UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F/A

Amendment No. 1

ANNUAL REPORT PURSUANT TO SECTION 13

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended 30 June 2005

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

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report             

Commission file number 1-10798

TELECOM CORPORATION OF NEW ZEALAND LIMITED

(Exact name of Registrant as specified in its charter)

New Zealand

(Jurisdiction of incorporation or organisation)

Telecom House, 68 Jervois Quay, Wellington, New Zealand

(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 Depository Shares	New York Stock Exchange
(“ADSs”, evidenced by American Depository Receipts (“ADRs”))
Ordinary Shares, no par value	New York Stock Exchange*
(“shares”)

* Not for trading, but only in connection with the registration of ADSs 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, no par value	1,957,523,328
Special rights convertible preference share, no par value	1

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, and (2) has been subject to the filing requirements for the past 90 days.    Yes  x    No  ¨

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  ¨    No  x

Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 Item 18  x

TABLE OF CONTENTS

Explanatory Note

Telecom Corporation of New Zealand Limited are filing this Amendment No. 1 on Form 20-F/A to their Annual Report on From 20-F for the fiscal year ended 30 June 2005, which was originally filed with the Securities and Exchange Commission on 7 September 2005, to amend Item 18, which is amended by replacing this Item in its entirety.

Item 18 is amended to:

• Clarify that the audit report covers all financial years presented in the financial statements;

• Adjust financial statement headings to specify that the financial statements are presented in New Zealand dollars; and

• Include additional wording in the introductory paragraphs to note 28 to specify that inclusion of parent company financial statements is a requirement of NZ GAAP but is prohibited by US GAAP.

This Amendment does not reflect events that have occurred after the 7 September 2005 filing date of the Annual Report on Form 20-F, or modify or update the disclosures presented in the original Form 20-F, except to reflect the amendments described above.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Telecom Corporation of New Zealand Limited:

We have audited the accompanying consolidated statements of financial position of Telecom Corporation of New Zealand Limited and its subsidiaries (the Group) as of June 30, 2005 and 2004, and the related consolidated statements of financial performance and cash flows for each of the years in the three-year period ended June 30, 2005, all expressed in New Zealand dollars. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of June 30, 2005 and 2004 and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2005, in conformity with accounting principles generally accepted in New Zealand.

Accounting principles generally accepted in New Zealand 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 28 to the consolidated financial statements. Also, as described in Note 28, certain financial measures determined in accordance with US GAAP for the years ended June 30, 2004 and 2003 have been restated to correct certain errors primarily pertaining to the Group’s accounting for its investment in the Southern Cross Group.

KPMG

Wellington, New Zealand

24 August 2005

F - 1

TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES

Statement of Financial Performance

For the year ended 30 June 2005

		Group						Parent
		2005 NZ$		2004 NZ$		2003 NZ$		2005 NZ$		2004 NZ$
(Dollars in millions, except per share amounts)	notes
Operating revenues
Local service		1,101		1,120		1,110		—		—
Calling	2	1,348		1,454		1,550		—		—
Interconnection		207		193		154		—		—
Mobile		841		813		796		—		—
Data		777		721		670		—		—
Internet		223		229		219		—		—
Solutions		321		54		34		—		—
Other operating revenues	2	787		776		666		565		320
Abnormal revenues	4	154		28		—		86		28
		5,759		5,388		5,199		651		348
Operating expenses
Labour	3	(735	)	(594	)	(548	)	—		—
Cost of sales		(1,664	)	(1,480	)	(1,426	)	—		—
Other operating expenses	3	(933	)	(942	)	(909	)	—		—
Abnormal expenses	4	(59	)	(121	)	—		—		—
		(3,391	)	(3,137	)	(2,883	)	—		—
Depreciation	12	(694	)	(755	)	(754	)	—		—
Amortisation		(74	)	(68	)	(66	)	—		—
Interest income		31		27		14		339		339
Interest expense	5	(320	)	(361	)	(407	)	(418	)	(380	)
Earnings before income tax		1,311		1,094		1,103		572		307
Income tax (expense) / credit	6	(392	)	(337	)	(391	)	26		21
Earnings after income tax		919		757		712		598		328
Minority interests in profits of subsidiaries		(3	)	(3	)	(3	)	—		—
Net earnings attributable to shareholders	23	916		754		709		598		328
Net earnings per share (in cents)		47	¢	39	¢	38	¢
Weighted average number of ordinary shares outstanding (in millions)		1,946		1,922		1,887

See accompanying notes to the financial statements.

F - 2

TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES

Statement of Movements in Equity

For the year ended 30 June 2005

		Group						Parent
		2005 NZ$		2004 NZ$		2003 NZ$		2005 NZ$		2004 NZ$
(Dollars in millions)	note
Equity at the beginning of the year		2,208		1,767		1,328		4,218		4,159
Total recognised revenues and expenses
Net earnings attributable to shareholders		916		754		709		598		328
Minority interests in profits of subsidiaries		3		3		3		—		—
Movement in foreign currency translation reserve 8	16	(75	)	(45	)	(40	)	—		—
		844		712		672		598		328
Contributions from owners
Capital contributed	16	28		15		—		28		15
Shares issued under the dividend reinvestment plan	16	84		142		145		84		142
Shares issued under the Restricted Share Scheme	16	4		6		1		4		6
Movement in deferred compensation		3		1		1		3		1
		119		164		147		119		164
Distributions to owners
Dividends:
Parent	16	(833	)	(488	)	(428	)	(833	)	(488	)
Minority interests		(2	)	(2	)	(2	)	—		—
Tax credit on supplementary dividends	16	95		55		52		95		55
Buy-out of minority interest		4		—		(2	)	—		—
		(736	)	(435	)	(380	)	(738	)	(433	)
Equity at the end of the year		2,435		2,208		1,767		4,197		4,218
Represented by:
Contributed capital	16	1,987		1,871		1,708		1,987		1,871
Foreign currency translation reserve	16	(363	)	(288	)	(243	)	—		—
Minority interests		8		3		2		—		—
Retained earnings		798		620		299		2,205		2,345
Deferred compensation		5		2		1		5		2
Equity at the end of the year		2,435		2,208		1,767		4,197		4,218

See accompanying notes to the financial statements.

F - 3

TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES

Statement of Financial Position

As at 30 June 2005

		Group		Parent
		2005 NZ$	2004 NZ$	2005 NZ$	2004 NZ$
(Dollars in millions)	notes
ASSETS
Current assets:
Cash		235	238	—	—
Short-term investments	7	81	247	—	—
Receivables and prepayments	8	1,311	971	272	—
Inventories	9	56	50	—	—
Due from subsidiary company	20	—	—	1,147	1,264
Total current assets		1,683	1,506	1,419	1,264
Non-current assets:
Long-term investments	10	544	767	7,997	7,901
Intangibles	11	911	915	—	—
Property, plant and equipment	12	4,283	4,312	—	—
Total non-current assets		5,738	5,994	7,997	7,901
Total assets		7,421	7,500	9,416	9,165
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accruals	13	1,014	931	12	7
Debt due within one year	14	863	803	—	—
Due to subsidiary companies	20	—	—	5,207	4,940
Total current liabilities		1,877	1,734	5,219	4,947
Non-current liabilities:
Deferred taxation	6	136	120	—	—
Long-term debt	15	2,973	3,438	—	—
Total non-current liabilities		3,109	3,558	—	—
Total liabilities		4,986	5,292	5,219	4,947
Equity:	16
Shareholders’ funds		2,427	2,205	4,197	4,218
Minority interests		8	3	—	—
Total equity		2,435	2,208	4,197	4,218
Total liabilities and equity		7,421	7,500	9,416	9,165

On behalf of the Board

RODERICK DEANE, Chairman                                     THERESA GATTUNG, Chief Executive Officer and Managing Director

Authorised for issue on 24 August 2005

See accompanying notes to the financial statements.

F - 4

TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES

Statement of Cash Flows

For the year ended 30 June 2005

		Group						Parent
		2005 NZ$		2004 NZ$		2003 NZ$		2005 NZ$		2004 NZ$
(Dollars in millions)	notes
Cash flows from operating activities
Cash was provided from / (applied to):
Cash received from customers		5,598		5,306		5,251		—		—
Interest income		30		21		11		338		339
Dividend income		7		5		3		7		5
Dividends received from subsidiary companies		—		—		—		558		315
Payments to suppliers and employees		(3,317	)	(2,925	)	(2,973	)	—		—
Payments from provisions		—		—		(5	)	—		—
Income tax paid	6	(297	)	(352	)	(307	)	—		—
Interest paid on debt		(318	)	(374	)	(414	)	(418	)	(380	)
Net cash flows from operating activities	23	1,703		1,681		1,566		485		279
Cash flows from investing activities
Cash was provided from / (applied to):
Sale of property, plant and equipment		19		10		31		—		—
Sale / (purchase) of short-term investments, net		169		(186	)	162		252		(185	)
Purchase of subsidiary companies		(84	)	—		—		—		—
Purchase of long-term investments		(6	)	(5	)	(175	)	(282	)	—
Sale of long-term investments		23		198		54		—		198
Purchase of property, plant and equipment		(696	)	(627	)	(607	)	—		—
Capitalised interest paid		(8	)	(7	)	(5	)	—		—
Net cash flows (applied to) / provided from investing activities		(583	)	(617	)	(540	)	(30	)	13
Cash flows from financing activities
Cash was provided from / (applied to):
Proceeds from long-term debt		389		—		348		—		—
Repayment of long-term debt		(1,051	)	(560	)	(593	)	—		—
Proceeds from / (repayment of) short-term debt, net		260		(54	)	(457	)	266		—
Capital contributed		28		14		—		28		14
Dividends paid		(749	)	(346	)	(286	)	(749	)	(344	)
Net cash flows applied to financing activities		(1,123	)	(946	)	(988	)	(455	)	(330	)
Net cash flow		(3	)	118		38		—		(38	)
Opening cash position (including bank overdrafts)		238		120		82		—		38
Closing cash position (including bank overdrafts)		235		238		120		—		—

See accompanying notes to the financial statements.

F - 5

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 STATEMENT OF ACCOUNTING POLICIES

Reporting Entity and Statutory Base

Telecom Corporation of New Zealand Limited is a company registered in New Zealand under the Companies Act 1993, and is an issuer for the purposes of the Financial Reporting Act 1993.

The financial statements presented are those of Telecom Corporation of New Zealand Limited (“Parent”, “the Company” or the “Parent Company”), its subsidiaries and associates (the “Telecom Group”, “Group” or “Telecom”).

Nature of Operations

Telecom is a major supplier of information and communications technology services in New Zealand and Australia. Telecom provides a full range of telecommunications products and services including local, national, international and value-added telephone services, mobile services, data and internet services, equipment sales and installation services, leased services and directories. Telecom is also a significant provider of information technology services, including systems integration, procurement, consulting and other technology services.

Basis of Preparation

The financial statements have been prepared in accordance with the Financial Reporting Act 1993 which requires compliance with accounting practice generally accepted in New Zealand (“NZ GAAP”). This differs in certain significant respects from accounting practice generally accepted in the United States (“US GAAP”). Information relating to the nature and effect of such differences is presented in Note 28 to the consolidated financial statements.

Financial statements of the parent company are presented in accordance with NZ GAAP. Under NZ GAAP, the parent company records its investment in controlled subsidiaries at cost unless in the opinion of the Directors an impairment has occurred. Any impairment is recognised in earnings in the period in which it occurs. US GAAP does not permit the presentation of parent company only financial statements within the Group financial statements and the US GAAP information presented in note 28 to the consolidated financial statements pertains only to the consolidated financial statements.

The financial statements are expressed in New Zealand dollars. References in these financial statements to “$” and “NZ$” are to New Zealand dollars, references to “US$” are to US dollars, references to “A$” are to Australian dollars and references to “GBP” are to Pounds Sterling.

Measurement Basis

The measurement basis adopted in the preparation of these financial statements is historical cost, modified by the revaluation of certain investments as identified in specific accounting policies below.

Specific Accounting Policies

Basis of Consolidation

Subsidiaries

Subsidiaries are those entities controlled, directly or indirectly, by the Telecom Group.

The consolidated financial statements are prepared from the accounts of the Company and its wholly and majority-owned subsidiaries using the purchase method of consolidation. All significant intercompany accounts and transactions are eliminated on consolidation.

Associates

Associates are entities in which the Telecom Group has significant influence, but not control, over the operating and financial policies of the entity.

Associates are reflected in the consolidated financial statements using the equity method, whereby Telecom’s share of the post-acquisition net surplus of associates is included in consolidated earnings before interest and tax.

Where the equity accounted carrying amount of an investment in an entity falls below zero, the equity method of accounting is suspended and the investment recorded at zero. If this occurs, the equity method of accounting is not resumed until such time as Telecom’s share of losses and reserve decrements not recognised during the financial years in which the equity method was suspended are offset by the current share of profits and reserves.

Goodwill Arising on Acquisition

Goodwill represents the excess of purchase consideration over the fair value of net assets acquired at the time of acquisition of a business or shares in a subsidiary or associate. Goodwill is amortised on a systematic basis over the period benefits are expected to arise, which will be no more than 20 years.

The unamortised balance of goodwill is reviewed annually and to the extent that it is no longer probable of being recovered from the future economic benefits of the investment it is recognised immediately as an expense.

Acquisition or Disposal During the Year

Where an entity becomes or ceases to be a Telecom Group entity during the year, the results of that entity are included in the net earnings of the Telecom Group from the date that control or significant influence commenced or until the date that control or significant influence ceased.

F - 6

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 STATEMENT OF ACCOUNTING POLICIES

(continued)

Revenue Recognition

Telecom recognises revenues as it provides services or delivers products to customers. Billings for telecommunications services (including fixed line, mobile and internet access billings) are made on a monthly basis throughout the month. Unbilled revenues from the billing cycle date to the end of each month are recognised as revenue during the month the service is provided. Revenue is deferred in respect of the portion of fixed monthly charges that have been billed in advance.

Where multiple deliverables are provided in a transaction, these are separated and accounted for as single units based on their relative fair values unless individual deliverables have no stand-alone value.

Revenue from the sale of prepaid mobile minutes is initially deferred, with recognition occurring when the minutes are used by the customer.

Revenue from directories advertising and related publication costs are recognised upon publication of the directory.

Revenue from installations and connections and related costs are recognised upon completion of the installation or connection. Revenue from equipment sales is recognised upon delivery of equipment to the customer.

Accounts Receivable

Accounts receivable are recorded at expected realisable value after providing for bad and doubtful accounts expected to arise in subsequent accounting periods. The provision for doubtful debts is based on management’s assessment of amounts expected to be uncollectable for specific customers or groups of customers based on age of debt, history of payments, account activity, economic factors and other relevant information.

Bad debts are written off against the provision for doubtful accounts in the period in which it is determined that the debts are uncollectable.

Inventories

Inventories principally comprise materials for self-constructed network assets, critical maintenance spares, customer premises equipment held for rental or sale and mobile equipment held for sale. Inventories are stated at the lower of cost and net realisable value after due consideration for excess and obsolete items. Cost is determined on a first-in first-out or weighted average cost basis.

Investments

Long-term investments are stated at cost. Long-term investments include the Parent’s investment in subsidiaries.

Where, in the opinion of the Directors, there has been impairment in the value of investments this is recognised in the current period.

Property, plant and equipment

Property, plant and equipment is valued as follows:

• The value of property, plant and equipment purchased from the Government was determined on the basis of depreciated replacement cost using estimated remaining lives as at 1 April 1987.

• Subsequent additions are valued at cost. The cost of additions to plant and equipment and other assets constructed by Telecom consists of all appropriate costs of development, construction and installation, comprising material, labour, direct overhead and transport costs.

• For each asset project, interest costs incurred during the period required to complete and prepare the asset for its intended use are capitalised as part of the total cost.

Software Developed for Internal Use

Telecom capitalises the direct costs associated with the development of network and business software for internal use where project success is regarded as probable. Capitalised costs include external direct costs of materials and services consumed, payroll and direct payroll-related costs for employees (including contractors) directly associated with the project and interest costs incurred while developing the software. Software developed for internal use is depreciated over its useful life.

F - 7

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 STATEMENT OF ACCOUNTING POLICIES

(continued)

Depreciation

Depreciation is charged on a straight-line basis to write down the cost of property, plant and equipment to their estimated residual value over their estimated useful lives, which are as follows:

Telecommunications equipment and plant:
Customer local access	3-50	years
Junctions and trunk transmission systems	10-50	years
Switching equipment	3-15	years
Customer premises equipment	3-5	years
Other network equipment	4-25	years
Buildings	40-50	years
Motor vehicles	4-10	years
Furniture and fittings	5-10	years
Computer equipment	3-5	years

Where the remaining useful lives or recoverable values have diminished due to technological change or market conditions, depreciation is accelerated or the assets are written down.

Land and capital work in progress are not depreciated.

Where property, plant and equipment is disposed of, the profit or loss recognised in the Statement of Financial Performance is calculated as the difference between the sale price and the carrying value of the asset.

