KT CORP — Audit Report / Information 2005

May 12, 2005

6-K 1 u99763e6vk.htm KT CORPORATION KT Corporation PAGEBREAK

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of May 2005

KT Corporation

206 Jungja-dong Bundang-gu, Sungnam Kyunggi-do 463-711 Korea (Address of principal executive offices)

(indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

Form 20-F þ Form 40-F o

(Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

Yes o No þ

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This Current Report on Form 6-K is being filed to incorporate by reference into Registration Statement No. 333-100251 on Form F-3, effective December 27, 2002, relating to $1,210,050,000 0.25% Convertible Notes Due 2007, $500,000,000 4.30% Bonds Due 2005 and Warrants to Purchase 9,270,200 Common Shares.

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TABLE OF CONTENTS

Independent Auditors’ Report
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
SIGNATURES

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KT CORPORATION AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2003 and 2004

(With Independent Auditors’ Report Thereon)

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link1 "Independent Auditors’ Report"

Independent Auditors’ Report

Based on a report originally issued in Korean

The Board of Directors and Stockholders KT Corporation:

We have audited the accompanying consolidated balance sheets of KT Corporation and subsidiaries (the “Company”) as of December 31, 2003 and 2004, and the related consolidated statements of earnings and changes in stockholders’ equity and cash flows for the years then ended, all expressed in Korean Won. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of KT Freetel Co., Ltd. (“KTF”), a 46.9% and 48.7% owned subsidiary at December 31, 2003 and 2004, respectively, as of and for the years then ended December 31, 2003 and 2004. The financial statements of KTF, which are included in the consolidated financial statements of the Company, reflect total combined assets constituting 29.1% and 29.5% as of December 31, 2003 and 2004, respectively, and total revenues constituting 28.1% and 30.5% for the years ended December 31, 2003 and 2004, respectively, of the related consolidated totals. Those financial statements were audited by other auditors whose report has been furnished to us and our report, insofar as it relates to the amounts included for KTF, is based solely on the report of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 and significant estimates used by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2004, and the results of its operations, the changes in its stockholders’ equity, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea.

The accompanying consolidated financial statements as of and for the year ended December 31, 2004 have been translated into United States dollars solely for the convenience of the reader and have been translated on the basis set forth in note 3 to the consolidated financial statements.

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Without qualifying our opinion, we draw attention to the following:

As discussed in note 2(a) to the consolidated financial statements, accounting principles and auditing standards and their application in practice vary among countries. The accompanying consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying consolidated financial statements are for use by those knowledgeable about Korean accounting procedures and auditing standards and their application in practice.

Seoul, Korea February 25, 2005

This report is effective as of February 25, 2005, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

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KT CORPORATION AND SUBSIDIARIES link1 "Consolidated Balance Sheets"

Consolidated Balance Sheets

December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

Assets	2003		2004		(note 3)
Current assets:
Cash and cash equivalents (notes 4 and 5)	W	760,868		1,755,929	$	1,696.4
Short-term financial instruments (note 5)		60,899		984,122		950.8
Current portion of investment securities (note 8):
Trading securities		52,397		6,186		6.0
Available-for-sale securities		286,757		257,803		249.1
Held-to-maturity securities		5,712		1,660		1.6
Notes and accounts receivable – trade,
less allowance for doubtful accounts of W646,273 in 2003
and W702,635 in 2004 (note 2)		2,647,379		2,793,143		2,698.4
Accounts receivable – other		323,042		365,162		352.8
Inventories (note 6)		364,833		374,319		361.6
Other current assets (note 7)		230,044		270,653		261.5
Total current assets		4,731,931		6,808,977		6,578.2
Investment securities:
Available-for-sale securities (note 8)		260,642		218,757		211.3
Held-to-maturity securities (note 8)		111,409		94,404		91.2
Equity securities of affiliates (note 9)		140,790		54,061		52.2
Total investment securities		512,841		367,222		354.7
Property, plant and equipment (note 10):
Land		1,154,955		1,167,683		1,128.1
Buildings and structures		4,282,494		4,555,427		4,401.0
Machinery and equipment		34,731,446		35,624,899		34,416.9
Vehicles		82,911		89,316		86.3
Tools, furniture and fixtures		2,005,812		2,114,653		2,042.9
Construction in progress		750,267		487,461		470.9
		43,007,885		44,039,439		42,546.1
Less accumulated depreciation		(26,633,942	)	(28,317,984	)	(27,357.8	)
Net property, plant and equipment		16,373,943		15,721,455		15,188.3
Other assets (notes 5, 11 and 26)		3,937,960		3,575,578		3,454.3
	W	25,556,675		26,473,232	$	25,575.5

See accompanying notes to consolidated financial statements.

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KT CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets, Continued

December 31, 2003 and 2004

(In millions of Won and U.S. dollars, except share data)

Liabilities and Stockholders' Equity	2003		2004		(note 3)
Current liabilities:
Notes and accounts payable – trade	W	1,022,805		853,381	$	824.4
Short-term borrowings (note 13)		631,689		438,592		423.8
Current portion of long-term debt (note 15)		2,172,510		4,756,067		4,594.8
Accounts payable – other		1,233,422		1,123,323		1,085.2
Advance receipts from customers		103,139		125,989		121.7
Accrued expenses		252,841		288,488		278.7
Withholdings		147,233		187,579		181.2
Income taxes payable		219,348		284,102		274.5
Other current liabilities (notes 14 and 23)		132,614		276,969		267.5
Total current liabilities		5,915,601		8,334,490		8,051.8
Long-term debt, excluding current portion (note 15)		9,049,748		6,985,071		6,748.2
Refundable deposits for telephone installation (note 16)		1,227,355		1,086,635		1,049.8
Accrual for retirement and severance benefits, net (note 17)		245,878		314,789		304.1
Long-term accounts payable – other (note 12)		572,606		554,024		535.2
Other long-term liabilities (note 18)		148,867		171,843		166.0
Total liabilities		17,160,055		17,446,852		16,855.1
Stockholders’ equity:
Common stock of W5,000 par value (note 19):
Authorized – 1,000,000,000 shares
Issued – 284,849,400 shares in 2003
and 2004		1,560,998		1,560,998		1,508.1
Capital surplus (note 20)		1,308,612		1,291,617		1,247.8
Retained earnings:
Appropriated (note 21)		8,025,854		5,431,862		5,247.7
Unappropriated (deficit)		(342,554	)	2,901,378		2,803.0
		7,683,300		8,333,240		8,050.7
Capital adjustments:
Treasury stock (note 22)		(3,962,598	)	(3,962,568	)	(3,828.2	)
Loss on retirement of treasury stock (note 22)		(16,391	)	(16,388	)	(15.8	)
Foreign-based operations translation adjustment		(5,859	)	(2,847	)	(2.7	)
Unrealized gains (losses) on available-for-sale securities
(note 8)		(24,799	)	7,797		7.5
Unrealized losses on equity securities of affiliates (note 9)		(2,691	)	(6,732	)	(6.5	)
Stock options (note 29)		6,745		11,686		11.3
		(4,005,593	)	(3,969,052	)	(3,834.4	)
Minority interest in consolidated subsidiaries		1,849,303		1,809,577		1,748.2
Total stockholders’ equity		8,396,620		9,026,380		8,720.4
Commitments and contingencies (note 23)		—		—		—
	W	25,556,675		26,473,232	$	25,575.5

See accompanying notes to consolidated financial statements.

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KT CORPORATION AND SUBSIDIARIES link1 "Consolidated Statements of Earnings"

Consolidated Statements of Earnings

Years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars, except earnings per share)

	2003		2004		(note 3)
Operating revenues (note 24)	W	16,067,779		17,068,371	$	16,489.6
Operating expenses (note 25)		14,245,343		14,587,839		14,093.2
Operating income		1,822,436		2,480,532		2,396.4
Other income (expense):
Interest income		115,454		116,725		112.8
Interest expense		(705,540	)	(678,514	)	(655.5	)
Equity in losses of affiliates, net (note 9)		(30,270	)	(79,350	)	(76.7	)
Foreign currency transaction and translation gain (loss), net
(note 15)		(27,074	)	542,566		524.2
Loss on disposition of property, plant and equipment, net		(122,966	)	(103,513	)	(100.0	)
Gain (loss) on disposition of available-for-sale
securities, net (note 8)		772,901		(15,115	)	(14.6	)
Impairment loss on available-for-sale securities (note 8)		(43,993	)	(5,831	)	(5.6	)
Impairment loss on held-to-maturity securities (note 8)		—		(42,078	)	(40.7	)
Contributions received for losses on universal
telecommunications services (note 32)		28,539		80,310		77.6
Prior year’s additional income tax payment (note 26)		(53,992	)	(943	)	(0.9	)
Contribution payments for research and development
and donations (note 32)		(182,983	)	(146,779	)	(141.8	)
Derivatives transaction and valuation loss, net (note 23)		(151	)	(146,937	)	(142.0	)
Other, net		8,699		7,963		7.7
		(241,376	)	(471,496	)	(455.5	)
Earnings before income taxes and
minority interest		1,581,060		2,009,036		1,940.9
Income taxes (note 26)		523,631		577,889		558.3
Earnings before minority interest		1,057,429		1,431,147		1,382.6
Minority interest in earnings of consolidated
subsidiaries, net		(235,695	)	(148,931	)	(143.9	)
Net earnings	W	821,734		1,282,216	$	1,238.7
Basic earnings per share of common stock
in Won and U.S. dollars (note 28)	W	3,802		6,084	$	5.88
Diluted earnings per share of common stock
in Won and U.S. dollars (note 28)	W	3,313		5,697	$	5.50

See accompanying notes to consolidated financial statements.

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KT CORPORATION AND SUBSIDIARIES link1 "Consolidated Statements of Changes in Stockholders’ Equity"

Consolidated Statements of Changes in Stockholders’ Equity

Years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

	Common — Stock	surplus		earnings		adjustments		interest		Total		(note 3)
Balance at January 1, 2003	W	1,560,998	1,447,951		8,274,482		(3,386,959	)	1,936,094		9,832,566
Net earnings		—	—		821,734		—		—		821,734
Retirement of treasury stock		—	—		(1,198,499	)	—		—		(1,198,499	)
Dividends		—	—		(212,887	)	—		—		(212,887	)
Cumulative effect of an accounting
change		—	—		(1,530	)	—		(2,198	)	(3,728	)
Increase (decrease) in unrealized
gains (losses) on available-for-sale
securities		—	—		—		(768,362	)	2,541		(765,821	)
Unrealized losses on equity
securities of affiliates		—	—		—		1,575		1,937		3,512
Decrease of treasury stock, net
(note 22)		—	—		—		149,627		—		149,627
Loss on retirement of treasury stock		—	—		—		(9,753	)	—		(9,753	)
Stock options		—	—		—		6,192		774		6,966
Changes in translation adjustments
of foreign subsidiaries		—	—		—		2,087		160		2,247
Changes in subsidiaries included
in consolidation		—	—		—		—		27,379		27,379
Acquisition of additional equity in
consolidated subsidiaries			(165,642	)	—		—		(260,410	)	(426,052	)
Equity change of subsidiary from
merger transaction		—	26,181		—		—		(92,958	)	(66,777	)
Minority interest in earnings of
consolidated subsidiaries		—	—		—		—		235,695		235,695
Other		—	122		—		—		289		411
Balance at December 31, 2003	W	1,560,998	1,308,612		7,683,300		(4,005,593	)	1,849,303		8,396,620	$	8,111.9
Net earnings		—	—		1,282,216		—		—		1,282,216		1,238.7
Retirement of treasury stock
in consolidated subsidiaries		—	(14,784	)	—		—		(135,069	)	(149,853	)	(144.8	)
Dividends (note 27)		—	—		(632,276	)	—		—		(632,276	)	(610.8	)
Dividends in consolidated
subsidiaries		—	—		—		—		(50,037	)	(50,037	)	(48.3	)
Increase (decrease) in unrealized
gains (losses) on available-for-
sale securities		—	—		—		32,596		(1,418	)	31,178		30.1
Unrealized losses on equity
securities of affiliates		—	—		—		(4,041	)	(1,281	)	(5,322	)	(5.1	)
Stock options		—	—		—		4,941		1,188		6,129		5.9
Changes in translation adjustments
of foreign subsidiaries		—	—		—		3,012		(2,814	)	198		0.2
Minority interest in earnings of
consolidated subsidiaries		—	—		—		—		148,931		148,931		143.9
Other		—	(2,211	)	—		33		774		(1,404	)	(1.3	)
Balance at December 31, 2004	W	1,560,998	1,291,617		8,333,240		(3,969,052	)	1,809,577		9,026,380	$	8,720.4

See accompanying notes to consolidated financial statements.

