“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.

(q) Recent accounting pronouncements

The FASB has issued Statement 157: Fair Value Measurements (“SFAS 157”) that defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements. This Statement applies
under other accounting pronouncements that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this
Statement does not require any new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. The Group is currently evaluating the
impact of SFAS 157 on its results of operations, financial position and cash flows

On September 29, 2006, the FASB issued FASB Statement No. 158: Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans - An Amendment of FASB Statements No. 87, 88, 106, and 132R (“SFAS 158”). This new
standard requires an employer to: (a) recognise in its statement of financial position an asset for a plan’s overfunded
status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its
funded status as of the end of the employer’s fiscal year (with limited exceptions); (c) recognise changes in the funded
status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in
comprehensive income of a business entity and in changes in net assets of a not-for-profit organisation; and (d) disclose
in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next
fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or
obligation.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-234

45.   US GAAP INFORMATION (CONTINUED)

(q)   Recent accounting pronouncements (continued)

The requirement to recognise the funded status of a benefit plan and the disclosure requirements are effective as of the
end of the fiscal year ending after December 15, 2006, for entities with publicly traded equity securities, and at the end of
the fiscal year ending after June 15, 2007, for all other entities. The requirement to measure plan assets and benefit
obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years
ending after December 15, 2008. The Group does not expect the adoption of SFAS 158 to have a material impact on its
operations, financial position or cash flows.

On February 15, 2007, the FASB issued Statement 159: The Fair Value Option for Financial Assets and Financial
Liabilities - including an amendment of FASB Statement No. 115 (“SFAS 159”), which permits an entity to measure certain
financial assets and financial liabilities at fair value. Under SFAS159, entities that elect the fair value option will report
unrealised gains and losses in earnings. The fair value option may be elected on an instrument-by-instrument basis, with
a few exceptions, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable,
unless a new election date occurs, as discussed in paragraph 9 of the Statement. SFAS 159 is effective as of the
beginning of an entity's first fiscal year beginning after November 15, 2007. The Group is currently evaluating the impact
of SFAS 159 on its results of operations, financial position and cash flows.

The FASB has issued FIN 48: Accounting for Uncertainty in Income Taxes – an interpretation of FASB 109 (“FIN 48”) to
clarify the accounting for uncertainty in income taxes recognised in an enterprise’s financial statements in accordance with
Statement 109: Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15,
2006. The Group is currently evaluating the impact of FIN 48 on its results of operations, financial position and cash flows.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-235

46.   NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS ACCOUNTING PRONOUNCEMENTS

Accounting pronouncements adopted at March 31, 2007

The Group adopted the following revised and new International Financial Reporting Standards prior to their effective
dates in the current financial year:

IFRS 8

Operating Segments

IFRIC 8

Scope of IFRS 2

The Group adopted the following revised and new International Financial Reporting Standards in accordance with their
effective dates during the current financial year:

IAS 21 (revised)

The Effects of Changes in Foreign Exchange Rates

IAS 39 (revised)

Financial Instruments: Recognition and Measurement

IFRIC 7

Applying the Restatement Approach under IAS 29

AC 502

Substantively Enacted Tax Rates and Tax Laws

The adoption of IFRIC 7, IFRIC 8 and IAS 39 had no impact on the Group’s results or cash flow information for the year
ended March 31, 2007.
Refer to Note 23 for the effect of the above adoption of IAS 21 (revised) on the financial statements. The adoption of the
other above mentioned standards did not impact the financial statements.

Accounting pronouncements not adopted at March 31, 2007

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 2008 financial year and is currently evaluating the effects of the
standard.

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 combines all of those financial instruments disclosures
together in a new standard.

The Group will adopt IFRS 7 during the 2008 financial years and is currently evaluating the effects of the standard.

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 stand-alone derivatives.

IFRIC 9 addresses:

º

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.

º

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 2008 financial years and is currently evaluating the effects of the interpretation.

VODACOM GROUP (PROPRIETARY) LIMITED

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

MARCH 31, 2007

F-236

46.   NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS ACCOUNTING PRONOUNCEMENTS (CONTINUED)

Accounting pronouncements not adopted at March 31, 2007 (continued)

In July 2006 the IASB issued IFRIC 10: Interim Financial Reporting and Impairment (“IFRIC 10”) effective for annual
periods beginning on or after November 1, 2006. The Interpretation addresses an apparent conflict between the
requirements of IAS 34: Interim Financial Reporting (“IAS 34”) and those in other standards on the recognition and
reversal in financial statements of impairment losses on goodwill and certain financial assets.

IFRIC 10 concludes that:

º

An entity shall not reverse an impairment loss recognised in a previous interim period in respect of goodwill or an
investment in either an equity instrument or a financial asset carried at cost; and

º

An entity shall not extend this consensus by analogy to other areas of potential conflict between IAS 34 and other
standards.

The Group will adopt IFRIC 10 during the 2008 financial year and is currently evaluating the effect of the interpretation.

In November 2006 the IASB issued IFRIC 11: IFRS 2 Group and Treasury Share Transactions (“IFRIC 11”) effective for
annual periods beginning on or after March, 1 2007. The Interpretation clarifies the application of IFRS 2: Share-based
Payment to certain share-based payment arrangements involving the entity’s own equity instruments and to
arrangements involving equity instruments of the entity’s parent. IFRIC 11 concluded that when an entity receives
services as consideration for rights to its own equity instruments, the transaction should be accounted for as equity-
settled.

The Group will adopt IFRIC 11 during the 2008 financial year and is currently evaluating the effect of the interpretation.

In November 2006 the IASB issued IFRIC 12 Service Concession Arrangements (“IFRIC 12”)effective for annual periods
beginning on or after January 1, 2008. The Interpretation addresses the accounting by private sector operators involved
in the provision of public sector infrastructure assets and services, such as schools and roads. The Interpretation states
that for arrangements falling within its scope (essentially those where the infrastructure assets are not controlled by the
operator), the infrastructure assets are not recognised as property, plant and equipment of the operator.
Rather, depending on the terms of the arrangement, the operator will recognise:

º

A financial asset (where the operator has an unconditional right to receive a specified amount of cash or other
financial asset over the life of the arrangement); or

º

An intangible asset (where the operator’s future cash flows are not specified – e.g. where they will vary according
to usage of the infrastructure asset); or

º

Both a financial asset and an intangible asset where the operator’s return is provided partially by a financial asset
and partially by an intangible asset.

The Group will adopt IFRIC 12 during the 2009 financial year and is currently evaluating the effect of the interpretation.

In March 2007 the IASB issued a revision to IAS 23: Borrowing Costs (“IAS 23”) effective for annual periods beginning on
or after January 1, 2009. The revised Standard removes the option of recognising immediately as an expense those
borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. The revised
Standard does not apply to borrowing costs directly attributable to the acquisition, construction or production of qualifying
assets measured at fair value or inventories that are manufactured, or otherwise produced, in large quantities on a
repetitive basis.

The Group will adopt the revised IAS 23 during the 2010 financial year and is currently evaluating the effects of the
standard.

AC 503 Accounting for BEE transactions (“AC 503”) deals with black economic empowerment transactions where the fair
value of cash and other assets received is less than the fair value of the equity instruments granted to the black economic
empowerment candidates. Furthermore, AC 503 only applies where the difference is as a result of the entity obtaining
black economic empowerment equity credentials. This standard is effective for periods beginning on or after May 1, 2006

The Group will adopt AC 503 during the 2008 financial year and is currently evaluating the effect of the standard.