Leased Assets

Telecom is a lessor of customer premises equipment. Such leases are considered operating leases because substantially all the benefits and risks of ownership remain with Telecom. Rental income is taken to revenue on a monthly basis in accordance with the lease term.

Telecom is a lessee of certain plant, equipment, land and buildings under both operating and finance leases. Lease costs relating to operating leases are charged against earnings as incurred. Finance leases, which effectively transfer to Telecom substantially all the risks and benefits of ownership of the leased assets, are capitalised at the present value of the minimum lease payments. The leased assets and corresponding liabilities are disclosed and the leased assets are depreciated over the period Telecom is expected to benefit from their use.

Compensated Absences

The liability for employees’ compensation for future absences, calculated on an actuarial basis, is accrued in respect of employees’ services already rendered and where the obligation relates to rights that may eventually vest.

Spectrum Licences

Costs incurred on the acquisition of spectrum licences are amortised from the date the underlying asset is held ready for use on a straight-line basis over the periods of their expected benefit.

Where the periods of expected benefit or recoverable values have diminished due to technological change or market conditions, amortisation is accelerated or the carrying value is written down.

Debt

Debt is stated at face value adjusted for unamortised discounts, premiums and prepaid interest. Discounts, premiums and prepaid interest are amortised to interest expense on a yield to maturity basis over the period of the borrowing. Borrowing costs such as origination, commitment and transaction fees are deferred and amortised over the period of the borrowing.

Research and Development Costs

Research and development costs are charged to earnings as incurred, except where, in the case of development costs, future benefits are expected beyond any reasonable doubt to exceed these costs. Where development costs are deferred, they are amortised over future periods on a basis related to the expected future benefits.

Repairs and Maintenance

Repairs and maintenance costs are expensed as incurred.

Advertising costs

Advertising costs are expensed as incurred.

Taxation

The taxation expense charged to earnings includes both current and deferred tax and is calculated after allowing for items that will not become deductible for taxation purposes.

Deferred taxation calculated on a comprehensive basis using the liability method is accounted for on timing differences between the earnings stated in the financial statements and the assessable income computed for taxation purposes.

Future tax benefits are not recognised unless realisation of the asset is virtually certain.

F - 8

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 STATEMENT OF ACCOUNTING POLICIES

(continued)

Foreign Currency

Transactions

Transactions denominated in a foreign currency are converted at the New Zealand exchange rate at the date of the transaction. Foreign currency receivables and payables at balance date are translated at exchange rates current at balance date. Exchange differences arising on the translation of accounts payable and receivable in foreign currencies are recognised in the Statement of Financial Performance.

Exchange gains and losses and hedging costs arising on contracts entered into as hedges of firm commitments are deferred until the date of such transactions at which time they are included in the determination of net earnings.

Where capital project commitments are hedged against foreign currency rate risk, the exchange difference on the hedging transaction up to the date of purchase and all other costs associated with the hedging transaction are capitalised as part of the cost of the item of property, plant and equipment.

All exchange gains and losses relating to other hedge transactions are brought to account in the Statement of Financial Performance in the same period as the exchange differences on the items covered by the hedge transactions. Costs on such contracts are amortised over the life of the hedge contract.

Translation of Foreign Group Entities

Assets and liabilities of independent overseas subsidiaries are translated at exchange rates existing at balance date. The revenue and expenses of these entities are translated at rates approximating the exchange rates ruling at the dates of the transactions. The exchange gain or loss arising on translation is recorded in the foreign currency translation reserve.

Derivative Financial Instruments

Telecom uses derivative financial instruments to reduce its exposure to fluctuations in foreign currency exchange rates, interest rates and electricity prices.

Telecom does not currently hold or issue derivative financial instruments for trading purposes. Gains and losses on derivatives are accounted for on the same basis as the underlying physical exposures. Accordingly, hedge gains and losses are included in the Statement of Financial Performance when the gains or losses arising on the related physical exposures are recognised in the Statement of Financial Performance.

For an instrument to qualify as a hedge, it must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract.

Derivative financial instruments that do not qualify or no longer qualify as hedges are stated at market values and any resultant gain or loss is recognised in the Statement of Financial Performance.

Interest rate swaps and cross currency interest rate swaps that hedge an underlying physical exposure are accounted for using the accrual method of accounting. Interest receivable and payable and unamortised discounts under the terms of the interest rate swaps and cross currency interest rate swaps are accrued over the period to which the payments or receipts relate, and are treated as an adjustment to interest expense.

The foreign exchange gains and losses on the principal value of cross currency swaps are reflected in the Statement of Financial Performance using the spot rate which offsets the foreign exchange gains and losses recorded on the underlying hedged transaction.

Premiums paid for interest rate and currency options and the net settlement on maturity of forward rate agreements are amortised over the life of the underlying hedged item.

Forward exchange contracts are accounted for as outlined in the accounting policy for foreign currency transactions.

Cash flows from derivatives are recognised in the Statement of Cash Flows in the same category as that of the hedged item.

Share Based Payments

An expense for share based payments made to employees is recognised over the vesting period, based on the fair value of the instrument at grant date.

For restricted shares the intrinsic value is deemed to be the fair value. For share options an option pricing model is used.

Cash and Cash Equivalents

For the purposes of the Statement of Cash Flows, cash and cash equivalents are considered to be cash on hand and in banks, net of bank overdrafts. Cash flows from certain items are disclosed net, due to the short-term maturities and volume of transactions involved.

Earnings Per Share

Earnings per share is computed by dividing net earnings by the weighted average number of ordinary shares outstanding during each period.

F - 9

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 STATEMENT OF ACCOUNTING POLICIES

(continued)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications of prior periods’ data have been made to conform to current year classifications.

Changes in Accounting Policies in the Current Financial Year

There have been no changes in accounting policy during the year ended 30 June 2005. The accounting policies used in the preparation of the financial statements for the year ended 30 June 2005 are consistent with those used in the preparation of the financial statements for the years ended 30 June 2004 and 2003.

F - 10

NOTE 2 CALLING AND OTHER OPERATING REVENUES

	Group			Parent
Year ended 30 June (Dollars in millions)	2005 NZ$	2004 NZ$	2003 NZ$	2005 NZ$	2004 NZ$
Calling
National	988	1,053	1,098
International	334	364	401
Other	26	37	51
	1,348	1,454	1,550
Other operating revenues
Resale	337	317	278	—	—
Directories	230	221	207	—	—
Equipment	69	72	69	—	—
Miscellaneous other	144	161	109	—	—
Dividends from investments	7	5	3	7	5
Dividends from subsidiary companies	—	—	—	558	315
	787	776	666	565	320

International Revenue

Included within international calling revenue is the net margin on transit traffic. Transit revenue is generated where Telecom acts as an intermediary carrier on international calls originating and terminating on other carriers’ networks. Telecom receives an inwards payment from the originating carrier and makes an outpayment to the terminating carrier. The net of these payments is recorded within Telecom’s international calling revenue. Gross payments under transit arrangements are shown below:

	Group
Year ended 30 June (Dollars in millions)	2005 NZ$		2004 NZ$		2003 NZ$
Inwards payments	179		183		254
Outpayments	(150	)	(149	)	(211	)
Transit margin	29		34		43

F-11

NOTE 3 OPERATING EXPENSES

Labour

Included in labour costs are pension contributions of $2 million to the New Zealand Government Superannuation Fund (30 June 2004: $1 million, 30 June 2003: $2 million) and $12 million on behalf of Australian employees as required by the Superannuation Guarantee (Administration) Act 1992, (30 June 2004: $11 million, 30 June 2003: $11 million). Telecom has no other obligations to provide pension benefits in respect of employees.

Other Operating Expenses

	Group
Year ended 30 June (Dollars in millions)	2005 NZ$		2004 NZ$		2003 NZ$
Other operating expenses include:
Lease and rental costs	52		49		53
Research and development costs	9		10		7
Advertising costs	118		99		92
Foreign exchange gains	—		(1	)	(1	)
Bad debts written off	59		51		53
(Decrease) / increase in provision for doubtful accounts	(19	)	(15	)	3
Movement in provision for inventory obsolescence	(2	)	3		(2	)
(Gain) / loss on disposal of property, plant and equipment	(7	)	(5	)	2
Directors’ fees	2		1		1

Telecom purchases services from a wide range of suppliers, of which a small number are individually significant suppliers as detailed below:

Alcatel – provide operational support and manage the development and integration of network assets;

EDS - responsible for the operation and support of Telecom’s IT systems;

Ericsson - provide operational support to the TDMA wireless network;

Lucent - provide operational support and manage the development and integration of the CDMA wireless network; and,

Sprint – provide access to mobile CPE supply arrangements, mobile applications and other marketing and service initiatives.

Telecom believes that other suppliers could provide similar services on comparable terms. A change in suppliers could cause disruption to Telecom’s core operations and network and service development activities, which might adversely impact financial results.

Auditors’ remuneration

	Group
Year ended 30 June (Dollars In thousands)	2005 NZ$	2004 NZ$	2003 NZ$
Fees paid to principal auditors:
Audit of financial statements	2,751	1,900	1,644
Other assurance services	790	846	350
Other services	—	57	22
Total fees paid to principal auditors	3,541	2,803	2,016

Other assurance services relate to the audit of regulatory disclosures such as the Telecom List of Charges and the Telecom Service Obligation (“TSO”) as required by Telecommunications legislation.

Other services for the years ended 30 June 2004 and 2003 are principally accounting policy advice.

F - 12

NOTE 4 ABNORMAL ITEMS

	Group				Parent
Year ended 30 June (Dollars In millions)	2005 NZ$	2004 NZ$		2003 NZ$	2005 NZ$	2004 NZ$
Abnormal Revenues
Gain on sale of INL shares	86	—		—	86	—
Gain on sale of Intelsat	8	—		—	—	—
Recognition of Southern Cross support fees	41	—		—	—	—
Gain on repurchase of convertible notes	9	—		—	—	—
Gain on sale of Telecom Retail Stores	10	—		—	—	—
Gain on sale of Sky shares	—	28		—	—	28
	154	28		—	86	28
Abnormal Expenses
Write-down of TDMA network	24	110		—
Inter-carrier provisions	31	—		—
Restructuring costs	4	—		—
Partial recovery of AOL|7 write-down	—	(12	)	—
Write-down of Australian LMDS assets	—	23		—
	59	121		—

Abnormal Revenues

Gain on sale of Independent Newspapers Limited (“INL”) shares (Group and Parent)

In June 2005, Telecom announced that it had sold its entire stake in INL to Nationwide News Pty Limited, an affiliate of News Corporation for $272 million. This resulted in a gain on sale of $86 million being recognised in June 2005. Proceeds from the sale were received in July 2005, therefore at 30 June 2005 Telecom included within receivables and prepayments a receivable of $272 million (see Note 8).

Gain on sale of Intelsat

In January 2005, Intelsat Limited announced the successful closing of its amalgamation with a private equity group. As part of the amalgamation, Intelsat’s shareholders (including Telecom, which owned a stake of approximately 0.5%) received US$18.75 per share in return for their shares. In March 2005 Telecom received $22 million for the sale of its stake in Intelsat resulting in a gain on sale of $8 million.

Recognition of Southern Cross support fees

Southern Cross restructured its banking facilities with its senior bank syndicate in April 2003. As part of the restructure, Telecom agreed to provide contingent credit support for a portion of the refinanced debt. In return for providing this support, support fees are payable to Telecom from Southern Cross. Telecom has not previously recognised these fees, as oversupply of capacity in the international telecommunications industry and uncertainties around future levels of demand were negatively impacting Southern Cross’ operations, creating uncertainty over the collectibility of the support fees. Since this time, acceleration in bandwidth utilisation has significantly improved the outlook for Southern Cross culminating in significant new sales being generated. As a result of the cash generated by the additional sales, collectibility of the support fees is now expected and accordingly Telecom has accrued fees payable by Southern Cross of $41 million ($37 million net of tax) at March 2005. This represents fees for the period from April 2003 to March 2005.

Gain on repurchase of convertible notes

Telecom issued $300 million of convertible notes in 2001. In November 2004 Telecom repurchased $150 million of these notes. Due to market movements since the notes were issued, the amount required to buy the notes back was $145 million, resulting in a gain on buyback of $5 million. In February 2005 Telecom repurchased the remaining $150 million of notes. The amount required to buy the second tranche of notes back was $146 million, resulting in a gain on buyback of $4 million.

F - 13

NOTE 4 ABNORMAL ITEMS (continued)

Gain on Sale of Telecom Retail Stores

In August 2004 Telecom announced the sale of 15 of its business-focused retail stores to the Leading Edge Group for $16 million. The sale was completed on 30 September 2004, resulting in a gain on sale of $10 million.

Gain on sale of shares in Sky (Group and Parent)

In October 2003, Telecom sold all its shares in Sky Network Television Limited (“Sky”) to INL. Total consideration received was $221 million, made up of approximately $157 million in cash with the remainder in the form of shares in INL. Telecom realised a gain of $28 million on the sale of its stake in Sky.

Abnormal Expenses

Write-down of TDMA network

Telecom currently operates both TDMA and CDMA mobile networks. Telecom’s marketing emphasis has been geared towards growing usage of the CDMA network, which offers greater functionality and high speed data capability. This resulted in a migration of the customer base from TDMA to CDMA. TDMA customer numbers and revenues have declined markedly since the launch of CDMA and this is expected to continue, with revenues expected to fall to marginal levels toward the end of 2007. Due to the decline in the TDMA customer base, particularly the higher value post-paid base, the present value of the net cash flows that the TDMA network was expected to generate no longer supported its carrying value. Accordingly an impairment charge of $110 million ($74 million net of tax) was recognised at 30 June 2004 to write the network down to its assessed value at that time. With the continued transition of customers from TDMA to CDMA, the cash flows generated by the TDMA network have continued to decline to the point where at 30 June 2005 the present value of net future cash flows was negligible. Accordingly, a further impairment charge of $24 million ($16 million after tax) was recognised at 30 June 2005 to write the network down to nil.

Inter-carrier provisions

An abnormal charge of $31 million ($21 million net of tax) was recognised in March 2005 by Telecom’s Australian subsidiary AAPT following an extensive reassessment of accruals and provisions for disputes in the inter-carrier area. The charge is a one-off adjustment required to revise cost of sale accrual assumptions and to adjust the carrying value of disputed amounts receivable to amounts considered recoverable. These changes in accrual assumptions relate to prior periods.

Restructuring costs

Following the purchase of Gen-i and Computerland there have been a number of savings identified through the combination of these businesses. Costs of $4 million ($3 million net of tax) have been incurred to achieve these savings. These costs principally consisted of redundancy costs. The restructuring is expected to be complete by the quarter ending December 2005.

Partial recovery of AOL|7 write-down

In the year ended 30 June 2002 shareholder advances of A$115 million to AOL|7 were fully written down as they were not expected to be recoverable. In the year ended 30 June 2004, an agreement was reached with the other shareholders of AOL|7 to sell the AOL|7 business. Telecom received $12 million as its share of the proceeds from sale. This amount was credited to abnormal expenses as a partial recovery of the previous write-down.

Write-down of Australian LMDS assets

AAPT operates an LMDS wireless access network in major Australian metropolitan areas. Usage of this network did not grow to originally forecast levels due to the use of alternative access technologies. The forecast net cash flows expected to be generated by this network did not support its carrying value and accordingly it was written down to its assessed amount at 30 June 2004. A charge of $23 million ($16 million net of tax) was recognised to write these assets down to their assessed recoverable value of $19 million.

F - 14

NOTE 5 INTEREST

	Group						Parent
Year ended 30 June (Dollars in millions)	2005 NZ$		2004 NZ$		2003 NZ$		2005 NZ$	2004 NZ$
Interest expense:
Fixed loans	289		294		298		—	—
Other interest	3		10		31		—	—
Capital notes	28		47		67		—	—
Convertible notes	8		16		16		—	—
Interest paid to subsidiary companies	—		—		—		418	380
	328		367		412		418	380
Less interest capitalised	(8	)	(6	)	(5	)	—	—
Total interest expense	320		361		407		418	380

NOTE 6 INCOME TAX

The income tax expense / (credit) is determined as follows:

	Group						Parent
Year ended 30 June (Dollars in millions)	2005 NZ$		2004 NZ$		2003 NZ$		2005 NZ$		2004 NZ$
Earnings before income tax
Domestic	1,264		1,093		1,084		572		307
Foreign	47		1		19		—		—
Earnings before income tax	1,311		1,094		1,103		572		307
Tax at current rate of 33%	433		361		364		189		101
Adjustment to taxation for permanent differences:
Gain on sale of investments	(31	)	(8	)	—		(28	)	(9	)
Amortisation of goodwill	23		20		22		—		—
Overprovided in prior years	—		(33	)	(4	)	—		(7	)
Foreign sourced income not subject to tax	(19	)	—		—		—		—
Intercompany dividends	—		—		—		(184	)	(104	)
Other	(14	)	(3	)	9		(3	)	(2	)
Income tax expense / (credit)	392		337		391		(26	)	(21	)
The income tax expense / (credit) is represented by:
Current taxation	377		400		351		(26	)	(21	)
Deferred taxation	15		(30	)	44		—		—
Overprovided in prior years	—		(33	)	(4	)	—		—
	392		337		391		(26	)	(21	)
Domestic tax expense/(credit)	349		386		316		(26	)	(21	)
Foreign tax expense	28		14		35		—		—
Total current taxation	377		400		351		(26	)	(21	)
Deferred income tax expense / (credit) results from the following:
Depreciation	17		(37	)	41		—		—
Provisions, accruals and other	(2	)	7		1		—		—
Year 2000 expenditure	—		—		2		—		—
	15		(30	)	44		—		—
Domestic deferred income tax expense/(credit)	33		(34	)	40		—		—
Foreign deferred income tax expense/(credit)	(18	)	4		4		—		—
Total deferred income tax expense / (credit)	15		(30	)	44		—		—

F - 15

NOTE 6 INCOME TAX (continued)

The IRD had previously issued amended income tax assessments to Telecom in respect of a transaction for the income years 1993 – 1999. Telecom disputed the assessments, but provided for the disputed tax. In 2004 Telecom reached a settlement with the IRD, which resulted in a credit to tax expense of $29 million.