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KT CORPORATION AND SUBSIDIARIES link1 "Consolidated Statements of Cash Flows"

Consolidated Statements of Cash Flows

Years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

	2003		2004		(note 3)
Cash flows from operating activities:
Net earnings	W	821,734		1,282,216	$	1,238.7
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation		3,393,175		3,403,639		3,288.2
Amortization		364,051		393,849		380.5
Provision for doubtful accounts		363,774		287,073		277.3
Provision for retirement and severance benefits		1,067,076		281,453		271.9
Equity in losses of affiliates		30,270		79,350		76.7
Loss on disposition of property, plant and equipment		122,966		103,513		100.0
Loss (gain) on foreign currency translations, net		27,555		(546,335	)	(527.8	)
Loss (gain) on disposition of available-for-sale securities, net		(772,901	)	15,115		14.6
Impairment loss on available-for-sale securities		43,993		5,831		5.6
Impairment loss on held-to-maturity securities		—		42,078		40.7
Deferred income tax expense		46,294		106,964		103.3
Minority interest in earnings of consolidated subsidiaries		235,695		148,931		143.9
Changes in operating assets and liabilities:
Notes and accounts receivable – trade		(742,487	)	(361,316	)	(349.1	)
Accounts receivable – other		(387,518	)	(93,936	)	(90.7	)
Inventories		(197,478	)	(15,564	)	(15.0	)
Other asset (long-term accounts receivable – trade)		126,900		(266,813	)	(257.8	)
Notes and accounts payable – trade		(143,425	)	(150,771	)	(145.7	)
Accounts payable – other		60,928		(107,901	)	(104.2	)
Advance receipts from customers		(25,359	)	22,850		22.1
Accrued expenses		(5,792	)	35,647		34.4
Withholdings		(23,451	)	40,346		39.0
Income taxes payable		(240,025	)	(540	)	(0.5	)
Payment of retirement and severance benefits		(1,020,940	)	(93,178	)	(90.0	)
Severance benefits insurance deposit		(180,801	)	(119,568	)	(115.5	)
Other, net		226,166		226,434		218.8
Net cash provided by operating activities	W	3,190,400		4,719,367	$	4,559.4

See accompanying notes to consolidated financial statements.

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KT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, Continued

Years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

						2004
	2003		2004			(note 3)
Cash flows from investing activities:
Purchases of property, plant and equipment	W	(3,209,376	)	(2,971,376	)	$ (2,870.6	)
Proceeds from sale of property, plant and equipment		253,137		109,469		105.7
Decrease in accounts receivable – other		215,021		—		—
Decrease (increase) in short-term financial instruments		758,916		(923,223	)	(891.9	)
Purchases of available-for-sale securities		(315,553	)	(499,370	)	(482.4	)
Purchases of held-to-maturity securities		(11,412	)	(3,182	)	(3.1	)
Purchases of equity securities of affiliates		(83,890	)	—		—
Proceeds from sale of available-for-sale securities		210,121		589,977		570.0
Proceeds from maturity of held-to-maturity securities		218		12,992		12.5
Proceeds from sale of equity securities of affiliates		18,480		2,057		2.0
Decrease in other current assets		560,208		184,753		178.5
Decrease (increase) in other assets		123,258		(119,908	)	(115.8	)
Net cash used in investing activities		(1,480,872	)	(3,617,811	)	(3,495.1	)
Cash flows from financing activities:
Payment of dividends		(213,308	)	(683,208	)	(660.0	)
Proceeds from sale of accounts receivable		512,000		—		—
Proceeds from short-term borrowings, net		(484,696	)	(193,097	)	(186.6	)
Repayment of long-term debt		(1,989,381	)	(2,178,028	)	(2,104.2	)
Proceeds from issuance of long-term debt		1,285,653		3,235,976		3,126.2
Decrease in refundable deposits for telephone installation		(306,211	)	(140,720	)	(135.9	)
Increase (decrease) in other long-term liabilities		(2,781	)	3,905		3.8
Reacquisition of treasury stock		(412,247	)	—		—
Proceeds from sale of treasury stock		39,312		—		—
Reacquisition of treasury stock in consolidated subsidiaries		(69,747	)	(151,308	)	(146.2	)
Acquisition of additional equity interest in consolidated
subsidiaries		(426,052	)	(609	)	(0.6	)
Other, net		2,247		594		0.6
Net cash used in financing activities		(2,065,211	)	(106,495	)	(102.9	)
Net increase in cash and cash equivalents from change
of subsidiaries in consolidated financial statements		29,862		—		—
Net increase (decrease) in cash and cash equivalents		(325,821	)	995,061		961.4
Cash and cash equivalents at beginning of year		1,086,689		760,868		735.0
Cash and cash equivalents at end of year	W	760,868		1,755,929		$ 1,696.4

See accompanying notes to consolidated financial statements.

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1

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003 and 2004

| (1) |
| --- |
| KT Corporation (“KT” or the “Company”) commenced operations on January 1, 1982 through the
segregation of specified operations from the Korean Ministry of Information and Communication
(the “MIC”) for the purpose of contributing to the convenience in national life and improvement
of public welfare through rational management of the public telecommunications business and
improvement of telecommunications technology under the Korea Telecom Act. |
| Upon the repeal of the Korea Telecom Act as of October 1, 1997, KT became a government invested
institution regulated by the Korean Commercial Code and changed its name from Korea Telecom to
Korea Telecom Corp. pursuant to an amendment to its Articles of Incorporation. Shares of KT
were listed on the Korea Stock Exchange on December 23, 1998. KT issued 24,282,195 additional
shares on May 29, 1999 and issued American Depository Shares (“ADS”) representing these new
shares and government owned shares. On July 2, 2001, additional ADS representing 55,502,161
government-owned shares were issued. |
| The Korean government has gradually reduced its ownership interest in the Company since 1993
and completed the disposition of its ownership interest in the Company on May 24, 2002. On
March 22, 2002, the Company changed its name from Korea Telecom Corp. to KT Corporation. |
| Under Korean law, the MIC and other government entities have extensive authority to regulate
KT. The MIC has responsibility for approving rates for local service and interconnection
services provided by KT. Beginning in January 1998, KT is allowed to set its own rates for
domestic long-distance service, international long-distance service and other services without
approval from the MIC. |
| In recent years, KT has been subject to increasing competition as a result of the government’s
issuance of additional licenses to create competition in the telecommunications market and to
foster new telecommunications business areas. Additionally, in June 1997, the MIC awarded a
license to a second carrier to provide local telephone service. This new carrier commenced
operations in 1999. A third carrier commenced international long-distance service in 1997 and
domestic long-distance service in 1999. The entry of these new carriers into the local and
long-distance telephone service markets has had, and is expected to continue to have, a
negative impact on KT’s telephone service revenues and profitability. |

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements

| (a) |
| --- |
| The accompanying consolidated financial statements have been extracted from KT’s Korean
language consolidated financial statements that were prepared using accounting principles,
procedures and reporting practices generally accepted in the Republic of Korea (“Korean
GAAP”). The consolidated financial statements have been translated from those issued in the
Korean language into the English language, and have been modified to allow for the
formatting of the consolidated financial statements in a manner which is different from the
presentation under Korean financial statements practices. In addition, certain
modifications have been made in the accompanying consolidated financial statements to bring
the formal presentation into conformity with practices outside of Korea, and certain
information included in the Korean language statutory consolidated financial statements,
which management believes is not required for a fair presentation of KT’s financial
position or results of operations, is not presented in the accompanying consolidated
financial statements. |
| Accordingly, the accompanying consolidated financial statements and their utilization are
not designed for those who are not informed about Korean accounting principles, procedures
and practices and furthermore are not intended to present the financial position and
results of operations and cash flows in accordance with accounting principles and practices
generally accepted in countries and jurisdictions other than the Republic of Korea. |

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2

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

| (a) |
| --- |
| The consolidated financial statements include the accounts of KT and the following
controlled subsidiaries (collectively referred to as the “Company”) as of December 31, 2003
and 2004. Controlled subsidiaries include majority-owned entities by either the Company or
a controlled subsidiary and other entities where the Company or its controlled subsidiary
owns more than 30% of total outstanding common stock and is the largest shareholder. All
significant intercompany balances and transactions have been eliminated in consolidation. |

	Year of	Year of — obtaining	Percentage — ownership (%)
Subsidiary	establishment	control	2003	2004	Primary business
KT Freetel Co., Ltd. (“KTF”)	1997	1997	46.9	48.7	PCS business
KT Hitel Co., Ltd. (“KTH”)	1991	1992	65.9	65.9	Data communication
KT Submarine Co., Ltd. (“KTSC”)	1995	1995	36.9	36.9	Submarine cable construction
and maintenance
KT Powertel Co., Ltd. (“KTP”)	1985	1985	44.8	44.8	Trunk radio system business
KT Networks Corporation (“KTN”)	1986	1986	100.0	100.0	Group telephone management
KT Linkus Co., Ltd.	1988	1988	93.8	93.8	Public telephone maintenance
Korea Telecom America, Inc.	1993	1993	100.0	100.0	Foreign telecommunication business
Korea Telecom Philippines, Inc.	1994	1994	100.0	100.0	Foreign telecommunication business
New Telephone Company, Inc.
(“NTC”)	1993	1998	72.5	72.5	Foreign telecommunication business
Korea Telecom Japan Co., Ltd.	1999	1999	100.0	100.0	Foreign telecommunication business
KTF Technologies Inc. (“KTFT”)*	2001	2002	57.4	70.8	PCS handset development
KT Commerce Inc. (“KTC”)**	2002	2002	100.0	100.0	B2C, B2B service
KT Rental Corp. (“KTR”)***	1999	2003	98.8	—	Rental service
KT China Co., Ltd. (“KTCC”)	2003	2003	100.0	100.0	Foreign telecommunication business

| * | The 70.8% ownership percentage in KTFT represents the ownership of this entity by
KTF. |
| --- | --- |
| ** | The 100.0% ownership percentage in KTC represents the ownership of this entity by
KT (19.0%) and KTH (81.0%). |
| *** | The 98.8% ownership percentage in KTR represents the ownership of this entity by
KTN. |

| On March 6, 2003, KTICOM Co., Ltd. (“KTICOM”) was merged into KTF. This transaction
was done by KTF issuing an additional 7,082,476 shares of its common stock to the minority
shareholders of KTICOM, which resulted in a decrease in the Company’s equity ownership
interest. In addition, during 2003, the Company acquired an additional 15,532,846 shares of
KTF for W399,996 million, increasing its equity ownership interest to 46.9%. The amount
paid by KT exceeded the proportionate net assets of KTF by W165,642 million. This
difference was recorded as a reduction to capital surplus. In 2004, KTF reacquired
7,073,200 shares of its common stock and retired these treasury shares amounting to
W149,800 million by a charge to its retained earnings. Accordingly, the Company’s equity
ownership interest in KTF increased from 46.9% to 48.7%. |
| --- |
| KTP acquired Anam Telecom Ltd. on February 5, 2003. As a result, the Company’s equity
ownership interest decreased to 44.8%. |

