The Telkom Group believes that normalised earnings more accurately reflect the group's operational performance. The statement of comprehensive income is adjusted to exclude the effects of the sale and unbundling of our 50% share in Vodacom, the profit on sale of Telkom Media, the impairment of the goodwill and assets of Multi-Links, and the impact of the FIFA contract entered into with the Department of Communications. Unless otherwise indicated, the discussion below is based on normalised results, excluding the items below, and is based on continuing operations.

The statement of comprehensive income for the year ended 31 March 2009 has been adjusted to remove the effects of elimination of our 50% share in Vodacom, the Vodacom transaction expense, impairments and the gain on the revaluation of the Multi-Links put option to enable year on year comparison.

The impact of the items discussed above on group earnings as reported is as follows:

View Year on year reconciliation of normalised group statement of comprehensive income

Group Operating Revenue

Group operating revenue increased by 0.7% to R37,029 million (2009: R36,784 million) in the year ended 31 March 2010. The increase is mainly due to the inclusion of eleven months' revenue of our newly acquired MWEB Africa subsidiary and higher revenue from our Trudon subsidiary.

The relative strength of our reporting currency against the Nigerian Naira has adversely affected the Rand revenue growth of the Nigerian operations at a Telkom group level.

Telkom South Africa operating revenue

Operating revenue from the Telkom South Africa segment decreased by 0.1% to R33,487 million (2009: R33,523 million) primarily due to lower traffic revenue as a result of lower volumes, partially offset by growth in data revenues, higher interconnection revenue and increased revenue from subscriptions and connections and subscription based calling plans.

Subscription and connections revenue grew by 3.0% to R6,814 million (2009: R6,614 million) largely as a result of higher equipment sales and rental and increased line rental tariffs on postpaid lines.

Traffic revenue decreased by 9.3% as a result of lower fixed-to-mobile volumes due to the increasing substitution of calls placed using mobile services rather than fixed-line services, and lower local and long distance volumes. This was partially offset by an increase in revenue from subscription based calling plans by 14.2% to R1,484 million primarily due to increased volumes as a result of a 21.1% increase in the number of subscribers to 715,221 (2009: 590,590).

Interconnection revenue increased by 25.1% to R2,608 million (2009: R2,084 million) largely as a result of an increase of 26.5% in international interconnection revenue, a 13.9% increase in mobile interconnection revenue and a significant increase in domestic fixed-line interconnection revenue. The increased interconnection revenue from international operators is mainly a result of higher volumes on switched hubbing due to increased volumes as a result of an agreement signed with an operator in the United States to transit traffic mostly to African destinations. The increase in mobile interconnection revenue was driven by price and volume increases on international traffic. Fixed interconnection revenue increased mainly due to increased volumes by VANS.

Data revenue increased by 7.1% to R9,969 million (2009: R9,310 million) mainly due to an increase in internet access and related services, higher revenue from mobile leased lines and a growing demand for data services, including ADSL and growth in managed data network services.

Multi-Links operating revenue

Multi-Links Operating Revenue increased by 35.1% to 36,547 million Naira from March 2009. Traffic revenue decreased 6.2% mainly due to a decrease in traffic volumes during the year.

Subscriptions and connections revenue decreased 35.0% due to a decrease in customer premises equipment sales revenue as a result of the introduction of calling plans which did not include access fees and the downward pressures on the selling price of customer premises equipment in the market.

Interconnection revenue increased significantly due to a new line of business, namely International Carrier Services, which introduced traffic hubbing and card sales during the year. This new business contributed 10,548 million Naira to the increase.

Multi-Links' increased focus on data services resulted in a significant increase in data revenue mainly due to an increase in equivalent 2 megabit circuits services and the expansion of mobile broadband (EVDO) services.

Group Other Income

Other income includes profit on the disposal of investments, property, plant and equipment and intangible assets as well as interest received on loans to subsidiaries.

Group Operating Expenses

Group operating expenses increased by 8.4% to R32,746 million (2009: R30,220 million) in the year ended 31 March 2010, primarily due to an increase in employee expenses, selling, general and administrative expenses, and depreciation. The increase in employee expenses is due to the increase in salaries and wages in Telkom South Africa. Higher selling, general and administrative expenses are mainly attributable to Telkom South Africa and Multi-Links. Operating leases increased mainly as a result of Multi-Links's increased utilisation of leased cell sites. Depreciation increased as a result of higher investment in telecommunications network and data processing equipment in Telkom South Africa in recent years.