	Group				Parent
30 June	2005 NZ$		2004 NZ$		2005 NZ$		2004 NZ$
(Dollars in millions)
Current taxation:
Balance at the beginning of the year	35		9		(2	)	(24	)
Total taxation (expense) / credit in the current year	(377	)	(400	)	26		21
Taxation paid	297		352		—		—
Supplementary dividend tax credit
- previous year fourth quarter final	23		12		23		12
- first, second and third quarter interims	72		43		72		43
Transfers with subsidiary companies	—		—		—		11
Supplementary dividend tax credit offset with subsidiary companies	—		—		(125	)	(55	)
Overprovided in prior year	2		44		2		—
Other	(7	)	(25	)	—		(10	)
Prepaid income tax (see Note 8) / (tax payable) (see Note 13)	45		35		(4	)	(2	)
Prepaid income tax/(tax payable) balances consist of the following:
Domestic prepaid income tax/(tax payable)	45		30		(4	)	(2	)
Foreign prepaid income tax/(tax payable)	—		5		—		—
	45		35		(4	)	(2	)
Deferred taxation:
Balance at the beginning of the year	(120	)	(127	)	—		—
Provided in the current year	(15	)	30		—		—
Underprovided in prior year	(2	)	(12	)	—		—
Other	1		(11	)	—		—
Deferred taxation	(136	)	(120	)	—		—
Deferred taxation balances consist of the following:
Depreciation	(166	)	(149	)	—		—
Provisions, accruals and other	30		27		—		—
Tax losses in overseas subsidiary	—		2		—		—
	(136	)	(120	)	—		—
Domestic deferred tax liability	(158	)	(137	)	—		—
Foreign deferred tax asset	22		17		—		—
	(136	)	(120	)	—		—

In accordance with the Income Tax Act 1994, Telecom received tax credits from the Inland Revenue Department equivalent to the supplementary dividends paid.

The Telecom Group has not recognised in its deferred taxation balance the tax effect of accumulated losses and timing differences in overseas subsidiaries amounting to $2 million at 30 June 2005 (30 June 2004: $43 million), based on the relevant corporation tax rate of the overseas subsidiary’s country of residence. Obtaining the benefits of the deferred tax balance is dependent upon deriving sufficient assessable income, meeting conditions for deductibility and complying with relevant tax legislation.

F - 16

NOTE 7 SHORT-TERM INVESTMENTS

	Group
30 June	2005 NZ$	2004 NZ$
(Dollars in millions)
Short-term deposits	80	236
Government securities	1	11
	81	247

NOTE 8 RECEIVABLES AND PREPAYMENTS

	Group				Parent
30 June	2005 NZ$		2004 NZ$		2005 NZ$	2004 NZ$
(Dollars in millions)
Trade receivables	624		625		—	—
Less allowance for doubtful accounts	(42	)	(61	)	—	—
	582		564		—	—
Unbilled rentals and tolls	292		263		—	—
Prepaid income tax (see Note 6)	45		35		—	—
Prepaid expenses and other receivables	76		109		—	—
Receivable from sale of INL shareholding (see Note 10)	272		—		272	—
Southern Cross support fees receivable	44		—		—	—
	1,311		971		272	—
Allowance for doubtful accounts:
Balance at beginning of period	61		76
Charged to costs and expenses	40		36
Balance written off against provision	(59	)	(51	)
Balance at end of period	42		61

NOTE 9 INVENTORIES

	Group
30 June	2005 NZ$		2004 NZ$
(Dollars in millions)
Maintenance materials and consumables	4		2
Goods held for resale	39		29
Revenue work in progress	3		1
Materials for self-constructed assets	13		23
	59		55
Less provision for inventory obsolescence	(3	)	(5	)
	56		50
Allowance for inventory obsolescence:
Balance at beginning of period	5		2
Charged to costs and expenses	—		3
Release from provision	(2	)	—
Balance at end of period	3		5

F - 17

NOTE 10 LONG-TERM INVESTMENTS

	Group		Parent
30 June (Dollars in millions)	2005 NZ$	2004 NZ$	2005 NZ$	2004 NZ$
International telecommunications investments	—	14	—	—
Advances to associate companies (see Note 20)	95	103	—	—
Shares in listed companies	—	186	—	186
Other long-term investments	449	464	—	—
Subsidiary companies
Shares	—	—	4,158	3,876
Term advances	—	—	3,839	3,839
	544	767	7,997	7,901

Sale of International Telecommunications Investments

Telecom sold its investment in Intelsat Limited in January 2005. Telecom received $22 million for the sale of its stake in Intelsat Limited resulting in a gain on sale of $8 million (see Note 4).

Associate Company Investments

	Group
30 June (Dollars in millions)	2005 NZ$		2004 NZ$
Cost of investment in associates	31		31
Opening balance of share of associates’ equity	(31	)	(31	)
Equity accounted value of the investment	—		—

Sale of shares in Listed Companies

Telecom sold its entire stake in INL in June 2005 for total consideration of $272 million. This resulted in a gain on sale of $86 million being recognised in June 2005. Proceeds from the sale were received in July 2005, therefore at 30 June 2005 Telecom had recorded a receivable of $272 million (see Note 8).

Other Long-Term Investments

Other long-term investments includes Telecom’s 19.9% stake in Hutchison 3G Australia Limited of A$400 million (30 June 2004: A$400 million).

Subsidiary companies – term advances

These term advances have interest rates ranging between 0% and 10% (30 June 2004: 0% and 10%).

F - 18

NOTE 11 INTANGIBLES

	Group
(Dollars in millions)	Goodwill NZ$		Spectrum licences NZ$	Other intangibles NZ$	TOTAL NZ$
Cost
Balance at beginning of year	1,890		38	5	1,933
Acquisitions	75		—	—	75
Currency movements	(5	)	—	—	(5	)
Balance at end of year	1,960		38	5	2,003
Amortisation
Balance at beginning of year	1,015		2	1	1,018
Amortisation	70		2	2	74
Balance at end of year	1,085		4	3	1,092
Net book value at 30 June 2005	875		34	2	911
Net book value at 30 June 2004	875		36	4	915

Spectrum licences are being amortised over the licence period. Annual amortisation will be approximately $2 million per annum. Other intangible assets will be fully depreciated over the next year.

NOTE 12 PROPERTY, PLANT AND EQUIPMENT

	Group
(Dollars in millions)	Telecommunications equipment and plant NZ$		Freehold land NZ$	Buildings NZ$		Other assets NZ$		TOTAL NZ$
Cost	9,806		100	623		1,482		12,011
Capital work in progress	83		—	24		115		222
Less accumulated depreciation	(6,535	)	—	(332	)	(1,083	)	(7,950	)
Net book value at 30 June 2005	3,354		100	315		514		4,283
Depreciation expense 2005	515		—	28		151		694
Cost	9,489		106	599		1,279		11,473
Capital work in progress	58		—	25		106		189
Less accumulated depreciation	(6,048	)	—	(305	)	(997	)	(7,350	)
Net book value at 30 June 2004	3,499		106	319		388		4,312
Depreciation expense 2004	599		—	27		129		755

Values Ascribed to Land and Buildings

Telecom’s properties consist primarily of special-purpose network buildings, which form an integral part of the telecommunications network. The Directors estimate that the fair valuation of land and buildings (excluding properties designated for disposal) is approximately equivalent to their net book value as at 30 June 2005 taking into account their integral value to the network. Included in land and buildings at 30 June 2005 are properties held for sale of $3 million (30 June 2004 $1 million).

F - 19

NOTE 12 PROPERTY, PLANT AND EQUIPMENT (continued)

Operating Leases

Included in telecommunications equipment at 30 June 2005 is equipment (principally customer premises equipment) leased to customers under operating leases with a cost of $551 million (30 June 2004: $503 million) together with accumulated depreciation of $436 million (30 June 2004: $380 million).

Included in buildings at 30 June 2005 are buildings on leasehold land with a cost of $11 million (30 June 2004: $11 million) together with accumulated depreciation of $4 million (30 June 2004: $3 million).

Finance Leases

Included in telecommunications equipment at 30 June 2005 are assets capitalised under finance leases with a cost of $1,200 million (30 June 2004: $1,249 million) together with accumulated depreciation of $649 million (30 June 2004: $580 million). This amount includes capacity acquired from Southern Cross, with a cost of $427 million (30 June 2004: $422 million) and accumulated depreciation of $79 million (30 June 2004: $70 million).

Telecom has prepaid all obligations under finance leases and as a result has no outstanding commitments under finance leases.

Land Claims

Under the Treaty of Waitangi Act 1975, all interests in land included in the assets purchased from the New Zealand Government may be subject to claims to the Waitangi Tribunal, which has the power to recommend, in appropriate circumstances, with binding effect, that the land be resumed by the Government in order that it be returned to Maori claimants. In the event that the Government resumes land, compensation will be paid to Telecom under the provisions of the Public Works Act 1981. If this is insufficient to cover the loss, certain additional compensation is payable under the provisions of the Sale and Purchase Agreement between the Company and the Government.

Under the State Owned Enterprises Act 1986, the Governor General of New Zealand, if satisfied that any land or interest in land held by Telecom is waahi tapu (being land of special spiritual, cultural or historical tribal significance), may declare by Order in Council that the land be resumed by the Government, with compensation payable to Telecom under the provisions of the Public Works Act 1981. Telecom would expect to negotiate with the new Maori owners for continued occupancy rights of any sites resumed by the Government.

NOTE 13 ACCOUNTS PAYABLE AND ACCRUALS

	Group		Parent
30 June (Dollars in millions)	2005 NZ$	2004 NZ$	2005 NZ$	2004 NZ$
Trade accounts payable	702	620	—	—
Accrued personnel costs	121	108	—	—
Revenue billed in advance	90	78	—	—
Accrued interest	49	51	—	—
Tax payable (see Note 6)	—	—	4	2
Other accrued expenses	52	74	8	5
	1,014	931	12	7

F - 20

NOTE 14 DEBT DUE WITHIN ONE YEAR

	Group
30 June (Dollars in millions)	2005 NZ$	2004 NZ$
Long-term debt maturing within one year (see Note 15)
Bonds and other loans (8.30%*)	545	748
Short-term debt
Notes	318	—
Australian commercial paper	—	55
	863	803

(* weighted average effective interest rate for Telecom Group – includes the effect of hedging transactions, see Note 17)

Notes comprise amounts issued under Telecom’s $500 million note facility guaranteed by Telecom Corporation of New Zealand Limited and certain other subsidiary companies. As at 30 June 2005 the notes had a weighted average interest rate of 7.04%.

Australian commercial paper comprised amounts issued under the TCNZ Finance Limited Australian Branch A$1,500 million Short Term Note and Medium Term Note Program (guaranteed by Telecom Corporation of New Zealand Limited and certain other subsidiary companies). Issues outstanding at 30 June 2004 were denominated in Australian dollars with a weighted average interest rate of 5.58%.

Telecom has in place a US$1 billion European Commercial Paper Programme and a $200 million Asian Commercial Paper Programme. These programmes were unutilised at 30 June 2005 and 30 June 2004.

As at 30 June 2005 Telecom had committed stand-by credit facilities of US$400 million with various major banks. Telecom also had committed overdraft facilities of $20 million with New Zealand banks and A$20 million with Australian banks. There are no compensating balance requirements associated with these facilities.

None of Telecom’s debt due within one year is secured.

NOTE 15 LONG-TERM DEBT

	Group
30 June (Dollars in millions)	2005 NZ$		2004 NZ$
Telebonds	321		362
Eurobonds	150		150
Euro Medium Term Notes	2,738		3,069
Capital Notes	327		327
Convertible Notes	—		300
Other loans	—		1
	3,536		4,209
Less unamortised discount	(18	)	(23	)
	3,518		4,186
Less long-term debt maturing within one year (see Note 14)	(545	)	(748	)
	2,973		3,438
Schedule of Maturities
Due 1 to 2 years (7.94%*)	703		554
Due 2 to 3 years (8.35%*)	243		702
Due 3 to 4 years (9.56%*)	740		543
Due 4 to 5 years (8.34%*)	15		739
Due over 5 years (7.84%*)	1,272		900
Total due after one year (8.34%*)	2,973		3,438

(* weighted average effective interest rate for Telecom Group – includes the effect of hedging transactions, see Note 17)

None of Telecom’s long-term debt is secured.

F - 21

NOTE 15 LONG-TERM DEBT (continued)

TeleBonds

TCNZ Finance Limited, a subsidiary of the Company, has issued bonds (“TeleBonds”) to institutional and retail investors. These have been issued as income, compounding, or zero coupon bonds. TeleBonds have interest rates ranging from 6.25% to 9.60% and maturity dates between November 2005 and April 2016.

Eurobonds

Eurobonds are issued by TCNZ Finance Limited. Eurobonds on issue are denominated in US dollars, have an interest rate of 6.75% and mature on 11 October 2005. A cross currency interest rate swap has been entered into to manage the currency and interest rate risk exposure. The effective NZ dollar interest rate for the issue is 8.44%.

Euro Medium Term Notes

TCNZ Finance Limited launched a US$1 billion Euro Medium Term Note (“EMTN”) programme in March 2000. In May 2001 the programme was increased to US$2 billion. Both public debt transactions and private placements can be issued under the programme.

	Group
30 June (Dollars in millions)	2005 NZ$	2004 NZ$
5.5% due 19 April 2005, euro denominated	—	718
6.0% due 14 March 2006, GBP denominated	332	332
1.85% due 5 June 2007, yen denominated	412	412
6.125% due 12 December 2008, GBP denominated	690	690
6.75% due 14 December 2011, USD denominated	527	530
5.625% due 14 May 2018, GBP denominated	346	346
5.75% due 6 April 2020, GBP denominated	390	—
Private placement	41	41
	2,738	3,069

The private placement is denominated in yen. It has an interest rate of 2.0% and a maturity date of 8 June 2009.

Cross currency and interest rate swaps have been entered into to manage the EMTN’s currency and interest rate risk exposures. The effective interest rates inclusive of effects of hedging range from 7.29% to 9.65%.

In April 2005 the remaining balance of the Euro denominated notes matured and was partially refinanced with a GBP 150 million 15 year note issue.

F - 22

NOTE 15 LONG-TERM DEBT (continued)

Capital Notes

	Group
30 June (Dollars in millions)	2005 NZ$	2004 NZ$
Various NZ dollar TeleNotes	146	146
6.5% due 10 February 2008, Restricted Capital Securities	181	181
	327	327

TCNZ Finance Limited has issued long-term fixed interest unsecured subordinated capital notes (“TeleNotes”).

TeleNotes are issued for an initial term at the end of which Telecom can, at its sole discretion, redeem the TeleNotes including any unpaid interest for cash, offer investors the option of continuing to hold the TeleNotes for a new term and at a new yield or redeem the TeleNotes including any unpaid interest by subscribing for and procuring the issue of ordinary shares in the Company to the noteholders at a price equivalent to 90% of the average closing price of the Company’s shares in the 10 business days preceding the election date. Had the TeleNotes been redeemed at 30 June 2005 this would have involved the creation of 57 million shares (30 June 2004: 62 million shares).

TeleNotes on issue mature in September 2006 and have interest rates ranging from 7.25% to 8.03%.

In February 1998, Telecom New Zealand Finance Limited, a Telecom financing subsidiary, issued to certain qualified institutional buyers in the United States of America, under an Offering Memorandum pursuant to US SEC Rule 144A, an aggregate principal amount of face value US$150 million 6.5% Restricted Capital Securities for an initial term of ten years.

Telecom entered into cross currency interest rate swaps to convert the US$150 million proceeds into NZ$256 million. The effective interest rate for the remaining notes is 8.52%. In August and September 2003 Telecom New Zealand Finance Limited repurchased a total of US$44 million of the notes on issue.

The Restricted Capital Securities rank pari passu with the TeleNotes issued in New Zealand and are similar in all material respects.