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3

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

| (a) |
| --- |
| In March 2003, the Company invested W1,245 million in KTCC, which is a wholly-owned
subsidiary located in China. |
| In June 2004, KTF purchased an additional 555,555 shares of KTFT for W13,000 million. As a
result, KTF’s equity ownership interest in KTFT increased to 70.8% as of December 31, 2004. |
| In January 2004, KTN, a subsidiary of KT, purchased an additional 1.2% of KTR shares. As a
result, KTN’s equity ownership interest in KTR increased to 100.0%. In addition, KTR was
merged into KTN on April 27, 2004. |
| As of December 31, 2004, KT has issued guarantees of consolidated subsidiaries’
indebtedness and contract performance as follows: |

Subsidiary	Millions
KTSC	W	60,540
NTC		12,526
	W	73,066

Significant account balances which occurred in the normal course of business with and between subsidiaries as of December 31, 2003 and 2004 are summarized as follows (these amounts have been eliminated in consolidation):

Balance Sheet Items	Millions — 2003	2004
Notes and accounts receivable — trade	W	113,890	208,815
Accounts receivable — other		19,179	16,713
Convertible notes		332,375	347,814
Accounts payable — other		188,054	193,794
Key money deposits		48,895	41,599

Significant account balances which occurred in the normal course of business with equity method investees as of December 31, 2003 and 2004 are summarized as follows:

Transaction Parties		Balance Sheet Items	Millions — 2003	2004
KT	KDB	Trade notes and accounts receivable	W	4,079	54,664
KT	Other	Trade notes and accounts receivable		1,526	1,120
KT	Infotech	Accounts payable		19,348	23,374
KT	eNtoB	Accounts payable		16,462	16,669
KT	KOID	Accounts payable		13,169	14,757
KT	KTRD	Accounts payable		12,664	6,633
KT	KOIS	Accounts payable		8,852	9,538
KT	Other	Accounts payable		1,178	1,963

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4

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

| (a) |
| --- |
| Significant transactions which occurred in the normal course of business with and between
subsidiaries are eliminated in the course of consolidation for the years ended December 31,
2003 and 2004 are summarized as follows: |

	Millions — 2003	2004
Operating revenues	W	695,685	891,233
Operating expenses		835,728	1,124,463
Contributions received for losses on universal
telecommunications services		44,250	25,557
Other income		10,103	10,307

Significant transactions which occurred in the normal course of business with equity method investees for the years ended December 31, 2003 and 2004 are summarized as follows:

Transaction Parties		Income Statement Items	Millions — 2003	2004
KT	KDB	Sales	W	47,337	131,685
KT	KOID	Sales		8,942	10,676
KT	KOIS	Sales		6,480	7,934
KT	Other	Sales		1,367	1,872
KT	KOID	Purchases		96,944	102,624
KT	KTRD	Purchases		66,361	74,058
KT	KOIS	Purchases		66,148	71,778
KT	Infotech	Purchases		59,097	43,499
KT	NtoB	Purchases		33,101	86,406
KT	Other	Purchases		7,069	7,321

(b)	Cash Equivalents
	The Company considers short-term financial instruments with maturities of three months or
less at the acquisition date to be cash equivalents.
(c)	Financial Instruments
	Short-term financial instruments are instruments handled by financial institutions which
are held for short-term cash management purposes or will mature within one year, including
time deposits, installment savings deposits and restricted bank deposits.
(d)	Allowance for Doubtful Accounts
	Notes and trade accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Company’s best estimate of the amount
of probable credit losses in the Company’s existing notes and accounts receivable. The
Company determines the allowance for doubtful notes and accounts receivable based on an
analysis of portfolio quality and historical write-off experience. Account balances are
charged off against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote.

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5 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

(d)
Changes in the allowances for doubtful accounts for the years ended December 31, 2003 and
2004 are summarized as follows:

	Millions
	2003		2004
Balance at beginning of year	W	430,066		646,273
Increase due to the changes of consolidated subsidiaries		65		—
Provision		363,774		287,073
Write-offs		(147,632	)	(230,711	)
Balance at end of year	W	646,273		702,635

(e)	Inventories
	Inventories are stated at the lower of cost or net realizable value. Cost is determined by
the moving-average cost method, except for materials in transit for which cost is
determined by the specific identification method. Net realizable value is the estimated
selling price in the ordinary course of business, less the estimated selling cost.
Effective January 1, 2004, the Company adopted Statement of Korea Accounting Standards
(“SKAS”) No. 10 “ Inventories ”. Through 2003, a valuation loss incurred when the market
value of inventory falls below its carrying amount was reported as a non-operating expense.
In 2004, in accordance with SKAS No. 10, the Company included inventory valuation losses in
its cost of goods sold (“a component of operating expenses”). The Company recognized
inventory valuation losses of W21,471 million included in cost of goods sold for the year
ended December 31, 2004. As allowed by this standard, the Company did not reclassify prior
year balances because the amount was not material.
(f)	Investments in Securities
	Upon acquisition, the Company classifies certain debt and equity securities into one of the
three categories: held-to-maturity, available-for-sale, or trading securities. Investments
in debt securities that the Company has the positive intention and ability to hold to
maturity are classified as held-to-maturity. Securities that are bought and held
principally for the purpose of selling them in the near term (thus held for only a short
period of time) are classified as trading securities. Trading generally reflects active and
frequent buying and selling, and trading securities are generally used to generate profit
on short-term differences in price. Investments not classified as either held-to-maturity
or trading securities are classified as available-for-sale securities. Such determination
should be reassessed at each balance sheet date.
	Trading securities are carried at fair value, with unrealized holding gains and losses
included in earnings. Available-for-sale securities are carried at fair value, with
unrealized holding gains and losses reported as a capital adjustment. Investments in equity
securities and limited partnerships that do not have readily determinable fair values are
stated at cost. Declines in value judged to be other-than-temporary on available-for-sale
securities are charged to current results of operations. Realized gains and losses are
determined using the specific identification method based on the trade date of a
transaction. Investments in debt securities that are classified into held-to-maturity are
reported at amortized cost at the balance sheet date and such amortization is included in
interest income.

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6 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

(f)	Investments in Securities, Continued
	Marketable securities are at the quoted market prices as of the period end. Non-marketable
debt securities are recorded at the fair values derived from the discounted cash flows by
using an interest rate deemed to approximate the market interest rate. The market interest
rate is determined by the issuers’ credit rate announced by the accredited credit rating
agencies in Korea. Beneficiary certificates which are securities indicating beneficiary
right on certain investment securities held by the investment management companies are
recorded at fair value as determined by the investment management companies. Investments in
funds which are not classified as trading securities shall be classified as
available-for-sale securities and be stated at cost.
	Trading securities shall be classified as current assets, whereas available-for-sale
securities and held-to-maturity securities shall be classified as long-term investments.
However, available-for-sale securities, whose maturity dates are due within one year from
the balance sheet date or whose likelihood of being disposed of within one year from the
balance sheet date is probable, shall be classified as current assets. Likewise,
held-to-maturity securities whose maturity dates are due within one year from the balance
sheet date shall be classified as current assets.
(g)	Investment Securities under the Equity Method of Accounting
	For investments in companies except funds, whether or not publicly held, that are not
controlled, but under the Company’s significant influence, the Company utilizes the equity
method of accounting. Significant influence is generally deemed to exist if the Company can
exercise influence over the operating and financial policies of an investee. The ability to
exercise that influences may be indicated in several ways, such as the Company’s
representation on its board of directors, the Company’s participation in its policy making
processes, material transactions with the investee, interchange of managerial personnel, or
technological dependency. Also, if the Company owns directly or indirectly 20% or more of
the voting stock of an investee and the investee is not required to be consolidated (see
note 2(a)), the Company generally presumes that the investee is under significant
influence. In addition, certain funds which meet the above criteria are nevertheless
excluded from equity method accounting and instead accounted for as available-for-sale
securities and recorded at cost.
	Under the equity method of accounting, the Company’s initial investment is recorded at cost
and is subsequently increased to reflect the Company’s share of the investee income and
reduced to reflect the Company’s share of the investee losses or dividends received. Any
excess in the Company’s acquisition cost over the Company’s share of the investee’s
identifiable net assets is generally recorded as goodwill or other intangibles and
amortized by the straight-line method over the estimated useful life. The amortization of
goodwill or other intangibles is recorded against the equity income (losses) of affiliates.
When events or circumstances indicate that carrying amount may not be recoverable, the
Company reviews goodwill or other intangibles for impairment.
	Some investee companies depreciate their machinery and equipment by the straight-line
method in accordance with Korean GAAP considering the attributes and nature of the
underlying assets. Accordingly, the Company does not conform the depreciation method of
those investees to the declining-balance method used by the Company.
	Assets and liabilities of foreign-based companies accounted for using the equity method are
translated at the current rate of exchange at the balance sheet date while profit and loss
items in the statement of earnings are translated at the average rate during the year and
capital account at the historical rate. The translation gains and losses arising from
collective translation of the foreign currency financial statements of foreign-based
companies are offset and the balance is accumulated as capital adjustment.

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7 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

(g)	Investment Securities under the Equity Method of Accounting, Continued
	Under the equity method of accounting, the Company does not record its share of losses of
an affiliate when such losses would make the Company’s investment in such entity less than
zero unless the Company has guaranteed obligations of the investee or is otherwise
committed to provide additional financial support.
(h)	Property, Plant and Equipment
	Property, plant and equipment are stated at cost. Improvements that significantly extend
the life of an asset or add to its productive capacity are capitalized. Expenditures for
maintenance and repairs are charged to income as incurred. Property, plant and equipment
contributed by the government on January 1, 1982 are stated at net revalued amounts.
	Depreciation is computed using the declining-balance method (except for buildings,
structures, underground access to cable tunnels, and concrete and steel telephone poles,
and the assets of some subsidiaries which are depreciated using the straight-line method)
based on the following estimated useful lives of the related assets:

Buildings and structures	5-60
Machinery and equipment:
Underground access to cable tunnels,
and concrete and steel telephone poles	20-40
Other	3-15
Vehicles	3-10
Tools, furniture and fixtures:
Steel safe boxes	20
Tools, computer equipment, furniture and fixtures	2-8

| Prior to January 1, 2003, the Company capitalized interest costs on all borrowings incurred
prior to completion of the acquisitions, as part of the cost of qualifying assts. However,
effective January 1, 2003, the Company adopted Statement of Korea Accounting Standards No.
7, “ Capitalization of Financing Costs ”. In accordance with this standard, the Company
elected to no longer capitalize interest costs. Accordingly, the Company recognizes
interest costs and other financial charges on borrowings associated with the manufacture,
purchase, or construction of property, plant and equipment as an expense in the period in
which they are incurred. |
| --- |
| The Company reviews for impairment of property, plant and equipment, whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated undiscounted future net
cash flows expected to result from the use of the asset and its eventual disposition are
less than its carrying amount. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. |

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8 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

(i)	Contributions Received for Capital Expenditures
	Contributions received for capital expenditures are reflected as a reduction of the
acquisition cost of the acquired assets and, accordingly, reduce depreciation expense
related to the acquired assets over their useful lives. Contributions received, which have
yet to be disbursed for capital expenditures, are presented as a deduction of received
assets.
(j)	Intangible Assets