Operating expenditure contribution per segment

The increase in group operating expenses was driven by an increase in the operating expenses of Telkom South Africa and Multi-Links as well as the inclusion of eleven months' operating expenses of our newly acquired MWEB Africa subsidiary.

Telkom South Africa operating expenses

Telkom South Africa's operating expenses increased by 6.7% in the year ended 31 March 2010, to R26,077 million (2009: R24,434 million), primarily due to increased employee expenses, selling, general and administrative expenses and higher depreciation, amortisation, impairment and write-offs.

Employee expenses increased by 13.0% in the year ended 31 March 2010, primarily due to higher salaries and wages as a result of average annual salary increases of 7.5% as agreed with the unions as well as the one time adjustment to accelerate the elimination of disparities translating to an 11.2% average increase for the bargaining unit. During the 2010 financial year medical aid contributions were reclassified from benefits to salaries and wages.

Payments to other network operators decreased by 1.2% as a result of lower payments to mobile operators, partially offset by increased payments to international and fixed-line operators. Payments to mobile operators decreased by 10.8%, largely due to an 11.4% decrease in fixed-to-mobile traffic volumes and a 28.8% reduction in mobile termination rates with effect from 1 March 2010. Interconnection revenue decreased approximately R71 million for the month of March 2010 and payments to mobile operators decreased approximately R64 million for the month. Payments to international operators increased by 25.4% primarily due to higher volumes on switched hubbing.

Selling, general and administrative expenses increased by 10.3% primarily as a result of higher maintenance cost on new technologies, higher maintenance material cost, as well as write downs and increased provisions of technologically obsolete inventory and items classified as slow moving inventory as a result of the economic slowdown and higher bad debts. From 1 April 2009, ICASA changed the base of calculation of license fees from 0.1% of revenue from PSTS and VANS to 1.5% of gross profit, which resulted in a R62 million increase in the provision for the year.

Service fees increased marginally due to higher property management fees as a result of electricity increases and increased maintenance of sites in preparation of the Soccer World Cup, partially offset by lower insurance cost as a result of a reduction in the number of incidents.

The 13.1% increase in the depreciation, amortisation, impairment and write-offs to R4,404 million (2009: R3,894 million) was mainly as a result of higher depreciation due to the higher levels of investment in telecommunications network equipment and data processing equipment in recent years.

Multi-Links Operating Expenses (Excluding impairment)

Employee expenses increased by 21.7% in the year ended 31 March 2010, primarily due to the recruitment of new staff to fill strategic positions in the period under review and the realignment and restructuring of salaries, partially offset by a lower number of employees. Multi-Links undertook a headcount rationalisation including outsourcing of non-core activities. This has seen the headcount being reduced from 1,124 to 767 at 31 March 2010, a 31.8% reduction. Additional rationalisation activities are still in progress.

Payments to other operators increased 73.3% mainly due to the introduction of International Carrier Services business which introduced traffic hubbing and card sales during the year. This contributed 10,363 million Naira to the increase.

Selling, general and administrative expenses increased 66.1% as a result of increased inventory write-offs and provisions, higher maintenance costs, marketing and expatriate fees. Handset subsidies totalled 4,378 million Naira. Service fees decreased 20.9% mainly due to lower insurance cost and audit fees.

Operating leases increased significantly as a result of the increased utilisation of leased infrastructure as opposed to owned infrastructure, as well as increased maintenance costs as equipment comes out of warranty, specifically relating to cell sites.

Depreciation, amortisation, impairments and write-offs increased significantly in line with the expansion programme and network roll out.

EBITDA Per Segment

Investment Income

Investment income consists of interest received on short-term investments and bank accounts. Investment income increased by 177.6% to R508 million (2009: R183 million), largely as a result of higher interest income on short term deposits.

Finance charges and fair value movements

Finance charges include interest paid on local and foreign borrowings, amortised discounts on bonds and commercial paper bills, fair value gains and losses on financial instruments and foreign exchange gains and losses on foreign currency denominated transactions and balances. Finance charges and fair value movements decreased by 44.3% to R1,355 million (2009: R2,434 million) in the year ended 31 March 2010, primarily due to a 24.2% decrease in interest expense to R1,313 million (2009: R1,732 million) mainly as a result of the 69.5% decrease in the Group's net debt to R4,723 million (2009: R15,497 million) and lower interest rates. Net fair value and foreign exchange rate movements resulted in a loss of R42 million for the year ended 31 March 2010 (2009: R702 million). The decrease was mainly attributable to the recognition of exchange rate differences on the loan from Telkom to Multi-Links in other comprehensive income in the 2010 financial year, and the fair value gain on the mark to market valuation of investments held by our cell captive.

