Note 18: Contingencies

for the six months ended 30 September 2010

This condensed set of financial statements includes only an update on the contingencies that were reflected in the most recent annual financial statements and should be read in conjunction with the disclosures in the Group's March 2010 financial statements.

Supplier Dipute

Telcordia Settlement

The arbitrator's award was delivered on 11 June 2010. The arbitrator awarded an amount of USD30.5 million, excluding interest from March 2001, to Telcordia. Telkom paid an amount of USD8.7 million during 2007, which was in respect of conceded claims. The amount of the claim, plus interest thereon, as at 30 June 2010 was approximately USD82.7 million. The parties settled the matter on the basis that Telkom pay an amount of USD80 million, plus applicable VAT, which was paid.

Radio Surveillance Security Services ('RSSS')

RSSS invoiced Telkom R97 million in August 2010 for apparent upgrades and/or replacement of alarm systems dating back to 2008. No contract was concluded between Telkom and RSSS to perform these upgrades, nor were there any orders placed by Telkom with RSSS to proceed with the upgrades and/or replacements. Telkom has launched an investigation to confirm whether the services were actually rendered, however management has not been able to confirm this to date. Telkom's inhouse counsel is of the view that the invoice should not be paid.

Competition Comission

Telkom is party to a number of legal proceedings filed by several parties with the South African Competition Commission ('CC') alleging anti-competitive practices described below. Some of the complaints filed at the CC have been referred by the CC to the Competition Tribunal ('CT') for adjudication.

Should the CC find that Telkom committed a prohibited practice as set out in the Competition Act, the CT may impose a maximum administrative penalty of 10 percent of Telkom's annual turnover in the RSA during Telkom's preceding financial year. However, Telkom has been advised by external legal counsel that the CT has to date not imposed the maximum penalty on any offender in respect of the contraventions Telkom is being accused of.

The South African Value Added Network Services ('SAVA')

The South African Vans Association ('SAVA') filed complaints against Telkom at the CC on 7 May 2002 regarding certain alleged anti-competitive practices by Telkom. The CC referred this matter to the CT, together with the Omnilink matter discussed below. Telkom has filed its opposing affidavit and the CC has filed a replying affidavit. The matter was set down for hearing by the CT from 30 May 2011 to 17 June 2011. On 27 September 2010, the CC filed an application to amend its papers to include a margin squeeze allegation. Telkom is opposing this application which has been set down for hearing at the CT in November 2010. Telkom is also preparing for the hearing of the main complaint.

Omnilink

On 22 August 2002, Omnilink filed a complaint against Telkom at the CC alleging that Telkom was abusing its dominance by discriminating in its price for Diginet services between those charged to VANS and the price charged to Telkom customers who apply for a Telkom VPN solution. The CC referred this complaint, together with the SAVA complaint, to the CT for adjudication. This matter is currently being dealt with together with the SAVA matter discussed above.

A pre-trial hearing was held and the matter was set down for hearing from 30 May 2011 to 17 June 2011.

Competition Commission Multiple Complaints Referral

The CC served an application on Telkom on 26 October 2009, in which it referred certain aspects of the complaints against Telkom by MWEB and Internet Solutions, the Internet Service Providers Association ("ISPA"), MWEB, Internet Solutions and Verizon respectively ("Multiple Complaints"), to the CT. The CC furthermore filed a notice of non-referral in respect of those aspects of the complaints not referred by it to the CT.

Telkom opposed the Multiple Complaints referral and filed an exception application, due to the CC's papers being vague and embarrassing and certain complaints being alleged cumulatively as opposed to in the alternative. Telkom also raised certain constitutional points relating to the definition of "excessive pricing" in the Competition Act and the implications of the said definition. The exception application was heard on 11 October 2010 and the parties are awaiting the CC's ruling. Telkom will only be expected to file an answer to the main complaint once the exception has been finalised.

Internet Solutions ('IS')

IS self-referred certain aspects of their complaint, namely those parts of their complaint which were non-referred by the CC, to the CT on 26 November 2009. The IS complaint referral and the Multiple Complaints referral are being dealt with together at the CT.

In this matter too, Telkom filed an exception to IS' referral papers. The exception application was heard on 11 October 2010, together with the exception application in the Multiple Complaints referral matter. At the hearing of the exception, the parties were instructed by the CT to attempt to reach agreement as to the manner in which IS would amend their papers to remove the cause for exception. No agreement was reached and both parties rather submitted proposals to the CT as to an appropriate ruling. The matter was finalised on the aforementioned basis and the parties are now awaiting the CC's ruling. Telkom will only be expected to file an answer to the IS self-referral once the exception has been finalised.