(i)	Goodwill
	Goodwill, which represents the excess of the acquisition cost over the fair value of
net identifiable assets acquired related to entities that are being consolidated, is
amortized on a straight-line basis over its estimated economic useful life.
	Accounting for the difference between the acquisition cost and the amount of underlying
equity of a purchased entity differs depending on whether (1) the acquisition of the
controlling interest of an investee is the original acquisition or (2) the purchase
represents an additional equity purchase of a controlled entity. When the Company first
acquires a controlling financial interest of an entity, the difference between the
acquisition cost and the corresponding proportionate share of the entity’s equity as of
the most recently audited or reviewed balance sheet date is recorded as goodwill.
However, for additional equity purchases of existing consolidated subsidiaries, such
difference is recorded as a reduction of stockholders’ equity (capital surplus).
Goodwill is amortized over its estimated useful life of 4 to 10 years.
	Amortization of goodwill of W294,306 million and W212,210 million for the years ended
December 31, 2003 and 2004, respectively, and amortization of negative goodwill of W518
million for the years ended December, 31 2003 and 2004, are included in operating
expenses and other income, respectively, in the consolidated statements of earnings.
(ii)	Other Intangible Assets
	Other intangible assets, consisting of exclusive rights usage and software, are stated
at cost less accumulated amortization. Amortization is computed using the straight-line
method over periods which range from 3 to 50 years. The Company has monopolistic and
exclusive rights to control buildings and facilities utilization and copyrights by
contract or related laws. Accordingly, the Company amortizes those intangible assets
over the period of 30 or 50 years based on contract or related laws.
(iii)	Research and Development Costs
	The Company charges research and development costs to expense as incurred. However, the
costs which are recoverable from future earnings are deferred and amortized over their
estimated useful lives. In addition, internal use software development costs, after
technological feasibility test, such as those associated with Broadband Integrated
Services Digital Network (B-ISDN), Integrated Customer Information System (ICIS) and
Enterprise Resource Planning (ERP), are accounted for as intangible assets and
amortized by the straight-line method over their estimated economic useful lives from 3
to 6 years.
	The Company expensed research and development costs of W244,625 million and W265,207
million for the years ended December 31, 2003 and 2004, respectively. In addition, the
Company capitalized development costs, which consist of software, of W61,736 million
and W103,374 million for the years ended December 31, 2003 and 2004, respectively.

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9 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

(j)	Intangible Assets, Continued
	The Company reviews for impairment of intangible assets, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If such
assets are considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the assets.
(k)	Valuation of Receivables at Present Value
	Receivables arising from extended payment terms which generally involve sales of personal
communication service (“PCS”) handsets, are stated at present value and the difference
between the nominal value and present value is deducted directly from the nominal value of
related receivables and is amortized using the effective interest method over the payment
period. The amount amortized is included in interest income.
(l)	Convertible Notes and Bonds with Warrants
	Effective January 1, 2003, the Company adopted Statement of Korea Accounting Standards No.
9, “ Convertible Securities ” related to convertible bonds, bonds with warrants and
convertible preferred stock, which requires the separate recognition of the convertible
features and warrant rights. However, as allowed by the transition clause of the Statement,
the Company recognizes interest expense on convertible notes and bonds with warrants as
determined using the effective interest method, and amortization of a redemption premium is
recorded as long-term accrued interest expense.
(m)	Retirement and Severance Benefits
	Employees who have been with the Company for more than one year are entitled to lump sum
payments based on current rates of pay and length of service when they leave the Company.
The Company’s estimated liability under the plan which would be payable if all employees
left on the balance sheet date is accrued in the accompanying consolidated balance sheets.
A portion of the liability is covered by an employees’ severance pay insurance where the
employees have a vested interest in the deposit with the insurance company. Therefore, such
deposit for severance benefit insurance amounting to W519,377 million and W638,945 million
as of December 31, 2003 and 2004, respectively, are reflected in the accompanying
consolidated balance sheets as a deduction from the liability for retirement and severance
benefits.
	Through March 1999, under the National Pension Scheme of Korea, the Company transferred a
certain portion of retirement allowances of employees to the National Pension Fund. The
amount transferred will reduce the retirement and severance benefit amount to be payable to
the employees when they leave the Company and is accordingly reflected in the accompanying
consolidated balance sheets as a reduction from retirement and severance benefit liability.
The cumulative balances of such transfers to the National Pension Fund were W729 million
and W525 million as of December 31, 2003 and 2004, respectively. Beginning in April 1999,
however, a new regulation applies and such transfers to the National Pension Fund are no
longer required.

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10 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

(n)	Customer Call Bonus Program
	The Company records an estimated liability for the marketing costs associated with
providing gifts under the customer call bonus program when call bonus points are earned.
The liability is recorded in other long-term liabilities in the accompanying consolidated
balance sheets. The liability is adjusted periodically based on points earned, points
redeemed and changes in estimated costs.
(o)	Contingent Liabilities
	Contingent losses are generally recognized as a liability when probable and reasonably
estimable.
(p)	Revenue Recognition
	Operating revenues are recognized on a service-rendered basis. Revenues from public
telephone cards are recognized when a cardholder places a call. Sales and cost of sales of
Personal Communication Service (“PCS”) handsets are recognized when delivered to customers.
The non-refundable service initiation fees for telephone, broadband Internet access, PCS
services and leased-line service are recognized as revenue upon receipt.
	Prior to April 15, 2001, customers could choose between alternative plans for initiating
basic telephone services. Under these alternatives, customers could elect to place a fully
refundable deposit (which is reflected as a liability) or pay a reduced non-refundable
service initiation fee (which is included in operating revenues). Prior to this change, all
customers were required to place fully refundable deposits.
	Effective April 15, 2001, the Company revised the telephone installation deposit system.
Under the revised system, new customers are required to pay a non-refundable service
initiation fee. The non-refundable service initiation fee is included in operating revenues
upon commencement of service.
(q)	Foreign Currency Translation
	Monetary assets and liabilities denominated in foreign currencies are translated into
Korean Won at the balance sheet date. Unrealized foreign currency translation gains and
losses on monetary assets and liabilities are included in current results of operations. As
of December 31, 2003 and 2004, monetary assets and liabilities denominated in foreign
currencies are translated into Korean Won at W1,197.8 to US$1 and W 1,043.8 to US$1,
respectively, that are permitted by the Financial Accounting Standards. Non-monetary assets
and liabilities denominated in foreign currencies, which are stated at historical cost, are
translated into Korean Won at the foreign exchange rate at the date of the transaction.
	Prior to January 1, 2003, the Company accounted for foreign exchange translation gains and
losses on all borrowings, capitalizing financing costs, as part of the cost of qualifying
assets. However, effective January 1, 2003, the Company adopted Statement of Korea
Accounting Standards No. 7, “ Capitalization of Financing Costs ”. In accordance with this
standard, all foreign exchange translation gains and losses are included in the results of
operations.
(r)	Derivatives
	Derivative instruments, regardless of whether they are entered into for trading or hedging
purposes, are valued at fair value. Derivative contracts not meeting the requirements for
hedge accounting treatment are classified as trading contracts with the changes in fair
value included in current operations.

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11 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

(r)	Derivatives, Continued
	Derivative financial instruments used for hedging purposes are accounted for in a manner
consistent with the accounting treatment appropriate for the transactions being hedged or
associated with such contracts. The instruments are valued at fair value when underlying
transactions are valued at fair value, and resulting unrealized valuation gains or losses
are recorded in current results of operations.
(s)	Leases
	The Company accounts for and classifies its lease transactions as either an operating or
capital lease, depending on the terms of the lease under Korean Lease Accounting Standards.
If a lease is substantially noncancellable and meets one or more of the criteria listed
below, the present value of future minimum lease payments is reflected as an obligation
under capital lease.

| — | Ownership of the leased property shall be transferred to the lessee at
the end of the lease term without additional payment or for a contract price. |
| --- | --- |
| — | The lease has a bargain purchase option. |
| — | The lease term is equal to 75% or more of the estimated economic useful
life of the leased property. |
| — | The present value at the beginning of the lease term of the minimum lease
payments equals or exceeds 90% of the fair value of the leased property. |

| | If the above criteria are not met, the lease is classified as an operating lease and lease
payments are expensed on a straight-line basis over the lease term. |
| --- | --- |
| (t) | Income Taxes |
| | Income tax expense or benefit on earnings includes both current and deferred taxes. Current
tax is the expected tax payable on the taxable income for the year, using tax rates enacted
at the balance sheet date. Deferred tax is provided using the asset and liability method,
providing for temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for taxation purposes. However,
deferred taxes are not recognized for temporary differences related to unrealized gains and
losses on marketable investments in equity securities that are reported in a separate
component of stockholders’ equity. Deferred tax assets and liabilities are measured using
tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period of the expected
enactment date. |
| | A deferred tax asset is recognized only to the extent that it is probable that such
deferred tax asset is recoverable in a future period. Deferred tax assets are reduced to
the extent that it is no longer probable that the related tax benefit will be realized. |
| (u) | Dividends Payable |
| | Dividends are recorded when approved by the board of directors and stockholders. |

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12 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

(v)	Stock Options
	The stock option program allows the Company’s officers to acquire shares of the Company.
The option exercise price is generally fixed above the market price of underlying shares at
the date of the grant. The Company values stock options based upon an option-pricing model
(Black-Scholes model) under the fair value method and recognizes this value as an expense
over the period in which the options vest.
	When the options are exercised, equity is increased by the amount of the proceeds received,
and the values of options exercised and credited to the capital adjustment account. When
stock options are forfeited because the specified vesting requirements are not satisfied,
previously recognized compensation costs and corresponding capital adjustment account are
reversed to earnings. When stock options expire unexercised, previously recognized
compensation costs and corresponding capital adjustment account are reversed to capital
surplus.
(w)	Earnings Per Share
	Basic earnings per common share are calculated by dividing net earnings available to common
stock by the weighted-average number of shares of common stock holders outstanding during
each period. Diluted earnings per share are calculated by dividing net earnings plus
interest expenses, net of tax, of the convertible notes available to common stock holders
by the weighted-average number of shares of common stock outstanding adjusted to include
the potentially dilutive effect of the convertible notes.
	Stock options were not considered when calculating diluted earnings per share because the
exercise price of the stock options was greater than the average market price of the common
share and, therefore the effect would have been antidilutive.
(x)	Use of Estimates
	The preparation of consolidated financial statements in conformity with Korean GAAP
requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(y)	Minority Interest in Consolidated Subsidiaries
	Minority interest in consolidated subsidiaries are presented as a separate component of
stockholders’ equity in the consolidated balance sheets.
(z)	Foreign Currency Translation of Foreign Subsidiaries
	Assets and liabilities of the Company’s foreign subsidiaries and operations are translated
into Korean Won at the rates of exchange in effect at the balance sheet date. Income and
expense items are translated at the average exchange rates prevailing during the fiscal
year. Gains and losses resulting from such translation of financial statements are
recognized as a foreign-based operations translation adjustment in stockholders’ equity.