The balance sheet of Multi-Links was such that it was over-geared and unable to raise debt and creditor financing. Accordingly Multi-Links issued preference shares which were fully subscribed by Telkom. The proceeds on issue were used to repay part of the loans owing to Telkom to enable the company to negotiate third party financing.

From a Group perspective, Telkom's loans to Multi-Links are accounted for as part of the Group's net investment in a foreign operation. Exchange rate differences are therefore recognised in other comprehensive income and reclassified from equity to profit and loss in the event of a disposal of the net investment.

Taxation

Consolidated tax expense from continuing operations decreased by 29.4% to R1,566 million (2009: R2,219 million) mainly due to lower profitability. The consolidated effective tax rate for the year ended 31 March 2010 was 40.0% (2009: 49.0%). The lower consolidated tax rate is mainly due to lower secondary tax on companies paid in the 2010 financial year on a lower ordinary dividend (R1.15 declared in June 2009 vs R6.60 declared in June 2008).

Profit from discontinued operations

The profit from Telkom Media includes the reversal of an onerous lease liability recognised on 31 March 2009.

Consolidated statement of financial position

The Group's financial position remains strong. Net debt, after financial assets and liabilities, from continuing operations decreased by 69.5% to R4,723 million (2009: R15,497 million) resulting in a net debt to EBITDA ratio of 0.5 times from 1.3 times at 31 March 2009. On 31 March 2010, the Group had cash balances of R3.8 billion (2009: R1.9 billion). The proceeds retained from the Vodacom transaction contributed to the improvement.

Telkom Company issued commercial paper bills with a nominal value of R2,265 million for the year ended 31 March 2010 and commercial paper bills with a nominal value of R7,824 million were repaid during the year. The Company also repaid term loans of R2,000 million and partly repaid the syndicated loan of R820 million during the year under review.

View Condensed consolidated provisional statement of financial position

Free Cash Flow

The Group's cash flow for the year includes R20.6 billion proceeds received on the sale of our 15% stake in Vodacom, taxation paid relating to the Vodacom transaction and special dividend of R2.5 billion. Dividends paid amounted to R11.2 billion which includes the R19.00 per share dividend relating to the Vodacom transaction and the special dividend of R2.60 per share. Excluding the effects of the above, the Group's normalised free cash flow amounted to R5,507 million.

View Condensed consolidated provisional statement of cash flow

Group Capital Expenditure

Group capital expenditure which includes spend on intangible assets, decreased by 44.2% to R5,377 million (2009: R9,629 million) and represents 14.5% of group revenue (2009: 26.2%).

The decrease in capital expenditure was driven by a decrease in the capital expenditure of Telkom South Africa and Multi-Links.

Telkom South Africa capital expenditure

Telkom South Africa's capital expenditure, which includes spending on intangible assets, decreased by 36.7% to R4,170 million (2009: R6,586 million) and represents 12.5% of Telkom South Africa's revenue (2009: 19.6%).

Baseline capital expenditure of R2,366 million (2009: R3,327 million) was largely for the deployment of technologies to support the growing data services business (including the ADSL footprint), links to the mobile cellular operators and expenditure for access line deployment in selected high growth commercial and business areas. The lower expenditure for the period can be attributed to a more measured approach to the rollout of infrastructure to meet short-term demand and revenue generating services. The continued focus on rehabilitating the access network and increasing the efficiencies and reducing redundancies in the transport network contributed to the network evolution and sustainment capital expenditure.

The increase in revenue generating capital expenditure was as a result of the mobile business case. The decrease in expenditure on network evolution was mainly due to the deployment of automated restoration functionality for the National Transport Network and the provisioning of bandwidth for the FIFA World Cup and for future network growth requirements that occurred mostly in the 2009 financial year.

Telkom continues to focus on its operations support system investment with current emphasis on workforce management, provisioning and fulfilment, assurance and customer care, hardware technology upgrades on the enterprise networks and performance and service management and property optimisation. During the year ended 31 March 2010, R440 million (2009: R729 million) was spent on the implementation of several systems. Regulatory and other capital expenditure in the 2009 financial year includes R260 million intangible asset for the FIFA brand.