Convertible Notes

In May 2001, Telecom New Zealand Finance Limited, a Telecom financing subsidiary, issued NZ dollar denominated convertible notes for an aggregate principal amount of $300 million. The notes were issued for a term of seven years and paid a fixed coupon of 5.4%. Telecom repurchased $150 million of the notes on issue in November 2004 and repurchased the remaining $150 million of the notes in February 2005. This resulted in a gain on buyback of $9 million (see Note 4).

F - 23

NOTE 16 EQUITY

Kiwi Share

A special rights convertible preference share (the “Kiwi Share”) was created on 11 September 1990 and is registered in the name of, and may only be held by, the Minister of Finance on behalf of the Crown. The consent of the holder of the Kiwi Share is required for the amendment, removal or alteration of the effect of certain provisions of the Company’s Constitution which was adopted upon re-registration on 27 September 1996 under the Companies Act 1993.

The Company’s Constitution contains provisions that require Telecom to observe certain principles relating to the provision of telephone services and their prices, and that require the consent of the holder of the Kiwi Share and the Board of Telecom for a person to become the holder of an interest in 10% or more of the voting shares in Telecom.

The holder of the Kiwi Share is not entitled to vote at any meetings of the Company’s shareholders nor participate in the capital or profits of the Company, except for repayment of $1 of capital upon a winding up. The Kiwi Share may be converted to an ordinary share at any time by the holder thereof, at which time all rights and powers attached to the Kiwi Share will cease to have any application.

Contributed Capital

Movements in the Company’s issued ordinary shares were as follows:

30 June	2005		2004
(Dollars in millions)	Number	NZ$	Number	NZ$
Shares at the beginning of the year	1,936,947,744	1,871	1,905,326,320	1,708
Shares issued under the dividend reinvestment plan	13,999,472	84	27,477,890	142
Shares issued under the restricted share scheme	769,169	4	1,001,978	6
Shares issued under the share rights scheme	107,369	1	171,483	1
Issue of new shares upon exercise of options	5,699,574	27	2,970,073	14
Shares at the end of the year	1,957,523,328	1,987	1,936,947,744	1,871

Each of the ordinary shares confers on the holder the right to vote at any general meeting of the Company except that the Company’s Constitution provides for certain restrictions on voting, including where a holder holds more than 10% of the ordinary shares in breach of shareholding limitations.

Foreign Currency Translation Reserve

Movements in Telecom’s foreign currency translation reserve are reconciled below:

	Group
30 June (Dollars in millions)	2005 NZ$		2004 NZ$
Balance at beginning of the year	(288	)	(243	)
Net exchange difference on translation of independent foreign operations	(87	)	(71	)
Hedge of net investment in independent foreign operations	20		54
	(67	)	(17	)
Tax effect of items included in foreign currency translation reserve	(8	)	(28	)
Total movement for the year	(75	)	(45	)
Balance at end of the year	(363	)	(288	)

F - 24

NOTE 16 EQUITY (continued)

Telecom Incentive Schemes

Telecom has operated a share option scheme since 1994. During the year ended 30 June 2002, Telecom also established the Telecom Restricted Share Scheme and Telecom Share Rights Scheme.

Telecom Share Option Scheme

Telecom has operated a share option scheme since 1994 whereby certain key executives are granted a number of options to purchase ordinary shares in the Company. During the year ended 30 June 2002 the scheme was expanded to give both key executives and senior employees the option to participate in the scheme. The number of participants has subsequently been reduced from September 2003, with most employees now participating in the Restricted Share Scheme. Each option granted will convert to one ordinary share on exercise (provision is made for adjustment in certain circumstances). A participant may exercise his or her options (subject to employment conditions) any time during a prescribed period commencing at least one year from the date on which the options are conferred. A performance hurdle must be met in order to exercise any share options granted after August 2003. The total return to shareholders, measured as the combination of share price appreciation and dividends paid, must exceed the estimated cost of equity since the grant of the share option. External advisors will calculate the cost of equity annually from September 2005, when the first options subject to the hurdle are expected to vest. Achievement of the performance hurdle will be independently verified and once achieved, following the vesting of the share options, the share options may be exercised at any time up to and including the lapse date of the share options.

Options have been issued with a maximum term of six years. New ordinary shares will be issued in accordance with the Constitution upon the exercise of options. The price payable on exercise will be equivalent to the average daily closing price of Telecom shares reported on the New Zealand Exchange for the business days in the month immediately preceding the date on which options are granted (subject to adjustment if the shares traded “cum dividend”). The options granted are determined by a committee of the Board of Directors pursuant to the share option scheme.

Information regarding options granted under the share option scheme is as follows:

	Option price* NZ$	Number of options		Grant date fair value* NZ$
As at 30 June 2002	5.94	20,717,762
Granted	4.92	14,514,314		1.06
Exercised	4.70	(33,675	)
Lapsed	5.98	(4,848,123	)
As at 30 June 2003	5.33	30,350,278
Granted	5.01	4,062,515		0.66
Exercised	4.85	(2,970,073	)
Lapsed	5.47	(3,697,856	)
As at 30 June 2004	5.45	27,744,864
Granted	5.95	4,655,876		0.72
Exercised	4.83	(5,699,574	)
Lapsed	7.31	(3,844,579	)
As at 30 June 2005	5.39	22,856,587

* Weighted average

F - 25

NOTE 16 EQUITY (continued)

	Options outstanding				Options currently exercisable
Period Granted	Options outstanding	Price range NZ$	Price * NZ$	Remaining life* (years)	Options exercisable	Price * NZ$
1 April 1998 – 31 March 1999	20,043	8.54	8.54	0.1	20,043	8.54
1 April 1999 – 30 June 1999	31,417	8.12	8.12	0.1	31,417	8.12
1 July 1999 – 30 June 2000	640,333	7.86 – 8.80	8.13	0.3	640,333	8.13
1 July 2000 – 30 June 2001	2,229,064	5.19 – 6.77	6.61	1.1	2,229,064	6.61
1 July 2001 – 30 June 2002	3,842,799	4.70 – 5.27	4.73	2.0	3,810,184	4.73
1 July 2002 – 30 June 2003	7,705,178	4.43 – 5.27	4.93	3.0	2,803,685	4.93
1 July 2003 – 30 June 2004	3,780,603	5.01 – 5.59	5.01	4.0	—	—
1 July 2004 – 30 June 2005	4,607,150	4.94 – 6.30	5.95	5.3	—	—
	22,856,587				9,534,726

	Options outstanding			Options currently exercisable
Price range	Options outstanding	Price * NZ$	Remaining life* (years)	Options exercisable	Price * NZ$
4.00-4.99	11,387,132	4.86	2.9	6,446,563	4.80
5.00-5.99	8,826,844	5.53	4.6	465,790	5.53
6.00-6.99	1,950,818	6.75	1.2	1,930,580	6.76
7.00-7.99	278,446	7.86	0.3	278,446	7.86
8.00-8.99	413,347	8.34	0.3	413,347	8.34
	22,856,587			9,534,726

* Weighted average

Telecom Restricted Share Scheme

In September 2001 the Telecom Restricted Share Scheme (“RSS”) was introduced for selected executives and senior employees of the Group. In September 2003 participation has been extended so that the majority of employees that previously participated in the Share Options Scheme now participate in the RSS. Under the RSS, company shares are issued to Telecom Trustee Limited, a Telecom subsidiary and purchased by participants using funds lent to them by the company and held on their behalf by Telecom Trustee Limited. Under the RSS, apart from some exceptional circumstances, the length of the retention period before awards vest is 3 years. Awards may vest in annual tranches. The price for each share under the RSS is the average end of day market price of Telecom shares reported on the New Zealand Exchange for the days on which the exchange is open for trading in the month immediately preceding the date on which the share is allocated. If the individual is still employed by the Group at the end of the specified period, the employee is given a cash bonus which must be used to repay the loan and the shares are then transferred to the individual. The balance of the loans owing to the Group at 30 June 2005 is $11 million (30 June 2004: $7 million). The shares awarded are determined by a committee of the Board of Directors pursuant to the RSS.

Information regarding shares awarded under the RSS is as follows:

	Number of shares
Unvested shares as at 30 June 2003	449,774
Awarded pursuant to RSS	1,052,786
Lapsed	(78,136	)
Vested	(41,949	)
Unvested shares as at 30 June 2004	1,382,475
Awarded pursuant to RSS	862,061
Lapsed	(117,675	)
Vested	(208,989	)
Unvested shares as at 30 June 2005	1,917,872
Percentage of total ordinary shares	0.09	%

F - 26

NOTE 16 EQUITY (continued)

Telecom Share Rights Scheme

The Telecom Share Rights Scheme (“SRS”) was introduced for selected executives and senior employees of the Group in September 2001. Under the scheme, participants are granted the option to purchase company shares at a nil exercise price. Under the SRS, the vesting period is usually three years from the allocation date of the options but this may vary between tranches granted. Except under special circumstances, the options will be exercisable at the end of a specified period only if the individual is still employed by the Group. The options granted are determined by a committee of the Board of Directors pursuant to the SRS.

Information regarding options granted under the SRS is as follows:

	Option price NZ$	Number of options
As at 30 June 2003	—	426,524
Granted	—	1,059,194
Exercised	—	(171,483	)
Lapsed	—	(287,937	)
As at 30 June 2004	—	1,026,298
Granted	—	660,294
Exercised	—	(107,369	)
Lapsed	—	(318,064	)
As at 30 June 2005	—	1,261,159

	Options outstanding			Options currently exercisable
Period Granted	Options outstanding	Price NZ$	Remaining life* (years)	Options exercisable	Price NZ$
1 July 2002 – 30 June 2003	40,000	—	0.5	—	—
1 July 2003 – 30 June 2004	635,569	—	1.4	—	—
1 July 2004 – 30 June 2005	585,590	—	2.5	—	—
	1,261,159			—

* Weighted average

F - 27

NOTE 16 EQUITY (continued)

Dividends

Dividends declared and provided by the Company are as follows:

Year ended 30 June (Dollars in millions)	2005 NZ$		2004 NZ$		2003 NZ$
Previous year fourth quarter dividend paid	184		96		94
Supplementary dividend	23		12		13
First quarter dividend paid	184		96		94
Supplementary dividend	24		12		13
Second quarter dividend paid	185		96		94
Supplementary dividend	24		12		13
Third quarter dividend paid	185		145		94
Supplementary dividend	24		19		13
	833		488		428
Fourth quarter dividend declared subsequent to balance date not provided for (see Note 25)	196		184		96
Fourth quarter special dividend declared subsequent to balance date not provided for (see Note 25)	196		—		—
Dividends per share (including dividends declared but not provided for, but excluding supplementary dividends)	48.5	¢	27.0	¢	20.0	¢

Telecom receives an equivalent tax credit from the Inland Revenue Department for the amount of supplementary dividends paid.

Shares Issued in Lieu of Dividends

Telecom established a Dividend Reinvestment Plan in the year ended 30 June 2000. Under the plan shareholders can elect to receive dividends in cash or additional shares. In respect of the year ended 30 June 2005, 13,999,472 shares with a total value of $84 million were issued in lieu of a cash dividend (30 June 2004: 27,477,890 shares and $142 million). From January 2004, shares issued under the dividend reinvestment plan were issued at the prevailing market price (previously shares were issued at a 3% discount). This amount is excluded from dividends paid in the Statement of Cash Flows.

F - 28

NOTE 17 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Interest Rate and Currency Risk

Telecom employs the use of derivative financial instruments for the purpose of reducing its exposure to fluctuations in interest rates and foreign exchange rates. Telecom monitors the use of derivative financial instruments through the use of well-defined market and credit risk limits and timely reports to senior management.

The majority of Telecom’s long-term debt has been issued in foreign currencies. Telecom enters into cross currency interest rate swaps to convert issue proceeds into a floating rate New Zealand dollar or Australian dollar exposure. New Zealand dollar and Australian dollar interest rate swaps are used to convert floating rate exposure into fixed rate exposure where it is considered appropriate. As a result of these hedging activities the majority of Telecom’s long-term debt is subject to fixed interest rates.

Telecom enters into forward exchange contracts to protect it from the risk that the eventual New Zealand dollar cash flows resulting from purchases from foreign suppliers and short-term foreign currency borrowings will be adversely affected by changes in exchange rates. Forward exchange contracts are also used to maintain an appropriate level of assets and liabilities in particular currencies.

The notional principal or contract amounts outstanding are as follows:

	Group			Parent
30 June (Dollars in millions)	Maturities	2005 NZ$	2004 NZ$	2005 NZ$	2004 NZ$
Cross currency interest rate swaps	2005-2020	3,069	3,400	—	—
Interest rate swaps	2005-2020	3,352	3,466	—	—
Forward exchange contracts	2005-2006	1,329	1,322	—	—
Currency options	2005-2006	31	—	—	—

The notional amounts of interest rate swaps do not represent amounts exchanged by the parties, and therefore, are not a direct measure of the exposure of Telecom through its use of derivative financial instruments. The amounts exchanged are calculated on the basis of the notional principal amounts and the other terms of the instruments, which relate to interest rates.

Electricity Price Risk

Telecom uses electricity hedges to reduce exposure to electricity spot price movements. At 30 June 2005 Telecom had contracts to hedge electricity consumption of 17 megawatts per hour (30 June 2004: 16 megawatts per hour) with maturity dates ranging from December 2005 to December 2007.

Concentration of Credit Risk

In the normal course of its business, Telecom incurs credit risk from trade receivables and transactions with financial institutions. Telecom has a credit policy, which is used to manage this exposure to credit risk. As part of this policy, limits on exposures with counterparties have been set and approved by the Board of Directors and are monitored on a regular basis.

Telecom has certain derivative transactions that are subject to bilateral credit support agreements that require Telecom or the counterparty to post collateral to support mark-to-market valuation differences. No collateral has been posted by Telecom or any counterparty in the years ended 30 June 2005 and 30 June 2004.

Financial instruments which potentially subject Telecom to credit risk consist principally of cash, short-term investments, advances to associate companies, trade receivables and various off-balance sheet instruments. Telecom places its cash, short-term investments and off-balance sheet hedging instruments with high credit quality financial institutions and sovereign bodies and limits the amount of credit exposure to any one financial institution. Telecom has no significant concentrations of credit risk in respect of any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers included in Telecom’s customer base. As at 30 June 2005 the proceeds from the sale of INL shares of $272 million were recorded as a receivable, however, no significant credit risk exists with respect to this receivable at the balance date. Telecom has received the full proceeds from the sale of INL shares subsequent to the balance date.

F - 29

NOTE 17 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

Fair Values of Financial Instruments

The estimated fair values of Telecom’s financial instruments, which differ from the carrying values, are as follows:

	Group
	2005				2004
30 June (Dollars in millions)	Carrying value NZ$		Fair value NZ$		Carrying value NZ$		Fair value NZ$
Applicable financial instruments on the balance sheet:
Long-term investments – shares in listed companies	—		—		186		207
Long-term debt (see Note 15)	(3,518	)	(3,082	)	(4,186	)	(3,920	)
Financial instruments with off-balance sheet risk:
Interest rate swaps	(11	)	(114	)	(13	)	(91	)
Cross currency interest rate swaps	10		(600	)	13		(413	)
Foreign currency forward exchange contracts	(2	)	(4	)	(3	)	(15	)
Electricity hedges	—		—		—		(1	)

In addition to the above carrying value of long-term debt, accrued interest payable of $64 million (30 June 2004: $71 million) is recorded in the Statement of Financial Position.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash, Short-Term Investments, Short-term Debt, Receivables and Prepayments, Accounts Payable and Accruals

The carrying amounts of these balances are approximately equivalent to their fair value and therefore they are excluded from the table shown above.

Long-term Investments

The fair value of shares in listed companies is based on quoted market prices for these securities.

It was not practicable to estimate fair values of the remaining long-term investments as there are no quoted market prices for these or similar investments.

Long-term Debt

The fair value of long-term debt is calculated based on market prices for interest rate swaps with similar maturities plus a credit margin to reflect the rates available to Telecom for similar debt securities.

Cross Currency Interest Rate Swaps, Interest Rate Swaps and Forward Exchange Contracts

The fair values are estimated on the basis of the quoted market prices of these instruments.

The carrying value of the cross currency interest rate swaps and interest rate swaps represents the accrued interest and unamortised discount on these instruments.

Electricity hedges

The fair value of electricity hedges has been estimated using forecast spot prices.

F - 30

NOTE 17 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

Repricing Analysis

The following table indicates the effective interest rates, the earliest period in which recognised financial instruments reprice and the extent to which these factors have been modified by off-balance sheet financial instruments. This information provides a basis for the evaluation of the interest rate risk to which Telecom is exposed in the future.