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13 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

| (aa) | Accounting for the Disposition of an Equity Interest in a Consolidated
Subsidiary |
| --- | --- |
| | Gains or losses on the Company’s sale of a subsidiary’s stock is recognized in income if,
after the sale of the equity interest, the investment is no longer required to be
consolidated. If the entity is still required to be consolidated, the Company records the
difference between net proceeds and the carrying amount of the stock as an adjustment to
stockholders’ equity. |
| (ab) | Application of the Statements of Korea Financial Accounting Standards |
| | The Korean Accounting Standards Board (“KASB”) has published a series of Statements of
Korea Accounting Standards (“SKAS”), which will gradually replace the existing financial
accounting standards, established by the Korea Financial Supervisory Board. SKAS No. 10,
No. 12 and No. 13 were adopted by the Company as of January 1, 2004. SKAS No. 15 “ Equity
Method Accounting ”, No. 16 “ Income Taxes ”, and No. 17 “ Provisions, Contingent Liabilities
and Contingent Assets ” become effective for the Company on January 1, 2005 according to the
effective date set forth by each SKAS. The Company does not expect the adoption of these
standards to have a material impact on the financial statements. |

(3)	Basis of Translating Consolidated Financial Statements
	The consolidated financial statements are expressed in Korean Won and, solely for the
convenience of the reader, the consolidated financial statements as of and for the year
ended December 31, 2004, have been translated into United States dollars at the rate of
W1,035.1 to US$1, the noon buying rate in the City of New York for cable transfers in Won
as certified for customs purposes by the Federal Reserve Bank of New York as of December
31, 2004. The translation should not be construed as a representation that any or all of
the amounts shown could be converted into U.S. dollars at this or any other rate.
(4)	Cash and Cash Equivalents
	Cash and cash equivalents as of December 31, 2003 and 2004 are summarized as follows:

	Millions — 2003	2004
Cash on hand	W	380	65
Checking accounts		3,919	5,751
Passbook accounts		17,859	22,290
Cash in transit		541,918	424,884
Time deposits		196,792	1,302,939
	W	760,868	1,755,929

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14

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

| (5) |
| --- |
| There are certain amounts included in cash and cash equivalents and short-term and long-term
financial instruments, which are restricted in use for expenditures for certain business
purposes as of December 31, 2003 and 2004 as follows: |

	Millions — 2003	2004
Cash and cash equivalents	W	1,038	—
Short-term financial instruments		3,127	5,800
Long-term financial instruments		61	92
	W	4,226	5,892

(6)
Inventories as of December 31, 2003 and 2004 are summarized as follows:

	Millions — 2003	2004
PCS handsets	W	225,809	282,652
Valuation allowance		—	(21,471	)
Construction and repair materials		72,924	29,331
Other		66,100	83,807
	W	364,833	374,319

(7)
Other current assets as of December 31, 2003 and 2004 are summarized as follows:

	Millions — 2003	2004
Current portion of long-term loans to employees	W	118,629	136,047
Prepaid expenses		28,412	28,203
Prepayments		49,371	74,030
Accrued interest income		8,359	25,098
Refundable deposits		8,721	4,154
Short-term loans		6,526	271
Receivables from derivative contracts (note 23)		9,070	2,661
Other		956	189
	W	230,044	270,653

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15 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(8)
Investments in securities as of December 31, 2003 and 2004 are summarized as follows:

(a) Trading securities (fair value)

	Millions — 2003	2004
Mutual funds	W	52,397	6,186

(b) Available-for-sale securities

(i) Equity securities

of ownership (%)			Millions
2003	2004		2003	2004
Current assets:
Knowledge Plant, Inc.*	4.4	4.4		7,272	1,625
Mobilians Co., Ltd.*	—	12.2		—	4,893
			W	7,272	6,518
Investment assets:
New Skies Satellites N.V.	1.4	—	W	15,917	—
Intelsat, Ltd.	0.7	0.7		6,222	6,222
Inmarsat Ventures plc	2.3	—		15,015	—
Inmarsat
Group holdings., Ltd.	—	2.3		—	653
Real Telecom Corporation	6.5	6.5		721	721
Korea Software Financial Cooperative	1.4	1.4		1,000	1,000
Korea Information Certificate Authority, Inc.	9.4	9.4		2,000	2,000
KT Internal Venture Fund No. 1	89.3	89.3		3,303	3,303
KT Internal Venture Fund No. 2	90.0	94.3		3,000	5,000
Mirae Asset Securities Co., Ltd.	9.6	4.4		11,960	5,000
Korea Telecom Venture Fund No. 1	90.0	90.0		18,000	18,000
Sky Life Contents fund	22.5	22.5		4,500	4,500
Korea Information Technology Fund	33.3	33.3		100,000	100,000
Kookmin Credit Information Inc.	13.0	13.0		1,202	1,202
On Game Network Inc.	19.5	19.5		1,061	1,061
GaeaSoft Corp.*	2.1	2.1		913	514
KRTnet Corporation*	7.5	7.5		4,454	3,634
Sports Toto	6.7	6.7		13,500	13,500
VACOM Wireless, Inc.	16.8	16.8		1,880	719
ESTsoft Corp.	15.0	15.0		1,650	1,650
CEC Mobile	16.7	16.7		4,456	4,456
Onse Telecom	6.4	8.6		4,605	6,181
Wide Telecom, Inc*	0.5	0.5		24	11
Dalsvyaz*	2.6	2.6		234	204
Other	—	—		13,684	22,078
			W	229,301	201,609

• Investments in these equity securities are recorded at fair value. All other equity securities that do not have readily determinable fair values are stated at cost.

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16 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(8) Investments in Securities, Continued

(b) Available-for-sale securities, Continued

(i)	Equity securities, Continued
	The Company recognized an impairment loss on available-for-sale securities of W43,993
million and W5,831 million for the years ended December 31, 2003 and 2004, respectively.
These charges were related to other-than-temporary declines in the value of the investee
companies.
	The Company and SK Telecom agreed to an equity swap on December 20, 2002 under which each
company sold all of the other’s equity shares it held in the other. According to the
agreement, the Company exchanged 4,457,635 shares of SK Telecom for 15,454,659 shares of
treasury stock plus cash of W211,868 million on December 30, 2002. In addition, the
Company exchanged 3,809,288 shares of SK Telecom for 14,353,674 shares of treasury stock
plus cash of W122,679 million on January 10, 2003 and the Company recognized a gain on
disposition of available-for-sale securities in the amount of W775,241 million for the
year ended December 31, 2003. Subsequent to January 10, 2003, the Company no longer has
any shares of SK Telecom.
(ii)	Debt securities

Maturity		Millions — 2003	2004
Current assets:
Beneficiary certificates	2005	W	216,105	251,285
Equity-linked securities	—		63,380	—
		W	279,485	251,285
Investment assets:
KTF Second Securitization Specialty Co., Ltd.	—		19,254	—
Other	—		12,087	17,148
		W	31,341	17,148

| | On April 11, 2002, the Company purchased equity-linked securities from an investment
bank. The value of the equity-linked securities were linked to the weighted-average
quoted price of SK Telecom stock. The Company’s investments in the equity-linked
securities were recorded at fair value and unrealized holding gains and losses were
recorded as a separate component of stockholder’s equity. The equity-linked securities
were tested for impairment during 2003 because of the decrease of the quoted market value
of the SK Telecom shares. As a result of this impairment test, the Company recognized an
impairment loss amounting to W35,137 million on the equity-linked securities for the year
ended December 31, 2003. As of December 31, 2003, the equity-inked securities also had
unrealized losses recorded within stockholders’ equity of W34,078 million. During 2004,
the Company disposed of its equity-linked securities and recognized a realized loss on
disposition of available-for-sale securities amounting to W54,806 million. |
| --- | --- |
| (iii) | Changes in unrealized gains (losses) |
| | Changes in unrealized gains (losses) on available-for-sale securities for the year ended
December 31, 2004 are summarized as follows: |

Beginning balance	Millions — W	(24,799
Realized losses on disposition of securities		27,844
Changes in unrealized gains and losses, net		4,752
Net balance at end of year	W	7,797

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17 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(8) Investments in Securities, Continued

(c) Held-to-maturity securities

	Millions — 2003	2004
Current assets:
Government and municipal bonds	W	5,712	1,660
Investment assets:
Government and municipal bonds		11,495	2,501
Beneficiary certificates (note 23(j))		99,914	88,667
Other		—	3,236
	W	111,409	94,404

During 2003, KTF acquired beneficiary certificates issued by Shinhan Bank Trust in relation to the disposal of trade accounts and notes receivable (see note 23(j)). During 2004, KTF recognized the difference between fair value and acquisition cost as impairment loss of W42,078 million, which may arise from the uncollectability of the trade accounts and notes receivable.

(9)
Investments in affiliated companies accounted for using the equity method as of December 31,
2003 and 2004 are summarized as follows:

			Millions
Ownership (%)			2003		2004
2003	2004		Net asset	Book value	Net asset		Book value
Listed*:
Hallim Venture Capital Corporation
(“HVCC”)	25.3	25.3	W	7,700	3,512	2,466		—
Unlisted:
Mongolian Telecommunications Co.	40.0	40.0		4,982	4,982	8,183		8,183
Korea IT Venture Partners Inc.	28.0	28.0		9,227	9,227	9,228		9,228
KBSi Co., Ltd.	32.4	32.4		1,386	1,386	1,667		1,667
Korea Telephone Directory Co., Ltd.	34.0	34.0		8,601	8,601	8,777		8,777
eNtoB Corp.	23.8	23.8		3,420	3,420	3,803		3,803
KT Infotech Corporation	15.6	15.6		4,350	3,955	3,334		3,059
Korea Telecom Realty Development
and Management Co., Ltd.	19.0	19.0		1,964	1,921	2,172		2,172
Korea Digital Satellite Broadcasting
Co. (“KDB”)	29.9	29.9		40,411	89,885	(2,191	)	—
Korea Information Data Corp.	19.0	19.0		6,864	6,864	9,138		9,138
Korea Information Service Corp.	19.0	19.0		4,552	4,552	6,007		6,007
KT Instrument & Communication Corp.	19.0	19.0		309	309	354		354
Bank Town Co., Ltd.	19.0	19.0		444	433	569		569
Korea Telecom Hitel Global Co., Ltd.	49.0	49.0		293	293	—		—
Sports TOTO On-Line	30.0	30.0		1,450	1,450	1,104		1,104
			W	95,953	140,790	54,611		54,061

• The quoted market value (based on the closing KOSDAQ price) of HVCC as of December 31, 2004 is W2,990 million.

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18 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(9)	Investments in Equity Securities of Affiliated Companies, Continued
	In December 2003, the Company purchased an additional 11,770,000 shares of KDB for W82,390
million including W49,119 million of investor-level goodwill. After making this cash purchase,
the Company’s equity ownership interest increased to 29.9%. In 2004, the Company impaired
investor-level goodwill of W37,030 million related with KDB due to continuous operating losses.
This impairment loss was recorded as a component of equity in losses of affiliates. In
addition, in 2004, KDB issued 11,875,000 shares of callable preferred stock, which has no
voting rights, amounting to W94,028 million to a third party. In the calculation of the
Company’s equity ownership interest in KDB’s net assets, the Company excluded the proceeds from
the preferred stock issuance.
	The Company has recorded unrealized losses of W2,691 million and W6,732 million relating to the
above affiliates as of December 31, 2003 and 2004, respectively, which have been accounted for
as capital adjustments. These capital adjustments have been recorded as unrealized losses on
equity securities of affiliates within stockholders’ equity.
	The Company received dividends of W554 million and W333 million in the aggregate from
affiliates for the years ended December 31, 2003 and 2004.
(10)	Insurance
	Property, plant and equipment are insured against fire damage up to an amount of W1,237,621
million and W1,619,139 million as of December 31, 2003 and 2004, respectively. Additionally,
the Company maintains insurance policies covering loss and liability arising from automobile
accidents.
(11)	Other Assets
	Other assets as of December 31, 2003 and 2004 are summarized as follows:

	Millions
	2003		2004
Frequency usage right, net (note 12)	W	1,208,429		1,115,996
Long-term loans to employees		565,556		475,319
Leasehold rights and deposits		330,747		313,302
Goodwill		944,326		731,694
Negative goodwill		(2,071	)	(1,553	)
Other intangible assets, net		276,714		338,552
Long-term accounts receivable — trade		48,438		139,740
Long-term accounts receivable — other		17,361		17,368
Deferred income tax assets (note 26)		415,396		373,726
Other		133,064		71,434
	W	3,937,960		3,575,578

| (12) |
| --- |
| During 2001, KTICOM acquired an IMT-2000 frequency usage right and a license to operate the
IMT-2000 business from the MIC for W1,300 billion. KTICOM was merged into KTF on March 6, 2003.
The Company paid 50%, or W650 billion, of this amount in 2001 and the net present value of the
remaining W650 billion unpaid balance is recorded as long-term accounts payable — other in the
accompanying consolidated balance sheet as of December 31, 2004. This right have a contractual
life of 15 years and are amortized based on the date commercial service is initiated through
the end of their contractual life. The Company began amortizing the frequency usage right on
December 1, 2003. |