Trudon (Proprietary) Limited ('Trudon') v Directory Solutions CC and Telkom

Directory Solutions lodged a complaint at the CC on 25 March 2010 alleging that Trudon is abusing its dominance in the market in contravention of section 8 of the Competition Act 89 of 1998.

The complainant alleges:

• that Trudon refuses to publish the complainant's own entries;
• that Trudon refuses to advise the complainant timeously of the opening and closing canvas dates;
• that Trudon insists on receiving advance payment for entries submitted by the complainant on behalf of consumers whilst other entries submitted to Trudon directly by consumers are paid for on a monthly basis; and
• that Trudon's conduct is aimed at forcing the complainant out of the market.

In November 2009, Directory Solutions launched an application for interim relief at the CT, requesting an order that :

"The First Respondent be ordered to publish all entries submitted by the Applicant to First Respondent on behalf of Applicant's customers in the applicable telephone directories of the Second Respondent, with immediate effect, pending the outcome of the complaint lodged by the Applicant against the First and Second Respondent under reference 2009APR4384.

The First Respondent be prohibited from demanding payment upfront from the Applicant's customers as a prerequisite for publication of their entries on the basis that First Respondent contravenes Section 8 of the Competition Act 89 of 1998".

On 8 April 2010, the CT made an interim order in favour of Directory Solutions. Trudon and Telkom lodged an appeal at the Competition Appeal Court and the Competition Appeal Court ruled in favour of Telkom and Trudon on 17 June 2010, setting aside the interim order made by the CT. Directory Solutions then brought an application for special leave to appeal to the Supreme Court of Appeal, which is pending.

Chorus Call (Proprietary) Limited ('Chorus Call')

Chorus Call filed a complaint at the CC on 26 May 2009, alleging that "there is no difference in the prices Telkom charges its customers for national or long-distance peak calls, irrespective of the point of termination. For local peak calls, Telkom's minimum rate for calls on its network is R0.650 (including VAT) and R0.00653 (including VAT) per second. Rates for Telkom's peak local calls to a Neotel number are the same as the national rate. This pricing method results in Telkom calls to a Neotel number costing 66% more than a call terminating on Telkom's network." Telkom has not yet been provided with a full copy of the complaint.

The CC has forwarded various questionnaires to Telkom since March 2010 to which Telkom has responded.

ECN Telecommunications (Proprietary) Limited ('ECN')

ECN filed a complaint at the CC on 16 October 2009 alleging that "Telkom is marking up calls made by its subscribers to ECN's network to such an extent (by more than 100%) that ECN is being prevented from competing in the fixed line call termination market. As a direct result of Telkom's dominant position, nearly 100% of the calls that originate on fixed lines are made by Telkom subscribers. This means that Telkom has the ability to off-set retail tariffs at a level that will prevent ECN's fixed lines from becoming a competitive alternative to Telkom's fixed lines. ECN regards Telkom's excessive pricing of calls to ECN as (a) an abuse of its dominant position (b) a clear attempt to lessen competition in the market and (c) as being contrary to the public interest..."

Telkom has not yet been provided with a full copy of the complaint. The CC has forwarded various questionnaires to Telkom since March 2010 to which Telkom has responded.

Phuthuma Networks (Proprietary) Limited ('Phuthuma')

Telkom was informed by the CC that a complaint was filed by Phuthuma at the CC, wherein Phuthuma alleges that "Telkom has contravened section 8(c) of the Competition Act no 89 of 1998, as amended, by abusing its dominant position in engaging in anti-competitive conduct in the telegraphic and telex maritime services market by unilaterally awarding these services to Networks Telex." On 28 June 2010, the CC decided not to refer the complaint to the CT, but the complainant self-referred the matter to the CT on 20 July 2010, alleging that Telkom engaged in an exclusionary act "by appointing Network Telex in 2007 without any formal procurement process." Telkom filed its opposing affidavit and Phuthuma has filed a replying affidavit. A pre-hearing has been scheduled for 1 December 2010.

General litigation Matters

Maredi Telecom and Broadcasting (Proprietary) Limited ('Maredi')

Maredi served an application on Telkom, Ericsson SA and Telsaf Data (Proprietary) Limited on 8 January 2009. The matter relates to a tender published by Telkom for the supply of point to point split mount microwave equipment. Maredi, Telsaf, Ericsson and a fourth company, Mobax, were shortlisted. The tender was awarded by Telkom to Telsaf and Ericsson.