(Dollars in millions)	Weighted effective interest rate		Within 1 year NZ$		1-2 years NZ$		2-3 years NZ$		3-4 years NZ$		4-5 years NZ$		Greater than 5 years NZ$		Total NZ$
Financial assets:
Cash balances	5.46	%	235		—		—		—		—		—		235
Investments	6.99	%	81		—		—		—		—		—		81
Financial liabilities:
Debt	8.23	%	(863	)	(703	)	(243	)	(740	)	(15	)	(1,272	)	(3,836	)
Off-balance sheet instruments:
Interest rate swaps			2,462		(410	)	(180	)	(730	)	—		(1,142	)	—
Cross currency interest rate swaps			(2,587	)	412		181		731		—		1,263		—
30 June 2005 repricing profile			(672	)	(701	)	(242	)	(739	)	(15	)	(1,151	)	(3,520	)
30 June 2004 repricing profile			(340	)	(554	)	(700	)	(542	)	(738	)	(779	)	(3,653	)

NOTE 18 COMMITMENTS

Operating Leases

Minimum rental commitments for all non-cancellable operating leases are:

	Group
30 June	2005 NZ$	2004 NZ$
(Dollars in millions)
Payable within 1 year	56	48
Payable within 1-2 years	45	46
Payable within 2-3 years	43	37
Payable within 3-4 years	46	30
Payable within 4-5 years	23	27
Payable thereafter	83	80
	296	268

Capital Commitments

At 30 June 2005, capital expenditure amounting to $99 million (30 June 2004: $103 million) had been committed under contractual arrangements, with substantially all payments due within one year. The capital expenditure commitments principally relate to telecommunications network assets.

F - 31

NOTE 19 CONTINGENCIES

Contingent Liabilities

Lawsuits and Other Claims

In March 2004, the Commerce Commission issued proceedings against Telecom claiming that during the period since 2001, Telecom has misused its market power and has priced access to its data tail services for high speed data transmission for the purposes of deterring potential and existing competitors from engaging in competitive conduct. The Commerce Commission seeks a declaration that this behaviour contravened section 36 of the Commerce Act, a pecuniary penalty, an injunction restraining Telecom from engaging further in the conduct and costs. The likely hearing date is currently unknown.

In July 2000, the Commerce Commission issued proceedings against Telecom claiming that the introduction of 0867 constituted a use by Telecom of its dominant position for proscribed purposes. The Commission seeks a declaration that this contravened s36 of the Commerce Act, a pecuniary penalty and costs.

In March 2005, Asia Pacific Telecommunications Limited issued proceedings against Telecom alleging breaches of contract and duties owed by Telecom in respect of international switched transit services. The plaintiffs seek damages, interest and costs.

In disclosing aforementioned matters, the Directors of Telecom consider that the likelihood of a liability being incurred is remote.

The Commerce Commission issued proceedings against Telecom Mobile alleging that it had breached the Fair Trading Act and the Door to Door Sales Act 1967. The Commission alleged that in a marketing campaign in 2001 and early 2002 Telecom misled customers by not providing a right of cancellation. The Commission sought a declaration that 14,196 agreements were void and that customers may claim back any monies paid to Telecom under the agreements, and an order that would require Telecom to communicate this to affected customers, together with costs. The Commission failed to obtain summary judgment at the High Court but this was overturned by the Court of Appeal on 24 August 2005, with the Court granting the orders sought by the Commission. It is likely that Telecom will appeal to the Supreme Court. The Directors estimate that the amount that could be repaid in connection with this claim approximates $1 million to $15 million if the appeal to the Supreme Court is unsuccessful.

Various other minor lawsuits, claims and investigations have been brought or are pending against Telecom.

The Directors of Telecom cannot reasonably estimate the adverse effect (if any) on Telecom if any of the foregoing claims are ultimately resolved against Telecom’s interests and there can be no assurance that such litigation will not have a material adverse effect on Telecom’s business, financial condition or results of operations. All of the proceedings summarised above have been commenced in the High Court of New Zealand unless otherwise stated.

Land Claims

As previously stated in Note 12, interests in land included in property, plant and equipment purchased from the Government may be subject to claims to the Waitangi Tribunal or deemed to be waahi tapu and, in either case, may be resumed by the Government. Certain claims have been brought or are pending against the Government under the Treaty of Waitangi Act 1975. Some of these claims may affect land transferred to the Company by the Government and/or by the Company to its subsidiary companies. In the event that land is resumed by the Government, there is provision for compensation to Telecom.

Financial Instruments

There are contingent liabilities in respect of outstanding contracts for the sale and purchase of foreign currencies, cross currency interest rate swaps, interest rate swaps, interest rate options and foreign currency options. No significant losses are anticipated in respect of these matters.

AAPT had issued bank guarantees totalling A$5 million as at 30 June 2005 (30 June 2004: A$5 million).

Contingent Credit Support

Southern Cross restructured its senior debt facility on 30 April 2003 to better align debt repayments with anticipated future cash flows, extend maturity and provide additional financial flexibility. As part of this restructured facility Telecom is providing contingent credit support for up to US$33 million as at 30 June 2005 in favour of the senior bank syndicate. Southern Cross has recently been successful in securing significant additional sales, the receipts from which are expected to repay the debt against which Telecom has provided contingent support.

F - 32

NOTE 19 CONTINGENCIES (continued)

Cross Border Lease Guarantees

Telecom has entered into several cross border leases in respect of certain telecommunications assets. Telecom has given certain undertakings including letters of credit in accordance with limited guarantees entered into as part of the transactions. The likelihood of losses in respect of these matters is considered to be remote.

Parent Company

The Parent Company has guaranteed, along with guaranteeing subsidiary companies, indebtedness of TCNZ Finance Limited amounting to $3,510 million (30 June 2004: $3,631 million) under a guarantee dated 27 May 1997 and trust deeds dated 25 October 1988, 3 April 1992, 17 March 2000, 18 December 2000 and 11 May 2001, together with subsequent supplemental trust deeds and interest thereon. The Parent Company has issued further guarantees in relation to commercial paper and other treasury activities of TCNZ Finance Limited. The Parent Company has also provided intercompany guarantees to Telecom New Zealand Limited.

NOTE 20 RELATED PARTY TRANSACTIONS

Interest of Directors in Certain Transactions

Certain directors have relevant interests in a number of companies with which Telecom has transactions in the normal course of business. A number of Telecom’s directors are also non-executive directors of other companies. Any transactions undertaken with these entities have been entered into on an arms-length commercial basis.

Advances to Associate Companies

As at 30 June 2005 Telecom had made a long-term shareholders’ advance of US$67 million (NZ$95 million) to Southern Cross Cables Holdings Limited at an interest rate of Libor + 0.75% (30 June 2004: US$65 million, NZ$103 million).

AAPT made an interest-free advance of A$115 million to AOL|7 Pty Limited (“AOL|7”) (formerly AOL Australia Pty Limited). This amount was not expected to be recoverable and accordingly was written down to zero at 30 June 2002. In the period ended 31 March 2004, an agreement was reached with the other shareholders of AOL|7 to sell the AOL|7 business. Telecom received $12 million as its share of the proceeds from sale. This amount was credited to abnormal expenses as a partial recovery of the previous write-down.

Other Transactions with Associate Companies

The Group provides network operations and management services to Southern Cross in respect of its operations in New Zealand. The Group has also derived revenue from Southern Cross for the construction of network facilities in New Zealand. The Group makes operations and maintenance payments to Southern Cross in connection with capacity it has purchased on Southern Cross. The Group previously provided services to its then associate entity AOL|7 in 2004 and 2003. The group sold its shareholding in AOL|7 in 2004. Balances in respect of these transactions with associate companies are set out in the table below. The Group has also acquired capacity from Southern Cross under finance leases (see Note 12).

	Group
Year ended 30 June	2005 NZ$		2004 NZ$		2003 NZ$
(Dollars in millions)
Revenue from associates	60		20		31
Expenses to associates	(7	)	(15	)	(16	)
Receivables from associates	46		4		4
Payables to associates	—		—		(1	)

F - 33

NOTE 20 RELATED PARTY TRANSACTIONS (continued)

Parent Company

Amounts due from subsidiary companies are for no fixed term and are at an interest rate of 6.0%.

Amounts due to subsidiary companies are for no fixed term and are at a weighted average interest rate of 7.85% at 30 June 2005 (30 June 2004: 7.94%).

NOTE 21 SUBSIDIARY AND ASSOCIATE COMPANIES

At 30 June 2005, the significant companies of the Telecom Group and their activities were as follows:

	Country of incorporation	Interest held		Principal activity
Subsidiary Companies
Telecom New Zealand Limited	New Zealand	100	%	Provides local, national, international and value- added telephone and data services.
Telecom Mobile Limited	New Zealand	100	%	Provides mobile telecommunications services.
Telecom Directories Limited	New Zealand	100	%	Publishes telephone directories.
Xtra Limited	New Zealand	100	%	Internet service provider.
Gen-i Limited	New Zealand	100	%	Systems integrator
Ceritas New Zealand Limited	New Zealand	100	%	Technology solutions provider (trading as Computerland)
Telecom Retail Holdings Limited	New Zealand	100	%	Retailer of telecommunications products and services.
Telecom IP Limited	New Zealand	100	%	Owns group intellectual property.
Telecom Cook Islands Limited	Cook Islands	60	%	Provides telecommunications services in the Cook Islands.
Telecom Samoa Cellular Limited	Western Samoa	90	%	Provides mobile telecommunications services.
TCNZ Finance Limited	New Zealand	100	%	A group finance company.
Telecom New Zealand Finance Limited	New Zealand	100	%	A group finance company.
Telecom New Zealand Finance (No.2) Limited	Bermuda	100	%	A group finance company
TCNZ Australia Investments Pty Limited	Australia	100	%	A holding company.
Telecom Southern Cross Limited	New Zealand	100	%	A holding company.
TCNZ (Bermuda) Limited	Bermuda	100	%	A holding company.
Telecom Southern Cross Finance Limited	Bermuda	100	%	A group finance company.
Telecom New Zealand International Australia Pty Limited	Australia	100	%	Provides international wholesale telecommunications services.
TCNZ Australia Pty Limited	Australia	100	%	Provides outsourced telecommunications services.
Telecom New Zealand Japan Kabushiki Kaisha	Japan	100	%	Provides international wholesale telecommunications services.
Telecom New Zealand UK Limited	United Kingdom	100	%	Provides international wholesale telecommunications services.
Telecom New Zealand USA Limited	United States	100	%	Provides international wholesale telecommunications services.
AAPT Limited	Australia	100	%	Provides value added telecommunications services.
Commerce Solutions Limited	Australia	100	%	Provides e-commerce solutions.
Associate Companies
Pacific Carriage Holdings Limited	Bermuda	50	%	A holding company.
Southern Cross Cables Holdings Limited	Bermuda	50	%	A holding company.
Aurora Energy AAPT Pty Limited	Australia	33	%	Telecommunications services provider.

The financial year-end of all significant subsidiaries and associates is 30 June.

F - 34

NOTE 22 SEGMENTAL REPORTING

Industry segments

During 2004 and 2003, Telecom was organized and reported the results of its operations in five business segments: NZ Wired, NZ Wireless, International, Australia Consumer, and Australian Business. In 2005 Australian operations became increasingly integrated, delivering its telecommunications products and services to its consumer and business customer bases across common infrastructure with shared support functions. Beginning in 2005, Telecom changed its organization structure such that Australia operations are managed and reported as one segment: Australian Operations. Segment financial information has been restated for all periods in order to conform to the new structure.

Telecom management monitor business performance based on the following industry segments.

NZ Wired - which comprises Telecom’s fixed line and value added telephony services in New Zealand. Services include local, national, international and 0800 calling; data, broadband, internet and leased line services, a broad range of value added and intelligent network telephony services and the publishing of directories.

NZ Wireless - which is a provider of wireless voice and data services in New Zealand.

International - which reflects the operations of Telecom New Zealand International, a provider of international telecommunications including inwards and outwards calling in New Zealand and Australia and transit traffic between destinations world-wide.

Australian Operations - comprises a full range of fixed line and wireless products and services provided to residential, small business and corporate customers in Australia. Telecom previously had two reporting segments within Australian Operations, Australian Consumer and Australian Business.

The accounting policies of the segments are the same as those set out in Note 1. Inter-segment sales are priced on an arms length basis. Interest income and interest expense are not allocated to the segments, as these are managed by a central treasury function. Hence management have defined the segment result as earnings before interest and taxation.

F - 35

NOTE 22 SEGMENTAL REPORTING (continued)

As at and for the year ended 30 June 2005

	Telecom Group
	NZ Wired NZ$		NZ Wireless NZ$		Inter- national NZ$		Australian Operations NZ$		Total Operating Segments NZ$		Corporate and other NZ$		Elimin- ations NZ$		TOTAL NZ$
(Dollars in millions)
Operating revenue:
External customers	3,297		797		139		1,362		5,595		10		—		5,605
Internal customers	7		—		200		17		224		4		(228	)	—
Abnormal revenue*	—		10		—		—		10		144		—		154
Total revenue	3,304		807		339		1,379		5,829		158		(228	)	5,759
Depreciation & amortisation	(376	)	(94	)	(64	)	(160	)	(694	)	(74	)	—		(768	)
Abnormal expenses*	(4	)	(24	)	—		(31	)	(59	)	—		—		(59	)
Earnings before interest and tax	1,443		149		42		(30	)	1,604		(4	)	—		1,600
Add interest income															31
Less interest expense															(320	)
Earnings before income tax															1,311
Segment total assets	2,664		456		678		1,008		4,806		3,419		(804	)	7,421
Expenditure on long-lived assets	426		89		35		118		668		35		—		703
As at and for the year ended 30 June 2004
	Telecom Group
	NZ Wired NZ$		NZ Wireless NZ$		Inter- national NZ$		Australian Operations NZ$		Total Operating Segments NZ$		Corporate and other NZ$		Elimin- ations NZ$		TOTAL NZ$
(Dollars in millions)
Operating revenue
External customers	3,018		688		157		1,487		5,350		10		—		5,360
Internal customers	37		4		224		20		285		—		(285	)	—
Abnormal revenue*	—		—		—		—		—		28		—		28
Total revenue	3,055		692		381		1,507		5,635		38		(285	)	5,388
Depreciation & amortisation	(377	)	(141	)	(68	)	(170	)	(756	)	(67	)	—		(823	)
Abnormal expenses*	—		(110	)	—		(11	)	(121	)	—		—		(121	)
Earnings before interest and tax	1,478		19		46		10		1,553		(125	)	—		1,428
Add interest income															27
Less interest expense															(361	)
Earnings before income tax															1,094
Segment total assets	2,793		435		758		1,172		5,158		3,519		(1,177	)	7,500
Expenditure on long-lived assets	348		68		68		101		585		23		—		608

* Abnormal revenues and expenses are described in note 4 to these financial statements.

F - 36

NOTE 22 SEGMENTAL REPORTING (continued)

As at and for the year ended 30 June 2003

	Telecom Group
	NZ Wired NZ$		NZ Wireless NZ$		Inter- national NZ$		Australian Operations NZ$		Total Operating Segments NZ$		Corporate and other NZ$		Elimin- ations NZ$		TOTAL NZ$
(Dollars in millions)
Operating revenue
External customers	2,937		617		203		1,437		5,194		5		—		5,199
Internal customers	26		3		192		29		250		—		(250	)	—
Total revenue	2,963		620		395		1,466		5,444		5		(250	)	5,199
Depreciation & amortisation	(379	)	(171	)	(51	)	(159	)	(760	)	(60	)	—		(820	)
Earnings before interest and tax	1,453		116		46		17		1,632		(136	)	—		1,496
Add interest income															14
Less interest expense															(407	)
Earnings before income tax															1,103
Segment total assets	3,585		695		713		1,486		6,479		2,774		(1,498	)	7,755
Expenditure on long-lived assets	314		69		108		83		574		26		—		600

Geographic segments

Disclosure of revenues, earnings before interest and taxation (being the performance measure of segment result used by management), long-lived assets and total assets on a geographical basis is set out below. Inter-segment sales are priced on an arms length basis.

As at and for the year ended 30 June 2005

	Telecom Group
	New Zealand Operations NZ$	Australian Operations NZ$		Other Operations NZ$	Eliminations NZ$		Consolidated NZ$
(Dollars in millions)
Operating revenue*
External customers	4,303	1,358		98	—		5,759
Earnings before interest and taxation	1,624	(31	)	69	(62	)	1,600
Interest income							31
Interest expense							(320	)
Earnings before tax							1,311
Segment long-lived assets	3,586	643		54	—		4,283
Segment total assets	5,549	1,055		1,045	(228	)	7,421

F - 37

NOTE 22 SEGMENTAL REPORTING (continued)

As at and for the year ended 30 June 2004

	Telecom Group
	New Zealand Operations NZ$	Australian Operations NZ$	Other Operations NZ$	Eliminations NZ$		Consolidated NZ$
(Dollars in millions)
Operating revenue*
External customers	3,844	1,490	54	—		5,388
Earnings before interest and taxation	1,456	24	6	(58	)	1,428
Interest income						27
Interest expense						(361	)
Earnings before tax						1,094
Segment long-lived assets	3,484	768	60	—		4,312
Segment total assets	6,002	1,215	1,062	(779	)	7,500
As at and for the year ended 30 June 2003
	Telecom Group
(Dollars in millions)	New Zealand Operations NZ$	Australian Operations NZ$	Other Operations NZ$	Eliminations NZ$		Consolidated NZ$
Operating revenue*
External customers	3,660	1,466	73	—		5,199
Earnings before interest and taxation	1,499	24	24	(51	)	1,496
Interest income						14
Interest expense						(407	)
Earnings before tax						1,103
Segment long-lived assets	3,674	900	61	—		4,635
Segment total assets	6,363	1,377	868	(853	)	7,755

* Further details of operating revenue by product are provided in the table showing analysis of Group revenues on page 85 in Item 5 of the 20-F.