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19 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(12)
The net amount of the frequency usage right as of December 31, 2003 and 2004 is as follows:

	Millions
	2003		2004
Frequency usage right	W	1,216,223		1,216,223
Less: Accumulated amortization		(7,794	)	(100,227	)
	W	1,208,429		1,115,996

Long-term accounts payable — other related to frequency usage right is stated at the net present value of future cash flows, calculated using the effective interest rate (9.93%) at the time of receipt of the frequency use license. The balances as of December 31, 2003 and 2004 are as follows:

	Millions
	2003		2004
Long-term accounts payable — other	W	650,000		650,000
Less: Present value discount		(131,239	)	(111,793	)
	W	518,761		538,207

The maturities of the Company’s long-term accounts payable — other related to frequency usage right outstanding as of December 31, 2004 are as follows:

Year	Millions
2005	W	—
2006		—
2007		90,000
2008		110,000
2009		130,000
2010		150,000
2011		170,000
	W	650,000

(13)
Short-term borrowings (all of which mature within one year) as of December 31, 2003 and 2004
are summarized as follows:

per annum (%)		Millions — 2003	2004
Commercial paper	3.96~4.80%	W	478,000	215,000
Borrowings from banks	4.18~6.00%		119,817	195,883
Short-term borrowings in foreign currency	0.60~4.71%		33,872	27,709
		W	631,689	438,592

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20 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(14)
Other current liabilities as of December 31, 2003 and 2004 are summarized as follows:

	Millions — 2003	2004
Key money deposits	W	100,739	104,197
Unearned income		4,932	4,002
Payables from interest rate swap (note 23)		16,077	7,278
Payables from interest currency swap (note 23)		—	99,615
Payables from currency swap (note 23)		3,554	40,799
Payables from currency forward (note 23)		—	10,025
Payables from currency option (note 23)		—	1,349
Other		7,312	9,704
	W	132,614	276,969

(15)
Long-term debt as of December 31, 2003 and 2004 is summarized as follows:

	Interest rate — per annum (%)	Maturity date	Millions — 2003	2004
Local currency (Won) debt:
Bonds	4.14~9.20	2005~2014	W	6,425,001	6,850,000
Convertible notes of KTF and KTFT	1.00	2005		38,880	38,600
Convertible notes issued in May 2002	3.00	2005		1,322,563	1,322,530
Borrowings from banks	4.90~7.25	2005~2007		90,680	72,223
Information and Telecommunication
Improvement Fund	3.53~6.85	2005~2009		173,070	132,764
				8,050,194	8,416,117
Foreign currency debt:
Convertible notes issued in January
2002 (USD)	0.25	2007		1,483,628	1,178,759
Bonds with warrants (Microsoft) (USD)	4.30	2005		598,900	521,900
Yankee bonds (USD)	7.50~7.63	2006~2007		419,230	365,330
Bonds (USD)	Libor+0.80	2006		179,670	156,570
MTNP notes (USD)	5.88~6.50	2014~2034		—	730,660
Bonds (JPY)	2.64~3.13	2005~2006		263,666	142,146
Loans (USD)	Libor+0.45~
	Libor+3.50	2005~2009		248,451	219,198
				3,193,545	3,314,563
				11,243,739	11,730,680
Add: Premium on bonds				30,997	52,828
Less:
Current portion, net of discount				2,172,510	4,756,067
Discount on bonds				52,478	42,370
			W	9,049,748	6,985,071

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21 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

| (15) |
| --- |
| In June 2004, the Company established a US$1 billion Medium Term Note Program (MTNP). As of
December 31, 2004, the Company has issued notes in the amount of US$700 million with a fixed
interest rate under the MTNP. The notes are listed on the Singapore Stock Exchange. As of
December 31, 2004, the unused portion of the MTNP amounts to US$300 million. |
| On January 4, 2002, the Company issued convertible notes with face amount of US$1,317.8
million. Holders of convertible notes are entitled to convert notes into shares of the
Company’s common stock from January 4, 2003 to January 1, 2007. In November 2004, holders of
the convertible notes elected their option to redeem these convertible notes. As a result, as
described in note 34, on January 4, 2005, the principal amount of US$1,115.1 million was
repaid. Prior to January 1, 2004, convertible notes are not subject to foreign currency
translation because convertible notes are regarded as non-monetary foreign currency liabilities
in accordance with Korean GAAP. However, in November 2004, certain holders of the convertible
notes elected their option to redeem these convertible notes. As a result of the election by
the note holders, the convertible notes are subject to foreign currency translation as of
December 31, 2004. Accordingly, the Company has recognized a foreign currency translation gain
of W304,870 million for the year ended December 31, 2004. During 2002 and 2003, the Company
purchased and retired convertible notes with a face value of US$191.5 million. |
| During 2002, bonds with warrants were issued in connection with a strategic alliance with
Microsoft Corp. Holders of bonds with warrants were entitled to exercise the warrants from
January 4, 2003 to December 31, 2003. The warrants expired on December 31, 2003 without being
exercised. The bonds of W521,900 million issued to Microsoft Corp. were repaid on January 4,
2005. |
| On May 25, 2002, the Company issued convertible notes with a face amount of W1,397,349 million. Holders of the
convertible notes are entitled to convert notes into shares of the Company’s common stock from September 25, 2002 to
April 25, 2005. The exchange price was W59,400 per share of common stock, which allowed the bondholders to obtain up
to 23,524,392 shares. During 2002, 2003 and 2004, due to early retirement of the convertible notes and 13,705 shares
of common stock converted, the number of shares allowed to the holders was reduced to 22,264,813 shares. The
convertible notes, if not converted, will be redeemed at 104.438% of their principal amount at maturity date. The
Company recognizes interest expense on the convertible notes using the effective interest method, and amortization
of the redemption premium is recorded as accrued interest expense. Since the issuance of the notes through December
31, 2004, the Company has purchased and retired convertible notes with a face value of W74,000 million and exchanged
convertible notes with a face value of W819 million with the Company’s shares. |
| On December 18, 2003, the Company purchased and retired convertible notes issued on January 4, 2002 with a face
value of US$83.7 million for US$85.8 million with a gain on
retirement of convertible notes of W7,441 million. |
| Aggregate principal maturities for the Company’s long-term debt as of December 31, 2004 are as follows: |

Fiscal year ending December 31,	Millions
2005	W	4,713,505
2006		1,232,601
2007		1,310,355
2008		857,686
2009		994,796
Thereafter		2,621,737
	W	11,730,680

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22 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(16)	Refundable Deposits for Telephone Installation
	Through September 15, 1998, KT collected deposits for telephone installation in accordance with
the Korea Public Telecommunication Business Law. Such deposits (which are reflected as a
liability) are to be refunded without interest to the telephone subscribers upon termination of
service. For changes in site classifications of telephones that were installed prior to January
1, 1990, KT is obligated to refund the original deposit received plus the increased deposit due
to changes in site classifications.
	Beginning on September 15, 1998, KT allowed customers to choose between alternative plans for
basic telephone service. Under such plan, customers were permitted the option to either place
fully refundable deposits or pay a reduced non-refundable service initiation fee. The
non-refundable service installation fees were recorded as operating revenues. Refundable
deposits continue to be subject to the same provisions as described above. Effective April 15,
2001, all new customers are required to pay a non-refundable service initiation fee.
(17)	Accrual for Retirement and Severance Benefits
	Changes in retirement and severance benefits for the years ended December 31, 2003 and 2004 are
summarized as follows:

	Millions
	2003		2004
Estimated severance benefits liability at beginning of year	W	379,606		245,878
Provision for the year		1,067,076		281,453
Increase due to change of consolidated subsidiaries		600		—
Payments		(1,020,940	)	(93,178	)
Withdrawal from the National Pension Fund, net		337		204
Payment for deposit of severance benefits insurance		(180,801	)	(119,568	)
Net balance at end of year	W	245,878		314,789

| | In September 2003, the Company offered a voluntary early retirement plan (the “Plan”) to its
employees. Under the terms of the Plan, employees participating in the Plan would receive
additional amounts of retirement and severance benefits. For the year ended December 31, 2003,
the Company recorded costs of W831,535 million related to this Plan covering approximately
5,500 employees. |
| --- | --- |
| (18) | Other Long-term Liabilities |
| | Other long-term liabilities as of December 31, 2003 and 2004 are summarized as follows: |

	Millions — 2003	2004
Accrual for customer call bonus points	W	105,391	128,397
Advance receipt		17,099	16,390
Key money deposits from customers		20,963	24,868
Other		5,414	2,188
	W	148,867	171,843

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23 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(19)
The composition of holders of common stock as of December 31, 2003 and 2004 are summarized as follows:

No. of shares owned		percentage
2003	2004	2003	2004
Employee Stock Ownership
Associations	16,394,226	16,174,934	5.76 %	5.68 %
National Pension Corporation	9,461,792	10,654,638	3.32 %	3.74 %
Treasury stock	74,090,974	74,090,418	26.01 %	26.01 %
Others, including private companies	184,902,408	183,929,410	64.91 %	64.57 %
	284,849,400	284,849,400	100.00 %	100.00 %

Changes in common stock for the years ended December 31, 2003 and 2004 are as follows:

shares issued		Millions
Balance at January 1, 2003	309,077,659	W	1,560,998
Retirement of treasury stock on January 6, 2003	15,454,659		—
Retirement of treasury stock on June 20, 2003	2,937,000		—
Retirement of treasury stock on December 9, 2003	5,836,600		—
Balance at December 31, 2003	284,849,400	W	1,560,998
Retirement of treasury stock during 2004	—		—
Balance at December 31, 2004	284,849,400	W	1,560,998

| | As allowed by the Securities Exchange Law of the Republic of Korea, the Company retired its
treasury shares by a charge to retained earnings rather than its common stock. |
| --- | --- |
| (20) | Capital Surplus |
| | Capital surplus as of December 31, 2003 and 2004 is summarized as follows: |

	Millions
	2003		2004
Paid-in capital in excess of par value	W	1,440,258		1,440,258
Goodwill of additional equity in consolidated subsidiaries		(181,649	)	(181,649	)
Other, net		50,003		33,008
	W	1,308,612		1,291,617

The line item, “Other, net”, mainly consists of the effects of common stock issuance of subsidiaries, retirement of treasury stock in consolidated subsidiaries and merger between subsidiaries.

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24 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(21)
Retained earnings appropriated to various restricted reserves as of December 31, 2003 and
2004 are summarized as follows:

	Millions — 2003	2004
Involuntary reserve:
Legal reserve	W	780,499	780,499
Voluntary reserve:
Reserve for business rationalization		443,416	443,416
Reserve for technology and human resource development		3,334	—
Reserve for social overhead capital		3,333	—
Reserve for business expansion		6,587,325	4,000,000
Reserve for redemption of telephone bonds		207,947	207,947
	W	8,025,854	5,431,862

| | Retained earnings appropriated to the legal reserve are restricted in use as cash dividends
under the applicable laws and regulations of the Republic of Korea. The Korean Commercial Code
requires KT to appropriate to a legal reserve an amount equal to at least 10% of the cash
dividend amount at the end of each accounting period until the reserve equals 50% of stated
capital. The legal reserve may be used to reduce a deficit or may be transferred to stated
capital. |
| --- | --- |
| | The Company is allowed to appropriate from retained earnings amounts necessary to establish
reserves for business expansion and research and development at its own discretion. These
reserves may be used for research, development and facilities expansion of the Company. |
| | Under the Special Tax Treatment Control Law, the Company is allowed to make certain deductions
from taxable income. The Company is, however, required to transfer from retained earnings the
amount of tax benefits obtained and transfer such amount into reserves for social overhead
capital and technology and human resource development. |
| | Through 2001, under the Special Tax Treatment Control Law, investment tax credits were allowed
for certain investments. However, the Company was required to transfer from retained earnings
the amount of tax benefits obtained into a reserve for business rationalization. Effective
December 11, 2002, the Company is no longer required to establish a reserve for business
rationalization despite tax benefits received for certain investments, and consequently the
existing balance is now regarded as a voluntary reserve. |
| (22) | Treasury Stock |

(a)	Trust fund
	During 2000, in order to stabilize the price of the Company’s common stock in the market,
the Company established a treasury stock fund of W100 billion. This trust fund is managed
by a bank, which is used primarily as a vehicle for trading the common stock of the
Company. The trust fund (which is recorded at cost) held treasury stock of 1,259,170 shares
as of December 31, 2003 and 2004, respectively.
(b)	Issuance to the notes holders
	During 2004, certain holders of convertible notes (as described in note 15), which were
issued on May 25, 2002, converted their notes into shares of the Company’s common stock. As
part of this transaction, 556 shares of treasury stock were issued to the note holders.