Maredi applied for an urgent court order, with a court hearing date set for 3 February 2009, requesting that the court prevent Telkom from entering into a contract with Ericsson and Telsaf or either party, and from ordering goods or services from Ericsson and Telsaf pursuant to the tender. Maredi also requested an order (the review application) that the court review and set aside the award of the tender to Telsaf and Ericsson or either of the aforementioned parties, and refer the tender back to Telkom in order for Telkom to reconsider its award. Maredi alleged that there were certain irregularities in the tender process.

Telkom and Ericsson opposed the application. On 20 February 2009 the High Court dismissed Maredi's urgent application with costs. However, Maredi is proceeding with the review application in the ordinary course and Telkom is opposing the application.

Phuthuma Networks (Proprietary) Limited ('Phuthuma')

Phuthuma served a summons on Telkom on 20 August 2009, wherein it is claiming various amounts as damages. Phuthuma has based its claim for damages on various allegations inter alia an allegation that Telkom had failed to adjudicate a tender in accordance with a fair, transparent, competitive and cost-effective procurement policy.

"The tender was published on 30 November 2007 for the outsourcing of Telkom's Telex and Gentex Services and for the provision of a solution to support the maritime industry requirements. The validity period was 180 days during which period Telkom was required to make an award. Telkom had cancelled the tender on 10 June 2009 without making any award, due to the expiry of the validity period."

Phuthuma is claiming:

Damages of R3.7 billion alternatively R5.5 billion further alternatively R1.8 billion plus interest at 15.5 % per annum from April 2008, alternatively from 30 April 2009 being date of notice in terms of Act 40 of 2002, further alternatively from date of service of the summons plus costs of suit plus further and or alternate relief.

Telkom is defending the matter. The matter has been set down for hearing on 17 February 2011.

South African National Road Agency Ltd ('SANRAL')

On 1 October 2008, an application issued out of the Pietermaritzburg Division of the KwaZulu Natal High Court was served upon Telkom by SANRAL. In terms of the application, SANRAL is seeking a declaratory order and an interdict. The interdict has not been brought on an urgent basis and arises from a long standing dispute between Telkom and SANRAL regarding the latter's right to refuse Telkom access to its road reserves and to claim huge levies in lieu of Telkom's occupation thereof. Telkom had over many years attempted to negotiate an agreement with SANRAL.

With regard to the declaratory order, SANRAL has requested the court to declare that Telkom cannot enter upon SANRAL's land for any purpose whatsoever without SANRAL's permission and subject to prescriptions referred to in S48(3) (b) of the SANRAL Act. In addition as part of the declaratory order, SANRAL has also requested the court to declare that the installation of facilities installed by Telkom on that portion of the N2 national road reserve at section 32 between kilometres 8.2 and the town of Pongola was and is unlawful. Judgement was granted against Telkom on 25 October 2010 in respect of the declaratory only. The order issued by the court requires Telkom to acquire the permission of SANRAL in terms of section 48 of the SANRAL Act and subject to the prescriptions of section 48 (3)(b) whenever it enters land under SANRAL's control. Telkom is appealing against the judgement.

Bihati Solutions (Proprietary) Limited ('Bihati')

The matter arises from a tender which was published on 8 November 2007 for the provision of network services. Telkom failed to make an award during the validity period of 120 days or the purported extension granted by the shortlisted bidders. An award was subsequently made during November 2008 after the validity period had expired. Telkom had obtained an opinion from senior counsel after it received challenges from the unsuccessful bidders regarding the validity of the award made under the tender. As a consequence of counsel's opinion, the Telkom Board resolved to review and set aside the aforesaid award.

Prior to Telkom filing an application for the review and setting aside of its award made, Bihati served an application on Telkom for the review and setting aside the Telkom Board's decision to review and setting aside of its earlier decision to award a tender to Bihati and five other service providers. Telkom is opposing Bihati's application. Telkom has requested the court to order that the two applications be heard simultaneously. The applications were heard on 18 November 2010. Judgement was reserved.

Complaints and Compliance ICASA Complaint

Phuthuma Networks (Proprietary) Limited ('Phuthuma')

During February 2010 Phutuma lodged a complaint against Telkom at the Complaints and Compliance Committee of ICASA. The complaint is that Telkom has contravened the provisions of the repealed Telecommunications Act as well as the conditions of its licence. Telkom made submissions to the Committee. The matter is part heard and the hearing will resume again during the course of 2011.

2011. The Secondary Taxation on Companies impact is R47 million.

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