F - 38

NOTE 23 RECONCILIATION OF NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS TO NET CASH FLOWS FROM OPERATING ACTIVITIES

	Group						Parent
Year ended 30 June (Dollars in millions)	2005 NZ$		2004 NZ$		2003 NZ$		2005 NZ$		2004 NZ$
Net earnings attributable to shareholders	916		754		709		598		328
Adjustments to reconcile net earnings to net cash flows from operating activities
Depreciation and amortisation	768		823		820		—		—
Bad and doubtful accounts	41		36		56		—		—
Deferred income tax	16		(7	)	56		—		—
Minority interests in profits of subsidiary	3		3		3		—		—
Abnormal revenues and expenses	(95	)	105		—		(86	)	—
Other	(6	)	(6	)	—		—		—
Changes in assets and liabilities net of effects of non-cash and investing and financing activities
(Increase) / decrease in accounts receivable and related items	(40	)	(72	)	133		—		—
Increase in inventories	—		(8	)	(6	)	—		—
Increase / (decrease) in current taxation	80		(8	)	29		(26	)	(21	)
Decrease in provisions	—		—		(5	)	—		—
Increase / (decrease) in accounts payable and related items	20		61		(229	)	(1	)	(28	)
Net cash flows from operating activities	1,703		1,681		1,566		485		279

NOTE 24 IMPUTATION CREDIT ACCOUNT

Dividends paid by New Zealand resident companies may include imputation credits representing the taxation already paid by the Company on the profits distributed. New Zealand resident shareholders may claim a tax credit equal to the value of the imputation credit attached to dividends. Overseas shareholders in general are not entitled to claim the benefit of any imputation credit. Overseas shareholders may benefit from supplementary dividends.

The movements in the imputation credit accounts are detailed below:

	Group						Parent
Year ended 30 June (Dollars in millions)	2005 NZ$		2004 NZ$		2003 NZ$		2005 NZ$		2004 NZ$
Balance at the beginning of the year	(498	)	(308	)	(152	)	(11	)	(8	)
New Zealand income tax paid	(285	)	(345	)	(291	)	—		—
Imputation credits attached to dividends received	(3	)	(2	)	(2	)	—		(158	)
Imputation credits attached to dividends paid	268		157		137		—		155
Transfer to Telecom imputation group	—		—		—		11		—
Balance at the end of the year	(518	)	(498	)	(308	)	—		(11	)

In March 2005, the parent company became a member of the Telecom Imputation Group by election under Part F Subpart DB of the Income Tax Act 1994 with effect from 1 April 2004. As a result, the credit balance for the parent company reported in the 2004 annual report has been transferred to the Telecom Imputation Group imputation credit account. As at 30 June 2005, the Telecom Imputation Group imputation credit account had a closing credit balance of $518 million. These imputation credits are available to attach to dividends paid by the parent company

F - 39

NOTE 25 SIGNIFICANT EVENTS AFTER BALANCE DATE

Declaration of Dividends

On 4 August 2005, the Board of Directors approved the payment of a fourth quarter dividend of $196 million, representing 10.0 cents per share. In addition, a supplementary dividend totalling approximately $26 million will be payable to shareholders who are not resident in New Zealand. On 4 August 2005 the Board of Directors also approved the payment of a special dividend of $196 million, representing 10.0 cents per share. A supplementary dividend relating to this special dividend totalling approximately $26 million will be payable to shareholders who are not resident in New Zealand. In accordance with the Income Tax Act 1994, Telecom will receive a tax credit from the Inland Revenue Department equivalent to the amount of supplementary dividends paid.

NOTE 26 QUARTERLY FINANCIAL INFORMATION (UNAUDITED AND NOT REVIEWED)

(Dollars in millions, except per share amounts)	Operating revenues (including abnormal items) NZ$	Abnormal items NZ$		Net earnings attributable to shareholders NZ$	Net earnings per share NZ¢
Quarter ended
30 September 2004	1,391	10		193	10
31 December 2004	1,406	5		198	10
31 March 2005	1,463	22		259	13
30 June 2005	1,499	58		266	14
Year ended 30 June 2005	5,759	95		916	47
Quarter ended
30 September 2003	1,323	—		162	9
31 December 2003	1,354	28		203	11
31 March 2004	1,361	12		232	12
30 June 2004	1,350	(133	)	157	8
Year ended 30 June 2004	5,388	(93	)	754	39

Earnings per share is computed independently for each of the quarters presented. Consequently, the sum of the quarters does not necessarily equal total annual earnings per share for the year.

F - 40

NOTE 27 ACQUISITION OF SUBSIDIARIES

The following significant acquisitions impacted Telecom’s financial statements in the year ended 30 June 2005:

• On 1 July 2004 Telecom acquired 100% of systems integrator Gen-i Limited for $63 million. Gen-i’s results were consolidated effective from this date.

• On 1 September 2004 Telecom acquired 100% of technology solutions provider Ceritas New Zealand Limited (trading as Computerland) for $26 million. Computerland’s results were consolidated from this date.

These purchases were made to strengthen Telecom’s position in the IT services market and the acquisition prices were struck based on the relative position of each company in that market. The principle purpose of the acquisitions was to acquire the IT consultancy workforce that existed in these businesses. Under NZ GAAP this is included in goodwill, hence the premium above the fair value of the net assets acquired.

Goodwill arising on these acquisitions has been amortised since the date of acquisition.

The effect of these acquisitions on the Group’s assets and liabilities was:

	Total NZ$
(Dollars in millions)
ASSETS
Current assets:
Receivables and prepayments	41
Inventories	4
Total current assets	45
Property, plant and equipment	9
Total assets	54
LIABILITIES
Current liabilities:
Accounts payable and accruals	37
Total liabilities	37
Net assets acquired	17
Net consideration:
Net cash paid	(89	)
Goodwill arising on acquisition	72
	17

The goodwill is not deductible for tax purposes and is included within the NZ Wired and New Zealand operations segments.

The pro-forma results of the Group had these acquisitions been made at the start of the years ended 30 June 2005 or 30 June 2004 are:

	2005 NZ$		2004 NZ$
(Dollars in millions)
Revenue	5,783		5,642
Net income	916		756
Earnings per share	47	¢	39	¢

F - 41

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The consolidated financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) applicable in New Zealand (“NZ”) which differs in certain significant respects from that applicable in the United States (“US”). These differences and the effect of the adjustments necessary to present certain financial measures in accordance with US GAAP are detailed below. As described in note (v) below, certain US GAAP measures for 2004 and 2003 have been restated.

NZ GAAP requires parent company only financial statements to be included within the consolidated financial statements. Parent company only financial statements have not been included in this note as they are not permitted to be included as part of the primary financial statements under US GAAP. The reconciliations and other information presented in this note are solely in relation to the consolidated financial statements.

EFFECT ON NET EARNINGS OF DIFFERENCES BETWEEN NZ GAAP AND US GAAP

	Group
Year ended 30 June (Dollars in millions)	2005 NZ$		restated		restated
			2004 NZ$		2003 NZ$
Net earnings in accordance with NZ GAAP	916		754		709
US GAAP Adjustments
Derivative financial instruments (b)	38		(11	)	(51	)
Depreciation of interest costs capitalised in prior years (c)	(4	)	(5	)	(5	)
Amortisation of goodwill (d)	70		65		66
Capacity sales (e)	2		2		2
Stock based compensation (f)	1		2		—
Government grants (g)	(15	)	(11	)	—
Deferred revenue (h / v)	(3	)	—		—
Provisions (i / v)	6		—		—
Consolidation of Southern Cross (p)	(21	)	—		—
Tax effect of US GAAP adjustments	(10	)	10		37
Net earnings before change in accounting principle, in accordance with US GAAP	980		806		758
Cumulative effect of change in accounting principle, in accordance with US GAAP (net of tax) (p / v)	—		(511	)	—
Net earnings after change in accounting principle, in accordance with US GAAP (v)	980		295		758
Basic net earnings per share in accordance with US GAAP before change in accounting principle (q)	50	¢	42	¢	40	¢
Cumulative effect of change in accounting principle on basic net earnings per share (p / v)	—		(27	)¢	—
Basic net earnings per share in accordance with US GAAP after change in accounting principle (q / v)	50	¢	15	¢	40	¢
Diluted net earnings per share in accordance with US GAAP before change in accounting principle (q)	50	¢	42	¢	39	¢
Cumulative effect of change in accounting principle on diluted net earnings per share (p / v)	—		(27	)¢	—
Diluted earnings per share in accordance with US GAAP after change in accounting principle (q / v)	50	¢	15	¢	39	¢

F - 42

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

CUMULATIVE EFFECT ON SHAREHOLDERS’ FUNDS OF DIFFERENCES BETWEEN NZ GAAP AND US GAAP

	Group
			restated		restated
Year ended 30 June	2005 NZ$		2004 NZ$		2003 NZ$
(Dollars in millions)
Shareholders’ funds in accordance with NZ GAAP	2,427		2,205		1,765
US GAAP Adjustments
Investments – accumulated unrealised holding gain on available-for-sale securities (a)	—		21		13
Accounts payable and accruals – derivative financial instruments (b)	(61	)	(91	)	(67	)
Property, plant and equipment – capitalisation of interest costs, net of accumulated depreciation (c)	3		7		12
Intangibles – non-amortisation of goodwill (d)	197		131		66
Unearned revenue – capacity sales (e)	(21	)	(23	)	(25	)
Provisions – stock-based compensation (f)	3		2		—
Property, plant and equipment – government grants (g)	(26	)	(11	)	—
Accounts payable and accruals – deferred revenue (h / v)	(30	)	(27	)	(27	)
Accounts payable and accruals – provisions (i / v)	—		(6	)	(6	)
Minority interests (j / v)	—		(4	)	(4	)
Investments – share of losses of associate companies (k)	(45	)	(45	)	(45	)
Investments – dividends from associates (l) (102) )	(102	)	(102	)	(102	)
Investments – foreign currency movement on associate advance (a / v)	52		44		38
Consolidation of Southern Cross (p / v)	(517	)	(510	)	—
Deferred tax assets (v)	170		169		137
Deferred tax liabilities (v)	(126	)	(108	)	(90	)
Shareholders’ funds in accordance with US GAAP (v)	1,924		1,652		1,665

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ FUNDS IN ACCORDANCE WITH US GAAP

	Group
			restated		restated
Year ended 30 June	2005 NZ$		2004 NZ$		2003 NZ$
(Dollars in millions)
Shareholders’ funds at beginning of year in accordance with US GAAP (v)	1,652		1,665		1,037
Net earnings (v)	980		295		758
Other comprehensive (loss)/income (a / v)	(89	)	(39	)	99
Total comprehensive income (v)	891		256		857
Dividends	(833	)	(488	)	(428	)
Tax credit on supplementary dividends	95		55		52
Capital contributed	116		163		146
Movement in deferred compensation	3		1		1
Shareholders’ funds at end of year in accordance with US GAAP (v)	1,924		1,652		1,665
Represented by
Contributed capital	1,987		1,871		1,708
Retained earnings/(loss) (v)	238		(4	)	134
Accumulated other comprehensive loss (a / v)	(306	)	(217	)	(178	)
Deferred compensation	5		2		1
Shareholders’ funds at end of year in accordance with US GAAP (v)	1,924		1,652		1,665

F - 43

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

(a) Total Comprehensive Income

Total comprehensive income consists of net income and other gains and losses affecting shareholders’ funds that, under US GAAP, are excluded from net earnings.

Changes in the components of other comprehensive income/(loss) are as follows:

	Group
			restated		restated
Year ended 30 June	2005 NZ$		2004 NZ$		2003 NZ$
(Dollars in millions)
Net earnings in accordance with US GAAP (v)	980		295		758
Other comprehensive income/(loss):
Foreign currency translation adjustments (v)	(54	)	(11	)	(5	)
Derivative (losses)/gains on cash flow hedges (b)	—		(21	)	38
Derivative (gains)/losses transferred to earnings	(9	)	9		68
Unrealised holding gain on available-for-sale securities	65		36		22
Gain on available-for-sale securities transferred to earnings	(86	)	(28	)	—
Income tax expense related to:
Foreign currency translation adjustments	(8	)	(28	)	(17	)
Derivative (losses)/gains on cash flow hedges	3		4		(7	)
Other comprehensive income/(loss) (v)	(89	)	(39	)	99
Total comprehensive income (v)	891		256		857

Components of accumulated other comprehensive loss were:

	Group
			restated
30 June (Dollars in millions)	2005 NZ$		2004 NZ$
Foreign currency translation adjustments (v)	(306	)	(244	)
Unrealised holding gain on available-for-sale securities	—		21
Derivative gains on cash flow hedges (net of tax)	—		6
Accumulated other comprehensive loss (v)	(306	)	(217	)

US GAAP requires equity securities to be classified as either ‘trading securities’ or ‘available-for-sale securities’. Telecom’s investment in INL was not held for the purpose of short-term trading and therefore met the definition of an available-for-sale security. Available-for-sale securities are carried at fair value with unrealised gains and losses reported as a component of other comprehensive income/(loss). The investment in INL was sold during the year as discussed in Note 4 therefore the accumulated balance in other comprehensive income/(loss) was reclassified to earnings.

Telecom previously held an investment in Sky, which also met the definition of an available-for-sale security. The accumulated balance in other comprehensive income in respect of the investment in Sky was reclassified to earnings when the investment was sold in the prior year.

F - 44

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

(b) Accounting for Derivative Financial Instruments

Under NZ GAAP, derivative financial instruments held for purposes other than trading are accounted for in the same manner as the hedged item. US GAAP requires all derivatives to be recorded in the Statement of Financial Position at their fair value. Changes in the fair values of derivatives during the period are required to be included in the determination of net income unless the derivative qualifies as a hedge.

Forward exchange contracts used to hedge net investments in foreign operations qualify as hedges under US GAAP. Hedge effectiveness is measured on an after tax spot to spot basis with the effective portion of changes in the fair value recorded as a foreign currency translation adjustment. Changes in the fair value of the portion of a net investment hedging derivative excluded from the effectiveness assessment are recorded in interest expense.

Changes in the fair value of all other derivative financial instruments have been recorded directly in earnings for US GAAP purposes. As a consequence the amount expected to be reclassified form other comprehensive income to earnings in the next 12 months is nil. (30 June 2004: gain of $5 million).

(c) Capitalisation of Interest Costs Relating to the Construction of Property, Plant and Equipment

Prior to 1 April 1989, Telecom did not capitalise interest costs incurred in connection with the financing of expenditures for the construction of telecommunications equipment and other property, plant and equipment. In the year ended 31 March 1990, Telecom changed that policy such that, for each asset project having a cost in excess of $10 million and a construction period of not less than 12 months, interest costs incurred during the period that was required to complete and prepare the asset for its intended use were capitalised as part of the total cost. In the year ended 31 March 1996, Telecom changed that policy further such that, for each asset project having a cost in excess of $100,000 and a construction period of not less than three months, interest costs incurred during the period that was required to complete and prepare the item of property, plant and equipment for its intended use were capitalised as part of the total cost. The policy was changed again from 1 April 1999 such that interest costs are capitalised for all property, plant and equipment projects.

Under US GAAP interest costs incurred in connection with the financing of all expenditure for the construction of assets are required to be capitalised during the period required to prepare the asset for its intended use. For the purpose of compliance with US GAAP the estimated amount of interest that would have been capitalised on construction costs incurred on capital projects not already capitalised in accordance with Telecom’s accounting policy has been determined and depreciated over the lives of the related assets. As a result of the change in accounting policy during the year ended 31 March 1996, which brought NZ GAAP accounting treatment in respect of capitalised interest into alignment with US GAAP in all material respects, the ongoing reconciling difference within net earnings comprise the depreciation charge on interest not capitalised under NZ GAAP prior to 1 April 1995.

(d) Amortisation of Goodwill

NZ GAAP requires goodwill to be amortised over a period not exceeding 20 years.

US GAAP contains the concept of indefinite life intangible assets and requires goodwill to be carried at cost, eliminating amortisation and requiring annual impairment testing. Telecom ceased amortising goodwill for US GAAP purposes from 1 July 2002. The carrying value is tested for impairment at least annually, with the most recent assessment carried out as at 30 June 2005.

Goodwill is allocated between the reportable segments as summarised below:

	Group
	NZ Wired NZ$	NZ Wireless NZ$	Australian Operations NZ$		TOTAL NZ$
(Dollars in millions)
Goodwill as at 30 June 2004	—	39	967		1,006
Purchased goodwill	72	—	—		72
Foreign currency translation adjustment	—	—	(5	)	(5	)
Goodwill as at 30 June 2005	72	39	962		1,073

F - 45

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

(e) Capacity Sales

Under NZ GAAP, gains arising from the sale of network capacity were previously recognised in earnings in the period in which the sale was made. Under US GAAP, such transactions do not qualify for immediate profit recognition and the profit is spread over the life of the capacity agreement.