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25 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(22) Treasury Stock, Continued

(c)	Purchase and retirement of treasury stock
	The Company and SK Telecom agreed to an equity swap on December 20, 2002, under which each
company sold all of the other’s equity shares it held in the other. According to the
agreement, the Company exchanged 4,457,635 shares of SK Telecom for 15,454,659 shares of
the Company’s common stock and cash of W211,868 million on December 30, 2002 and retired
these treasury stock for W786,666 million by a charge to retained earnings on January 6,
2003. In addition, on January 10, 2003, the Company exchanged 3,809,288 shares of SK
Telecom for 14,353,674 shares of the Company’s common stock amounting W730,704 million and
cash of W122,679 million.
	During 2003, the Company initiated a stock buyback and retirement program approved by the
Board of Directors. The Company reacquired 8,773,600 shares of treasury stock during 2003
and retired these treasury shares amounting to W411,833 million by a charge to retained
earnings. As of December 31, 2004, no amounts under the stock buyback and retirement
programs are outstanding.
(d)	Sale and contribution to Employee Stock Ownership Association
	On August 28, 2003, the Company sold 1,803,296 shares of treasury stock to the KT Employee
Stock Ownership Association (“ESOA”). The difference between carrying value and the fair
value of W13,886 million was recorded as a loss on retirement of treasury stock and the
difference between the fair value and the sales proceeds of W40,754 million was expensed in
2003.

Changes in treasury stock for the years ended December 31, 2003 and 2004 are as follows:

Number				Number
of shares		Millions		of shares		Millions
Balance at beginning of year	76,988,771	W	4,112,225		74,090,974	W	3,962,598
Purchase of the Company’s
common stock	23,127,274		1,142,537		—		—
Issuance to convertible note holders	(2,356	)	(127	)	(556	)	(30	)
Purchase by trust fund, net	8,840		414		—		—
Retirement of treasury stock	(24,228,259	)	(1,198,499	)	—		—
Sale and contribution to ESOA	(1,803,296	)	(93,952	)	—		—
Balance at end of year	74,090,974	W	3,962,598		74,090,418	W	3,962,568

(23) Commitments and Contingencies

| (a) |
| --- |
| On February 20, 2001, the Fair Trade Commission alleged that the Company had unfairly
assisted its affiliates by paying them unreasonably high service fees through the violation
of the Fair Trade Laws. The Fair Trade Commission imposed a fine of approximately W30,700
million, and the Company expensed W30,700 million for this claim during 2001. In November
2004, the Seoul High Court partially reversed the Fair Trade Commission’s decision and
decreased the fine from W30,700 million to W2,400 million. As of December 31, 2004, the
ruling of the Seoul High Court’s decision is not reflected in the accompanying consolidated
financial statements. The Company believes that the Fair Trade Commission will appeal to
the Supreme Court of Korea. |

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26 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(23) Commitments and Contingencies, Continued

(a)	Legal matters, Continued
	The Company is also in litigation as a defendant in other cases for damages allegedly
resulting from various claims, disputes and legal actions in the normal course of
operations. These claims amounted to W111,230 million as of December 31, 2004. Management
believes that the ultimate settlement of these matters, and the matter described in the
previous paragraph, will not have a material adverse effect on the Company’s financial
position, results of operations or cash flows.
(b)	Interest rate swaption
	During 2002, the Company entered into interest rate swaption contract with Citibank for
variable rates of interest in place of fixed rates of interest. Details of the interest
rate swaption contract outstanding as of December 31, 2004 are as follows:

	Swaption — premium		Notional	interest rate		Variable — interest
Bank	(millions)		amount	(1 year)		rate (3 months)	Exercise date	Type
Citibank	W	1,913	W	100,000	7.9 %	91-Day CD rate	April 25, 2005	Selling

| | Under the interest rate swaption contract, the Company recognized a valuation gain of
W2,448 million and a valuation loss of W(636) million for the years ended December 31, 2003
and 2004, respectively. |
| --- | --- |
| (c) | Interest rate swap |
| | During 2002, 2003 and 2004, the Company entered into various interest rate swap contracts
with financial institutions for variable rates of interest in place of fixed rates of
interest. Details of these interest rate swap contracts as of December 31, 2004 are as
follows: |

	Nominal — premium	Notional — amount	interest		Variable interest	Terminal
Bank	(millions)	(millions)	rate		rate	date
J.P. Morgan	$1.6	US$	150	7.50 %	6-month LIBOR +4.32%	June 1, 2006
J.P. Morgan	$0.5	US$	200	7.63 %	6-month LIBOR +4.61%	April 15, 2007
Citibank	—	W	110,000	5.29 %	3-month LIBOR +1.47%	April 30, 2008
Shinhan Bank	—	W	180,000	6.35 %	3-month LIBOR +2.47%
					+Contingent spread	September 30, 2007
Shinhan Bank	—	W	57,810	4.70 %	6-month LIBOR + 0.69%	June 24, 2009
UBS	—	W	57,810	4.70 %	6-month LIBOR + 0.69%	June 24, 2009
UBS	—	W	57,810	4.64 %	6-month LIBOR + 0.69%	June 24, 2009
BNP Paribas	—	W	110,000	5.29 %	3-month LIBOR +1.54%	April 30, 2008
CSFB	—	W	57,810	4.64 %	6-month LIBOR +0.69%	June 24, 2009

| Under the interest rate swap contracts, the Company recognized a valuation loss of W
(13,645) million and gain of W222 million for the year ended December 31, 2003, and a
valuation loss of W(2,943) million and gain of W12,427 million for the year ended
December 31, 2004. |
| --- |
| In addition, the Company settled two contracts and three contracts in 2003 and
2004, respectively, and recognized a transaction gain of W8,170 million and a
transaction loss of W(1,252) million for the years ended December 31, 2003 and 2004,
respectively. |

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27

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(23) Commitments and Contingencies, Continued

| (d) |
| --- |
| During June 2003, the Company entered into two currency swap contracts for principal and
interest denominated in Korean Won in place of principal and interest of long-term debt
denominated in U.S. dollars. Details of these currency swap contracts as of December 31,
2004 are as follows: |

	Receiving — amount		Paying — amount		Receiving	Paying	Terminal
Bank	(millions)		(millions)		Interest rate	Interest rate	date
J.P. Morgan	US$	50	W	59,750	4.30% (US$) per year	6.17% (Won) per year	January 3, 2005
J.P. Morgan	US$	150	W	179,760	3-month LIBOR	3-month LIBOR	June 24, 2006
					+ 0.80% (US$)	+2.64% (Won)

| | Under the currency swap contracts, the Company recognized valuation losses of W(2,429)
million and W(37,244) million for the years ended December 31, 2003 and 2004, respectively. |
| --- | --- |
| (e) | Interest currency swap |
| | In October 2003, the Company entered into five interest currency swap contracts with
financial institutions for principal and the fixed rate of interest denominated in Korean
Won in place of principal and the variable rate of interest of long-term debt denominated
in U.S. dollars. The principal amounts in Korean Won will be adjusted according to the
foreign exchange rate of the terminal date within certain ranges. In addition, during 2004,
the Company entered into five interest currency swap contracts with financial institutions
for principal and interest denominated in Korean Won in place of principal and interest of
long-term debt denominated in U.S. dollars. Details of these interest currency swap
contracts as of December 31, 2004 are as follows: |

	Receiving	Paying	Fixed	Variable
	amount	Amount	interest	interest	Terminal
Bank	(millions)	(millions)	rate (1 year)	rate (6 months)	date
J.P. Morgan	US$50	W55,000~60,000	4.3% (US$)	6-month LIBOR +4.55% (Won)	January 3, 2005
J.P. Morgan(*)	US$100	W115,620	5.9% (US$)	6-month LIBOR +1.87% (Won)
			5.5% (Won)		June 24, 2014
J.P. Morgan(**)	US$200	W231,240	5.5% (Won)	6-month LIBOR +0.69% (Won)
				5.9%-Contingent Spread (US$)	June 24, 2014
Merrill Lynch	US$100	W116,400	5.0% (Won)	5.9%-Contingent Spread (US$)	June 24, 2014
Merrill Lynch	US$50	W53,325	4.7% (Won)	5.9%-Contingent Spread (US$)	June 24, 2014
Citibank	US$25	W27,500~30,000	4.3% (US$)	6-month LIBOR +4.45% (Won)	January 3, 2005
UBS	US$25	W27,500~30,000	4.3% (US$)	6-month LIBOR +4.45% (Won)	January 3, 2005
Deutsche Bank	US$50	W55,000~60,000	4.3% (US$)	6-month LIBOR +4.57% (Won)	January 3, 2005
Deutsche Bank	US$50	W53,325	4.7% (Won)	5.9%-Contingent Spread (US$)	June 24, 2014
Shinhan Bank	US$50	W55,000~60,000	4.3% (US$)	6-month LIBOR +4.45% (Won)	January 3, 2005

| () | The interest will be received at 5.9% (US$) and paid at 6-month
LIBOR +1.87% (Won) every six months over the first five years. Then, the
interest will be received at 5.9% (US$) every six months and paid at 5.5% (Won) per
year over the following five years. |
| --- | --- |
| (*) | The interest will be received at 5.9%-contingent spread (US$) and paid at
6-month LIBOR+0.69% (Won) every six months over the first five years. Then, the
interest will be received at 5.9%-contingent spread (US$) every six months and paid at
5.5% (Won) per year over the following five years. |

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28 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(23) Commitments and Contingencies, Continued

(e)	Interest currency swap, Continued
	Under the interest currency swap contracts, the Company recognized valuation gain of W5,083
million and valuation loss of W(105,899) million for the years ended December 31, 2003 and
2004, respectively.
(f)	Currency Forward
	During 2004, the Company entered into eight currency forward contracts related to the
convertible notes which are due on January 4, 2005 (note 15) with financial institutions.
As of December 31, 2004, these fixed amount US dollar forward contracts amounting to $870
million are outstanding with a terminal date of January 3, 2005. Under the currency forward
contracts, the Company recognized a valuation loss of W(10,025) million and a valuation
gain of W164 million, respectively, for the year ended December 31, 2004.
	In 2004, KTFT and KTSC, subsidiaries of KT, entered into eight currency forward buying
contracts with financial institutions. As of December 31, 2004, one currency forward
contract amounting to $3.4 million in KTSC is outstanding with a terminal date of March 7,
2005. Under the currency forward contract, KTSC recognized a valuation gain of W42 million
for the year ended December 31, 2004.
	During 2004, KTFT settled seven contracts at the terminal date and recognized a transaction
loss of W(730) million and gain of W508 million for the year ended December 31, 2004.
(g)	Currency option
	In 2004, KTF has entered into two currency option contracts with Shinhan Bank. Each
currency option contract consists of a call and put option. The details of the currency
option contracts as of December 31, 2004 are as follows:

	Contract — amount		Fixed — Exchange	Terminal
Bank	(millions)	Position	rate	date
Shinhan Bank	JPY 2,000	JPY Call / JPY Put	10.30~10.85	May 24 2005
Shinhan Bank	JPY 2,000	JPY Call / JPY Put	10.65~13.40	April 20, 2006

Under these currency option contracts, KTF recognized a valuation loss of W(1,349) million for the year ended December 31, 2004.