(f) Stock-Based Compensation

Prior to 2004, Telecom applied the intrinsic value method, prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock-Based Compensation”, and related interpretations to account for its stock-based compensation plans. Accordingly the company recorded compensation expense over the vesting period. For share options, compensation expense was recognised only where the market price on the date the options were granted is in excess of the exercise price. During the prior year, Telecom began expensing the options issued based on the fair value on a prospective basis only for NZ GAAP. Restricted shares and issues under the Telecom Share Rights Scheme (TSRS) continue to be accounted for at intrinsic value for NZ GAAP. Compensation expense for these instruments is recognised based on the market price of the shares at grant date. Telecom’s stock-based compensation plans are described in Note 16.

For US GAAP reporting purposes, effective 1 July 2003, Telecom has adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based compensation” using the prospective method (as permitted under SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”) to all new awards granted, modified or settled after 1 July 2003. Awards prior to 1 July 2003 continue to be expensed based on the intrinsic method. The effect on the Group from adopting SFAS 148 in 2004 was a charge to earnings of $2 million.

The following table illustrates the effect on reported net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in each period.

	Group
			restated		restated
Year ended 30 June	2005 NZ$		2004 NZ$		2003 NZ$
(Dollars in millions)
US GAAP
Net earnings, as reported (v)	980		295		758
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects	6		2		2
Less: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects	(8	)	(6	)	(8	)
Pro-forma net earnings (v)	978		291		752
Basic earnings per share (v)
As reported	50	¢	15	¢	40	¢
Pro-forma	50	¢	15	¢	40	¢
Diluted earnings per share (v)
As reported	50	¢	15	¢	39	¢
Pro-forma	49	¢	15	¢	39	¢

The fair value of stock option grants was estimated using the Black Scholes option pricing model. The model is based on the following weighted average assumptions:

	Group
Year ended 30 June	2005 NZ$		2004 NZ$		2003 NZ$
(Dollars in millions)
Risk-free interest rate	6.2	%	5.7	%	6.2	%
Expected dividend yield	6.8	%	5.8	%	4.0	%
Expected option life (in years)	4.3		5.2		5.9
Expected stock price volatility	26.3	%	27.0	%	27.0	%

Restricted shares are valued based on the market price at date of grant.

F - 46

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

(g) Government Grants

Under NZ GAAP, subsidised assets are required to be recorded at fair value, with the related subsidy recognised as revenue.

Under US GAAP, the subsidy is credited against the value of the assets acquired. The reconciling difference will reverse in future years as the subsidised assets depreciate.

(h) Deferred Revenue

Under NZ GAAP, certain minor revenue streams are recognised as billed. Under US GAAP such revenue must be deferred until the service is provided.

(i) Provisions

Under NZ GAAP, minor differences have been identified and corrected in the current period as part of the adjustment to intercarrier provisions. Under US GAAP $ 6 million of the total intercarrier provision adjustment was recorded as prior period adjustment to beginning of year retained earnings at 1 July 2002 (see note v).

(j) Minority Interests

Under NZ GAAP minority interest is reported on the balance sheet as a component of shareholder funds and under US GAAP minority interest is reported outside of the equity section on the balance sheet. During the year ended 30 June 2005, the Group purchased the negative minority interest. For US GAAP purposes, the Group wrote-off this negative minority interest as a prior period adjustment because the Group determined that it had previously incorrectly recognised this item on the balance sheet. For US GAAP purposes, retained earnings at 1 July 2002 were restated to reflect the $4 million write-off of this negative minority interest (seen Note v).

(k) Share of Losses of Associate Companies

Under NZ GAAP, where the carrying amount of an equity investment in an associate falls below zero, the equity method of accounting is suspended and the investment is recorded at zero. If this occurs, the equity method of accounting is not resumed until such time as the Group’s share of losses and reserve decrements not recognised during the financial years in which the equity method was suspended, are offset by the current share of profits and reserves.

Under US GAAP net losses continue to be accrued until both the equity investment and any advances provided to the associate are reduced to zero.

(l) Dividends from Associates

Under NZ GAAP, dividends received from Southern Cross were initially applied to the carrying value of the equity investment in Southern Cross. Once the carrying value of the equity investment had been reduced to zero by these dividends, the equity method of accounting was suspended and remaining dividends were included as income in the Statement of Financial Performance.

Under US GAAP, dividends in excess of the carrying value of the equity investment are applied to reduce the balance of advances to associates, until these too are reduced to zero.

(m) Connection Revenue

Under NZ GAAP, charges for connecting customers to the network and costs related to connecting the customer are recognised in revenue/expenses as received/incurred.

US GAAP requires connection revenues to be deferred and recognised over the life of the connection, with related costs also deferred to the extent that they do not exceed deferred revenues. Telecom’s costs of connection exceed the revenue it derives from connection and therefore an adjustment to comply with US GAAP would result in equal deferral of income and expenditure. This would have no impact on net earnings or shareholders funds calculated in accordance with US GAAP.

F - 47

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

(n) Research and Development Expenditure

Under NZ GAAP, research and development costs are charged to expenses as incurred except where, in the case of development costs, future benefits are expected beyond any reasonable doubt to exceed these costs. Where development costs are deferred, they are amortised over future periods on a basis related to future benefits.

For the purpose of compliance with US GAAP, all research and development costs must be expensed as incurred. As at 30 June 2005 and 30 June 2004 there were no significant amounts of deferred development costs.

(o) Asset Impairments

US GAAP requires disclosure of the reporting segment in which impaired assets are included. In the current year an impairment write-down was recognised in the TDMA network of $24 million (30 June 2004: $110 million), which is included in the NZ Wireless segment. In the prior year an impairment write-down was recognised on the LMDS network ($23 million) which is included in the Australian Operations segment. See Note 4 for further details of the impairment charges.

(p) Variable Interest Entities

SOUTHERN CROSS

Telecom does not control Southern Cross, therefore it is not consolidated under NZ GAAP but treated as an investment in associate.

Under US GAAP Southern Cross is considered to be a ‘variable interest entity’ with Telecom being the primary beneficiary. Telecom has provided greater than 50% of the contingent credit support (which is considered to be a variable interest) in addition to providing 50% of Southern Cross’ equity and subordinated debt, therefore Telecom is considered to hold variable interests that would absorb a majority of Southern Cross’ losses. As a result Telecom consolidates Southern Cross under US GAAP. The first date of consolidation was 30 June 2004.

Southern Cross is an independent bandwidth wholesaler established to finance, construct and maintain the cable network, and to market network capacity. Southern Cross creditors have no recourse to the general credit of Telecom except the contingent credit support provided in favour of Southern Cross’ senior bank syndicate (See Note 19).

The impact of consolidation on the Group’s net earnings before change in accounting principle under US GAAP is as follows:

	Group
30 June	2005 NZ$		2004 NZ$
(Dollars in millions)
Operating revenue	85		—
Cost of sales	(34	)	—
Other operating expenses	8		—
Depreciation	(59	)	—
Interest income	6		—
Interest expense	(26	)	—
Income tax expense	(1	)	—
Net loss attributable to shareholders	(21	)	—

F - 48

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

The impact of consolidation on the Group’s statement of shareholders funds under US GAAP is as follows:

	Group
			restated
30 June	2005 NZ$		2004 NZ$
(Dollars in millions)
Cash	3		2
Restricted cash	19		148
Receivables and prepayments	(42	)	21
Deferred tax assets	—		(10	)
Property, plant and equipment	1,052		1,301
Total assets	1,032		1,462
Accounts payable and accruals	1,395		1,580
Long-term debt	154		392
Total liabilities	1,549		1,972
Cumulative effect on shareholders funds	(517	)	(510	)

Cash

Use of $19 million of Southern Cross’ cash balance (30 June 2004: $148 million) is restricted to interest and principal payments on debt and certain capital expenditure pursuant to Southern Cross’ senior debt facilities.

Long term investments

As described in Notes 28 (k) and (l), Telecom’s long-term investment in Southern Cross was previously reduced to nil under US GAAP. Therefore, the consolidation of Southern Cross does not impact long-term investments under US GAAP.

Property, plant and equipment

Property, plant and equipment comprises cable network assets and landing stations, which are being depreciated over the 20 year economic life of the network. Included within landing stations are assets acquired under capital leases with a cost of $117 million (30 June 2004: $130 million) and accumulated depreciation of $26 million (30 June 2004: $23 million).

Southern Cross incurs asset retirement obligations on equipment built on its submarine optical fibre cable system. The fair value of these obligations is estimated to be $3 million (2004: $3 million) and a provision has been established with a corresponding asset included as part of telecommunication equipment and plant.

Accounts payable and accruals

Accounts payable and accruals principally represents revenue received in advance under capacity usage agreements. This revenue is being recognised progressively over the life of the agreements.

Long-term debt

Long-term debt comprises amounts due under Southern Cross’ senior debt facility of $60 million (30 June 2004: $290 million) and advances from non-Telecom shareholders of $94 million (30 June 2004: $102 million).

Senior debt is at floating rates of interest at Eurodollar base rates plus a margin of between 0.85% and 1.45%. Contingent credit support for $13 million of the debt (30 June 2004: $73 million) is provided by non-Telecom shareholders of Southern Cross. $44 million of the senior debt matures within the next year (30 June 2004: $98 million) with the remainder maturing in the year ending 30 June 2008.

The shareholder advance is at an interest rate of LIBOR plus 0.75%.

F - 49

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

Segment

The Southern Cross Group operates a submarine cable within the Pacific region and is based in Bermuda. Telecom views the Southern Cross Group as an operating segment as a result of its consolidation commencing 30 June 2004. Southern Cross prepares its results under US GAAP. There are no significant differences between Telecom’s NZ GAAP accounting policies and Southern Cross’ US GAAP accounting policies. Total assets were $1,847 million at 30 June 2004.

30 June 2005
(Dollars in millions)	NZ$
Revenue from sale of capacity – external customers	137
Revenue from sale of capacity – internal customers	22
Total revenue	159
Depreciation and amortisation	91
Earnings before interest and tax	17
Segment total assets	1,425
Expenditure on long-lived assets	7

OTHER VARIABLE INTEREST ENTITIES

Telecom has entered into several cross border leases in respect of certain telecommunications assets whereby Telecom is lessee of assets from an intermediary lessee who is in turn lessor of asset from investors. The following intermediary lessors are variable interest entities with which Telecom has involvement but is not the primary beneficiary:

Variable Interest Entity	Commencement date	Value of assets subject to lease (US$m)
Neax Leasing Limited	May 1999	146
Networks Leasing Limited	September 2000	108
LFC Leasing Limited	September 2001	189
MFC Leasing Limited	December 2001	103

Telecom’s variable interests arise by virtue of the fact that Telecom has provided guarantees of up to 40% of the intermediary lessor’s scheduled lease obligations. These obligations are backed by investments held with high credit quality financial institutions and Telecom considers the likelihood of loss under the guarantee to be remote.

F - 50

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

(q) Earnings Per Share

US GAAP requires companies to present basic earnings per share and diluted earnings per share. The numerators and the denominators used in the computation of basic and diluted earnings per share are reconciled below:

Year ended 30 June	Group
				restated			restated
(Dollars in millions, except per share amounts)	2005			2004			2003
Basic EPS Computation
Numerator – net earnings before cumulative effect of change in accounting principle	NZ$	980		NZ$	806		NZ$	758
Numerator – net earnings after cumulative effect of change in accounting principle (v)	NZ$	980		NZ$	295		NZ$	758
Denominator – ordinary shares (in millions)		1,946			1,922			1,887
Basic EPS before cumulative effect of change in accounting principle (in cents)		50	¢		42	¢		40	¢
Basic EPS after cumulative effect of change in accounting principle (in cents) (v)		50	¢		15	¢		40	¢
Diluted EPS Computation
Numerator – net earnings before cumulative effect of change in accounting principle	NZ$	980		NZ$	806		NZ$	758
Add – capital note interest after income tax	NZ$	19			—		NZ$	37
Add – convertible note interest after income tax	NZ$	5		NZ$	11		NZ$	11
	NZ$	1,004		NZ$	817		NZ$	806
Numerator: Net earnings after cumulative effect of change in accounting principle (v)	NZ$	1,004		NZ$	295		NZ$	806
Denominator (in millions)
Ordinary shares		1,946			1,922			1,887
Capital notes		57			—			149
Convertible notes		17			36			36
Contingent shares		2			—			—
Options		5			4			1
		2,027			1,962			2,073
Diluted EPS before cumulative effect of change in accounting principle (in cents)		50	¢		42	¢		39	¢
Diluted EPS after cumulative effect of change in accounting principle (in cents) (v)		50	¢		15	¢		39	¢
Anti-dilutive potential shares (in millions)
Capital notes		—			62			—

Anti-dilutive potential shares have been excluded from the calculation of diluted EPS, as shown above. Including the cumulative effect of the change in accounting principle results in the convertible notes becoming anti-dilutive, reducing the denominator for the diluted EPS calculation to 1,926 for the year ended 30 June 2004.

F - 51

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

(r) Statement of Cash Flows

Under both NZ GAAP and US GAAP, a Statement of Cash Flows, which discloses cash flows from operating, investing and financing activities, is required to be presented. In prior periods a reconciling difference arose as under US GAAP, short-term deposits with original maturities of three months or less would generally qualify as a component of cash position. In the current year there were no short-term deposits with original maturities of three months or less (30 June 2004: $94 million, 30 June 2003: $64 million).

	Group
30 June	2005 NZ$		restated 2004 NZ$		2003 NZ$
(Dollars in millions)
Net cash flows from
Operating activities	1,771		1,681		1,566
Investing activities	(660	)	(584	)	(702	)
Financing activities	(1,207	)	(946	)	(988	)
Net cash flow	(96	)	151		(124	)
Foreign exchange translation adjustment	—		(3	)	(4	)
Cash balance arising upon consolidation of Southern Cross	—		2		—
Opening cash position	334		184		312
Closing cash position	238		334		184

Cash flows for the year ended 30 June 2004 have been restated to exclude restricted cash held in Southern Cross as disclosed in Note 28 (p).

(s) Deferred Taxation

Under NZ GAAP, deferred tax assets are recognised only to the extent management consider the likelihood of realising the deferred tax asset is virtually certain. Under US GAAP, deferred tax assets are generally recognised for all deductible temporary differences and a valuation allowance is established when management consider the likelihood of not realising the deferred tax asset is more likely than not. The components of the US GAAP net deferred tax liability are:

Deferred tax asset/(liability) as at:	30 June
	2005 NZ$		2004 restated NZ$
(Dollars in millions)
Deferred tax assets
Provisions, accruals and other	66		77
Investments in associates	—		—
Advances to associates	—		—
	66		77
Less valuation allowance	—		—
Net deferred tax assets	66		77
Deferred tax liability
Property, plant and equipment	(158	)	(146	)
Net deferred tax liability (v)	(158	)	(146	)
Net current deferred tax asset	51		47
Net non-current deferred tax liability	(143	)	(116	)
Net deferred tax liability (v)	(92	)	(69	)

F - 52

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

(t) Presentation of Statement of Financial Performance

Certain items in the NZ GAAP Statement of Financial Performance would be presented differently under US GAAP. Specifically, dividends from associates, gains on the prepayment of finance lease obligations and certain other components of NZ GAAP other operating revenue would not be included within revenue for US GAAP. Additionally, under US GAAP selling general and administration expenses would be presented separately and a portion of the depreciation expense may be included within cost of sales. Further, amounts currently reported as abnormal revenues and expenses under NZ GAAP would not be labelled as abnormal and would simply be reported as part of operating revenues and expenses. These differences relate solely to classification within the Statement of Financial Performance and have no impact on net earnings or shareholders’ funds.

As disclosed in Note 2, international calling revenue includes ‘new age transit’ revenue, which is disclosed net in revenue in the NZ GAAP statement of financial performance. Under US GAAP revenue would include international payments whilst out-payments would be included in cost of sales.

(u) Property, Plant and Equipment

Under US GAAP the cost and accumulated depreciation of major fixed asset categories is different from NZ GAAP due to the capitalisation of interest, the capitalisation of government grants and the consolidation of Southern Cross. The major fixed asset categories under US GAAP as at 30 June 2005 and 30 June 2004 are outlined in the table below:

	Telecom Group
	Tele- communications equipment and plant		Freehold land NZ$	Buildings NZ$		Other fixed assets NZ$		Construction in progress NZ$	TOTAL NZ$
(Dollars in millions)
Cost	11,278		100	623		1,482		222	13,705
Less accumulated depreciation	(6,978	)	—	(332	)	(1,083	)	—	(8,393	)
Net book value at 30 June 2005	4,300		100	291		399		222	5,312
Cost	11,181		106	599		1,279		189	13,354
Less accumulated depreciation	(6,443	)	—	(305	)	(997	)	—	(7,745	)
Net book value at 30 June 2004	4,738		106	294		282		189	5,609

F - 53

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

(v) Restatement of Certain Financial Measures as Reported Under US GAAP

Certain financial measures determined under US GAAP have been restated for the years ending 30 June 2003 and 2004 due to correction of errors. In 2001, under US GAAP, Telecom had written down the value of an advance to Southern Cross of $147 million. The advance was held in US dollars. The effect of movements in foreign exchange rates on the advance for NZ GAAP purposes was not correctly accounted for under US GAAP. Upon application of FIN 46R the elimination of the advance was not accounted for correctly, resulting in the understatement of US GAAP net earnings and shareholders’ funds. In addition, other minor errors were corrected, principally as a result of identifying and determining certain adjustments for the transition to NZ IFRS where certain differences between NZ GAAP and US GAAP were identified that had not previously been considered. These relate to revenue recognition, intercarrier provisions and minority interests. The impact of the correction of these errors on the applicable financial measures determined under US GAAP is as follows:

	2004						2003
(Dollars in millions)	As previously reported NZ$		Adjust- ments NZ$		As restated NZ$		As previously reported NZ$		Adjust- ments NZ$		As restated NZ$
Effect on net earnings under US GAAP
Cumulative effect of change in accounting principle	(604	)	93		(511	)	—		—		—
Net earnings after change in accounting principle	202		93		295		758		—		758
Cumulative effect of change in accounting principle on basic and diluted net earnings per share	(31	)¢	4	¢	(27	)¢	—		—		—
Basic net earnings per share after change in accounting principle	11	¢	4	¢	15	¢	40	¢	—		40	¢
Diluted net earnings per share after change in accounting principle	11	¢	4	¢	15	¢	39	¢	—		39	¢
Effect on reconciliation of shareholders’ funds between NZ GAAP and US GAAP
Accounts payable and accruals – deferred revenue	—		(27	)	(27	)	—		(27	)	(27	)
Accounts payable and accruals – provisions	—		(6	)	(6	)	—		(6	)	(6	)
Minority interests	—		(4	)	(4	)	—		(4	)	(4	)
Investments – foreign currency movement on associate advance	—		44		44		—		38		38
Consolidation of Southern Cross	(603	)	93		(510	)	—		—		—
Deferred tax assets	—		169		169		—		137		137
Deferred tax liabilities	50		(158	)	(108	)	36		(126	)	(90	)
Shareholders’ funds at end of year in accordance with US GAAP	1,541		111		1,652		1,653		12		1,665
Effect on consolidated statement of shareholders’ fund in accordance with US GAAP
Shareholders’ funds at beginning of year in accordance with US GAAP	1,653		12		1,665		1,043		(6	)	1,037
Net earnings	202		93		295		758		—		758
Other comprehensive income/(loss):
Foreign currency translation adjustments	(17	)	6		(11	)	(23	)	18		(5	)
Total other comprehensive income/(loss)	(45	)	6		(39	)	81		18		99
Total comprehensive income	157		99		256		839		18		857
Shareholders’ funds at end of year in accordance with US GAAP	1,541		111		1,652		1,653		12		1,665
Represented by:
Retained earnings/(loss)	(71	)	67		(4	)	160		(26	)	134
Accumulated other comprehensive loss:
Foreign currency translation adjustments	(288	)	44		(244	)	(243	)	38		(205	)
Accumulated other comprehensive loss	(261	)	44		(217	)	(216	)	38		(178	)
Shareholders’ funds at end of year in accordance with US GAAP	1,541		111		1,652		1,653		12		1,665

In addition to the above and as disclosed in note 28 (r), the company has restated cash and cash equivalents for the year ended 30 June 2004 to exclude Southern Cross’ restricted cash balances, which were incorrectly included within cash and cash equivalents.

F - 54

NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

(w) Impact of Recently Issued Accounting Standards

In December 2004 the US Financial Accounting Standards Board issued Statement of Financial Accounting Standards 123R (SFAS 123R) “Share Based Payment”, which revises SFAS 123 and supersedes Accounting Principles Board opinion 25. SFAS 123R requires the cost of all share-based payment transactions be recognised in the financial statements. SFAS 123R also establishes fair value as the measurement method in accounting for share-based payments to employees. SFAS 123R will be effective for Telecom for the year ending 30 June 2006. Management is currently evaluating the impact SFAS 123R will have on Telecom. However, the proforma results disclosed in Note 28 (f) are not necessarily indicative of what the impact of SFAS 123R will be upon adoption.

F - 55

NOTE 29 NEW ZEALAND EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

The IFRS project

In December 2002 the New Zealand Accounting Standards Review Board announced that International Financial Reporting Standards (“IFRS”) will apply to all New Zealand entities from 1 January 2007. In adopting IFRS for issue as NZ IFRS certain adaptations of IFRS have been made to reflect New Zealand circumstances. In complying with NZ IFRS Telecom will also be in compliance with IFRS. Early adoption of NZ IFRS from 1 January 2005 was allowed as Australian entities and the European Union adopted IFRS from that date.

Telecom has elected to apply NZ IFRS for the year ending 30 June 2006. The first financial results announcement prepared in accordance with NZ IFRS will be that for the quarter ending 30 September 2005. Telecom’s project to convert its financial reporting from NZ GAAP to NZ IFRS has now been completed, subject to any changes in standards and pronouncements. This has resulted in changes in presentation, classification and measurement of certain balances. This restated information is presented below for information purposes.

Impact of Transition to NZ IFRS

The impacts of Transition to NZ IFRS presented in this note are based on NZ IFRS standards that management expect to be in place when preparing the first complete NZ IFRS financial report (being for the quarter ending 30 September 2005). Only a complete set of financial statements and notes together with comparative balances can provide a true and fair presentation of Telecom’s financial position, results and cash flows in accordance with NZ IFRS. This note provides only a summary and further disclosures will be required in the first NZ IFRS financial report.

There is a significant amount of judgment involved in the preparation of the reconciliations from NZ GAAP to NZ IFRS. Consequently, the final reconciliations presented in the first financial report prepared in accordance with NZ IFRS may vary from the reconciliations provided in this note due to changes in financial reporting requirements or interpretations, additional guidance on the application of NZ IFRS or changes in Telecom’s operations.

Basis of preparation of data

The restated financial information has been prepared on the basis of all NZ IFRS and New Zealand Equivalents to Standing Interpretations Committee (“NZ SIC”) and New Zealand Equivalents to International Financial Reporting Interpretations Committee (“NZ IFRIC”).

In accordance with NZ IFRS 1, First Time Adoption of New Zealand equivalents to International Financial Reporting Standards, the transition date to NZ IFRS was 1 July 2004, the start of the comparative period for the year ending 30 June 2006. Normally accounting changes of this nature would require full retrospective application, but NZ IFRS 1 presents optional and mandatory exemptions to full retrospective application.

NZ IFRS 1 exemptions

NZ IFRS 1 permits those companies adopting NZ IFRS for the first time to take some exemptions from the full requirements of NZ IFRS when applying those standards to the comparative period. Telecom has applied the following key exemptions:

Business combinations

Business combinations prior to the transition date (1 July 2004) have not been restated on an NZ IFRS basis.

Share-based payments

Restricted shares and share options that had vested by 1 July 2004 have not been expensed. All restricted shares and share options that had been granted prior to 1 July 2004 but had not vested at that date will be expensed over their remaining vesting period.

Financial instruments

Accounting for financial instruments in the comparative period will continue under NZ GAAP. The date of transition to accounting for financial instruments under NZ IFRS was 1 July 2005. On this date Telecom adopted NZ IAS 32 and NZ IAS 39. The effect of this is disclosed below.

Translation differences

The balance of the foreign currency translation reserve, representing all cumulative translation differences that have arisen on the retranslation of overseas entities was set to zero at 1 July 2004.

F - 56

NOTE 29 NEW ZEALAND EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Compound financial instruments

In conjunction with the exemption of applying financial instrument accounting, the equity and liability element of compound financial instruments has not been restated where the liability element was extinguished prior to 1 July 2005.

Restated Financial Information under NZ IFRS

Statement of Financial Position (Balance Sheet) as at 1 July 2004 and 30 June 2005

		Group 1 July 2004				Group 30 June 2005
(Dollars in millions)	notes	NZ$	NZ$		NZ$	NZ$	NZ$		NZ$
		NZ GAAP	Adj’s		NZ IFRS	NZ GAAP	Adj’s		NZ IFRS
ASSETS
Current assets:
Cash and cash equivalents		238	94		332	235	—		235
Short-term investments	a	247	(94	)	153	81	—		81
Receivables and prepayments	a	971	(34	)	937	1,311	(45	)	1,266
Taxation recoverable	a	—	35		35	—	45		45
Inventories		50	—		50	56	—		56
Total current assets		1,506	1		1,507	1,683	—		1,683
Non-current assets:
Long-term investments		767	(103	)	664	544	(95	)	449
Receivables due after one year	a	—	103		103	—	95		95
Deferred tax assets	d	—	116		116	—	140		140
Intangible assets	a , b	915	600		1,515	911	732		1,643
Property, plant and equipment	a	4,312	(600	)	3,712	4,283	(681	)	3,602
Total non-current assets		5,994	116		6,110	5,738	191		5,929
Total assets		7,500	117		7,617	7,421	191		7,612
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accruals	c	931	27		958	1,014	30		1,044
Debt due within one year		803	—		803	863	—		863
Total current liabilities		1,734	27		1,761	1,877	30		1,907
Non-current liabilities:
Deferred taxation	d	120	107		227	136	125		261
Long-term debt		3,438	—		3,438	2,973	—		2,973
Total non-current liabilities		3,558	107		3,665	3,109	125		3,234
Total liabilities		5,292	134		5,426	4,986	155		5,141
Equity:
Shareholders’ funds		2,205	(21	)	2,184	2,427	36		2,463
Minority interests	e	3	4		7	8	—		8
Total equity		2,208	(17	)	2,191	2,435	36		2,471
Total liabilities and equity		7,500	117		7,617	7,421	191		7,612

F - 57

NOTE 29 NEW ZEALAND EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Restated Financial Information under NZ IFRS

Statement of Financial Performance (Income Statement) for the year ended 30 June 2005

(Dollars in millions, except per share amounts)	notes	NZ GAAP NZ$		Group adj’s NZ$		NZ IFRS NZ$
Operating revenues and other income
Local service		1,101		—		1,101
Calling	f	1,348		143		1,491
Interconnection		207		—		207
Mobile	f	841		(3	)	838
Data	f	777		(21	)	756
Internet		223		—		223
Solutions		321		—		321
Other operating revenues	g	787		(16	)	771
Abnormal revenues	h	154		—		154
Total operating revenues and other income		5,759		103		5,862
Operating expenses
Labour	h	(735	)	(3	)	(738	)
Cost of sales	i	(1,664	)	1,664		—
Intercarrier costs		—		(1,060	)	(1,060	)
Other operating expenses		(933	)	(726	)	(1,659	)
Abnormal expenses		(59	)	—		(59	)
Total operating expenses		(3,391	)	(125	)	(3,516	)
Earnings before interest, taxation, depreciation and amortisation		2,368		(22	)	2,346
Depreciation	a, b	(694	)	147		(547	)
Amortisation	a, b	(74	)	(76	)	(150	)
Earnings before interest and taxation		1,600		49		1,649
Net interest and other finance costs		(289	)	—		(289	)
Earnings before taxation		1,311		49		1,360
Income tax expense	d	(392	)	6		(386	)
Earnings from ordinary activities after taxation and before minority interests		919		55		974
Minority interests		(3	)	—		(3	)
Earnings attributable to shareholders		916		55		971
Earnings per share		47	¢	3	¢	50	¢

Reconciliation of Net Earnings for the Year Ended 30 June 2005 under NZ IFRS

(Dollars in millions)	notes	Group NZ$
Net Earnings under NZ GAAP for the year ended 30 June 2005		916
Goodwill amortisation	b	70
Changes in revenue recognition	f	(3	)
Government grants	g	(15	)
Share-based payments	h	(3	)
Deferred tax on adjustments		6
Net Earnings under NZ IFRS for the year ended 30 June 2005		971

F - 58

NOTE 29 NEW ZEALAND EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Restated Financial Information under NZ IFRS

Reconciliation of Equity under NZ IFRS

A reconciliation of equity under previous NZ GAAP to equity under NZIFRS at the date of transition to NZIFRS (1 July 2004) and at the end of the latest period presented in the previous financial statements (30 June 2005) is as follows:

(Dollars in millions)	notes	Group NZ$
Equity under NZ GAAP at 1 July 2004		2,208
Changes in revenue recognition	f	(27	)
Share based payments	h	1
Deferred tax on adjustments		9
Equity under NZ IFRS at 1 July 2004		2,191

(Dollars in millions)	notes	Group NZ$
Equity under NZ GAAP at 30 June 2005		2,435
Goodwill amortisation	b	70
Elimination of minority interest	e	(4	)
Changes in revenue recognition	f	(30	)
Government grants	g	(15	)
Deferred tax on adjustments		15
Equity under NZ IFRS at 30 June 2005		2,471

Notes to restated financial information

(a) Presentational differences

NZ IAS 1 specifies how financial information should be presented under NZ IFRS. The statement of financial performance is referred to as the income statement and the statement of financial position is referred to as the balance sheet.

Other presentation differences include:

• Software will now be classified as an intangible asset rather than as an item of property, plant and equipment where that software is not integral to a piece of equipment (reclassification of $296 million as at 30 June 2005; $209 million as at 30 June 2004)

• International telecommunications capacity acquired pursuant to capacity usage agreements will also now be classified as an intangible asset rather than as an item of property, plant and equipment (reclassification of $381 million at 30 June 2005; $378 million at 30 June 2004)

• Short-term investments are considered to be cash or cash equivalents where they are a highly liquid resource (reclassification of nil as at 30 June 2005; $94 million at 30 June 2004)

• Taxation recoverable must be presented separately on the face of the balance sheet (reclassification of $45 million as at 30 June 2005; $35 million at 30 June 2004)

• Advances made to Southern Cross that are not due within 12 months are now classified as receivables due in more than one year (reclassification of $95 million as at 30 June 2005; $103 million at 30 June 2004)

• Certain revenue streams where Telecom has determined it is acting as agent or is exchanging goods and services will be reported as the net margin, and certain other revenue streams where Telecom has determined it is acting as the principal in a transaction will be reported gross. The effect on the net profit is nil. Revenue increases by $122 million and cost of sales increases by the same amount due to these reclassifications on the year ended 30 June 2005.

(b) Goodwill

Goodwill will not be amortised. The periodic impairment reviews will be used to assess whether it has become impaired during the year. Where impairment is identified the write down will be taken to the income statement. This has reduced the amortisation charge for the year ended 30 June 2005 by $69 million, increasing earnings by that amount.

F - 59

NOTE 29 NEW ZEALAND EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

(c) Accounts payable and accruals

In accordance with the deferral of certain revenue streams a deferred revenue liability has been created. Total deferred revenue was $27 million at 1 July 2004 and $30 million at 30 June 2005.

(d) Deferred taxation

Deferred taxation is provided in full on temporary differences arising between the accounting and tax base of assets and liabilities. Deferred tax assets are only recognised to the extent that there will future taxable profits or deferred tax liabilities to offset those assets. Deferred tax assets are shown separately from deferred tax liabilities on the face of the balance sheet. This resulted in a reclassification of $125 million from non-current liabilities to non-current assets as at 30 June 2005 ($106 million as at 30 June 2004).

(e) Minority interests

A negative minority interest was reclassified to retained earnings at 30 June 2004 (reclassification of $4 million). This minority interest was bought out during the year ended 30 June 2005.

(f) Revenue recognition

Revenues received in advance for certain miscellaneous services will be deferred until the expiry of the obligation upon Telecom to provide the service. This has lead to the deferral of $30 million of revenue as at 30 June 2005. This will have a minor impact on ongoing earnings.

(g) Government grants

Government grants that are granted for the specific purpose of purchasing assets will be netted off against the cost of those assets if and when the conditions attached to that grant is met. This has reversed $16 million of revenue recognised during the year in accordance with NZ GAAP that will be netted off against the plant and equipment it was used to purchase in accordance with NZ IFRS and reduced depreciation expense by $1 million.

(h) Share based payments

Restricted shares and share options are valued using a binomial-lattice model. All shares issued since September 2001 have been valued and expensed over their vesting period.

(i) Cost of sales

NZ IAS 1 permits expenses to be presented by function or by nature. Cost of sales is a functional presentation, while other items in Telecom’s statement of financial performance are classified by nature, so it has been reclassified into intercarrier costs and other operating expenses, in order to achieve a consistent presentation of expenses by nature.

(j) Financial instruments

Telecom has applied the exemption that defers the date of transition for accounting for financial instruments under NZ IFRS. On 1 July 2005 Telecom applied these accounting policies and a number of adjustments were made to the opening balance sheet for the year ending 30 June 2006. The principal adjustments were to recognise all derivative financial instruments at fair value. This created a net liability of $64 million. This liability should principally unwind though equity to the extent that Telecom’s derivatives can be deemed effective hedges under NZ IFRS.

(k) Cash flow

There will be no significant adjustments to the reported cash flows of Telecom under NZ IFRS other than the change in definition of cash to include short-term investments, as detailed in note (a) above.

F - 60