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29 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(23) Commitments and Contingencies, Continued

(h)	Loans and Borrowings
	As of December 31, 2004, the Company has entered into bank overdraft agreements with two
banks for borrowings up to W750,000 million and a collection agreement for foreign currency
denominated checks up to US$1 million with Korea Exchange Bank. In addition, the Company
has received letter of credits up to US$35 million with four banks.
	In October 2004, the Company has entered into revolving stand-by credit line agreements
with 12 banks for borrowing up to US$200 million. However, as of December 31, 2004, there
is no outstanding amount under these agreements.
	As of December 31, 2004, KTP has received letter of credits up to US$4,235 thousand and
W1,000 million with three banks.
	As of December 31, 2004, KTF has entered into bank overdraft agreements with Shinhan Bank
for borrowings up to W50,000 million. The Company also has received letter of credits up to
US$20,000 thousand with Shinhan Bank.
	In addition, as of December 31, 2004, KTH also has entered into bank overdraft agreements
with Korea First bank for borrowings up to W1,000 million.
(i)	Guarantee Provided by a Third Party
	As of December 31, 2004, three financial institutions are providing guarantees for the
Company covering contract biddings up to US$7,403 thousand, SAR8 million and W57,701
million.
(j)	Disposal of KTF accounts receivable
	On November 4, 2003, KTF transferred handset installment receivables of W339,677 million
and guarantee insurance and other incident rights to KTF Second Securitization Specialty
Co., Ltd. As a result of this disposal, KTF received cash of W312,000 million and
subordinate debt securities of W19,254 million, and KTF recognized a loss on disposal of
trade accounts and notes receivable of W8,423 million for the year ended December 31, 2003.
	In addition, on December 19, 2003, KTF transferred PCS service receivables of W253,247
million as of October 31, 2003, and future trade receivables, which were expected to be
incurred until February 28, 2007 to Shinhan Bank Trust. As a result of this disposal, on
December 19, 2003, KTF received cash of W200,000 million and beneficiary certificate of
W53,247 million. Under this program, KTF sells receivables on a monthly basis. As a result,
the beneficiary certificate will change depending on the amount of disposals. KTF
recognized a loss on disposal of trade accounts and notes receivable of W1,680 million and
W11,816 million for the years ended 2003 and 2004, respectively. As of December 31, 2003
and 2004, the uncollected trade receivables under this program were W301,802 million and W
342,672 million, respectively.

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30 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(23) Commitments and Contingencies, Continued

(k) Leases

| (i) |
| --- |
| The Company maintains operating lease agreements for certain machinery and equipment
from Macquarie IT KOREA Lease Company and others. Annual future lease payments under
operating leases as of December 31, 2004 are as follows: |

Year ending December 31,	Millions
2005	W	67,600
2006		66,819
2007		6,268
2008		5,915
2009		5,915
Thereafter		31,621
	W	184,138

| (ii) |
| --- |
| The Company has capital lease agreements with GE Capital Korea Ltd. for certain
machinery and equipment, of which acquisition cost amounts to W22,860 million.
Depreciation on the machinery and equipment for the years ended December 31, 2003 and
2004 amounted to W312 million and W4,505 million, respectively. Annual future minimum
payments under the lease agreements as of December 31, 2004 are as follows: |

Year ending December 31, — 2005	Millions — W	4,955
2006		4,955
2007		4,955
2008		4,782
2009		2,123
		21,770
Less: amount representing interest		(1,683	)
	W	20,087

(24)
Operating revenues for the years ended December 31, 2003 and 2004 are as follows:

	Millions — 2003	2004
Internet services	W	2,369,593	2,606,852
Data communication services		1,083,093	962,627
Telephone services		6,610,982	6,189,290
PCS services		4,164,286	4,799,586
Sales of PCS handsets		1,153,505	1,754,968
Satellite services		119,639	119,412
Other		566,681	635,636
	W	16,067,779	17,068,371

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31 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(25)
Operating expenses for the years ended December 31, 2003 and 2004 are as follows:

	Millions
	2003		2004
Salaries and wages	W	2,038,466		1,945,714
Compensation expense (note 29)		6,966		6,129
Provision for retirement and severance benefits,
including early retirement payments		1,067,076		281,453
Employee benefits		597,859		503,857
Communications		64,231		56,613
Utilities		181,359		194,350
Taxes and dues		140,291		141,623
Rent		194,330		269,667
Depreciation		3,393,175		3,403,639
Amortization		364,051		393,849
Repairs and maintenance		450,550		488,407
Automobile maintenance		25,682		26,348
Commissions		834,846		1,061,726
Commissions to sales agent		565,082		940,039
Entertainment		4,545		7,903
Advertising		283,969		294,262
Education and training		59,254		50,372
Research and development		244,625		265,207
Travel		37,969		37,342
Supplies		47,096		38,809
Interconnection charges		1,077,082		973,429
Cost of goods sold		1,131,475		1,782,140
Cost of services (commissions for system integration service and other
miscellaneous service)		532,424		420,149
International line usage		184,326		194,143
Promotion		376,834		537,927
Provision for doubtful accounts		363,774		287,073
Other		97,992		111,269
		14,365,329		14,713,439
Less: amounts included in construction in progress		(119,986	)	(125,600	)
	W	14,245,343		14,587,839

In September 2003, the Company offered a voluntary early retirement plan (the “Plan”) to its employees. Under the terms of the Plan, employees participating in the Plan would receive additional amounts of retirement and severance benefits. For the year ended December 31, 2003, the Company recorded costs of W831,535 million related to this Plan covering approximately 5,500 employees.

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32 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(26) Income Taxes

(a) The Company is subject to a number of income taxes based upon taxable income which results in the following normal tax rates (including resident tax):

Taxable earnings — Up to W100 million	16.5 %	14.3 %
Over W100 million	29.7 %	27.5 %

The components of income tax expense for the years ended December 31, 2003 and 2004 are as follows:

	Millions — 2003	2004
Current income tax expense	W	477,337	470,925
Deferred income tax expense		46,294	106,964
	W	523,631	577,889

(b) The provision for income taxes calculated using tax rates differs from the actual provision for the years ended December 31, 2003 and 2004 for the following reasons:

	Millions
	2003		2004
Provision for income taxes
at normal tax rates	W	469,575		596,684
Tax effect of prior year’s
additional income tax payment		16,036		280
Tax effect of permanent differences, net		85,689		39,024
Utilization of loss carryforwards		(40,273	)	(32,628	)
Investment tax credits		(174,952	)	(206,344	)
Effect of tax rate change		33,974		6,535
Impairment of deferred tax asset		133,582		174,338
Actual provision for income taxes	W	523,631		577,889

| | The effective tax rates, after adjustments for certain differences between amounts
reported for financial accounting and income tax purposes, were approximately 33.1% and
28.8% for the years ended December 31, 2003 and 2004, respectively. |
| --- | --- |
| (c) | The tax effects of temporary differences that result in significant portions of
deferred income tax assets and liabilities as of December 31, 2003 and September 30, 2004
are presented below: |

	Millions — 2003	2004
Deferred income tax assets:
Retirement and severance benefits	W	9,309	8,357
Allowance for doubtful accounts		161,473	149,093
Refundable deposits for telephone installation		20,022	18,157
Equity in losses of affiliates		221,957	352,926
Investment securities		50,469	36,669
Tax credit carryforwards		25,816	61,526
Loss carryforwards		80,230	22,283
Other, net		90,355	107,347
Total deferred income tax assets		659,631	756,358

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33 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(26) Income Taxes, Continued

	Millions — 2003	2004
Deferred income tax liabilities:
Accumulated depreciation	W	28,166	64,708
Accrued interest income		2,257	10,004
Total deferred income tax liabilities		30,423	74,712
Write-off		213,812	307,920
Deferred income tax asset, net	W	415,396	373,726

| Following the Company’s acquisition of a controlling financial interest in KTM in July 2000,
KTM reassessed its business plan with the Company in KTM’s future business. As part of the
revised strategy, KTM’s intent was to seek a merger partner and undertake other operational
changes. During December 2000, KTM concluded that it was not likely that it would be able to
realize the tax benefit of its loss carryforward and, therefore, wrote off the related deferred
tax assets in the amount of W233,496 million as of December 31, 2000 by a charge to deferred
income tax expense in 2000. |
| --- |
| In 2001, KTM was merged into KTF with the combined entity operating under the name of KTF. Upon
the merger in 2001, the Company recognized a deferred tax asset for the net operating loss of
KTM. However, subsequent to the initial realization, the Company provided a valuation allowance
as a component of income tax expense for this deferred tax asset due to the uncertainty of
realization. As a result of KTM’s operating performance in 2001 as well as a change in tax
regulations, KTF was able to utilize KTM’s loss carryforward as a benefit to income tax expense
in the amount of W150,653 million in 2002, W135,600 million in 2003 and W109,860 million in
2004. As of December 31, 2004, KTF’s remaining loss carryforwards are W181,885 million which
will expire during 2005. During 2004, the Company concluded that a portion of this tax loss
carryforward was probable of realization in 2005. As a result, the Company recorded an income
tax benefit of W13,750 for the portion of the tax loss carryforward that is realizable in 2005.
However, KTF concluded that it is not probable that the total tax benefit of the loss
carryforward generated by KTM can be realized in 2005 and therefore, did not recognize a
deferred income tax asset related to KTM’s remaining loss carryforwards of W131,885 million
which are not expected to be realized in 2005 and will expire at the end of 2005. |
| The Company concluded that it was not probable that it would be able to realize the tax benefit
of its equity in losses of affiliates within the near future, which is construed usually to
mean 5 years and, therefore, wrote off the related deferred income tax assets in the amount of
W133,582 million and W169,963 million by a charge to deferred income tax expense for the years
ended December 31, 2003 and 2004, respectively. |
| In addition, in April 2004, KTR was merged into KTN, a subsidiary of KT, and KTN wrote off the
deferred tax assets in the amount of W4,375 million. |
| During 2003, the Korea National Tax Service initiated a tax audit of the Company for the
periods from 1998 to 2002. In September 2003, the Company received a final notice from the
Korea National Tax Service asserting income tax deficiencies. As a result of the tax audit, the
Company paid W67,410 million which consisted of W1,639 million of deferred income tax asset and
W65,771 million of prior year’s income tax expense for the year ended December 31, 2003. |
| During 2004, the Korea National Tax Service initiated a tax audit with the Company for a stock
transaction which took place in 2000. For the year ended December 31, 2004, the Company
recognized a deferred income tax asset of W65,294 million and a prior year’s income tax expense
of W943 million, respectively, from the cash payment related to this tax audit. |

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34 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(27) Dividends

| (a) |
| --- |
| On July 29, 2004, an interim dividend was declared by the Board of Directors and the
Company paid this dividend to common shareholders on August 13, 2004. Dividends relating to
each of the year’s earnings based upon the par value of common stock are as follows: |

2003	2004		Millions — 2003	2004
Dividends paid	—	20.0 %	W	—	210,759

(b) Dividends are generally proposed based on each year’s earnings and are declared, recorded and paid in the subsequent year. Dividends relating to each of the year’s earnings based upon the par value of common stock are as follows:

2003	2004		Millions — 2003	2004
Dividends proposed	40.0 %	40.0 %	W	421,517	421,518

| | Proposed dividends of W421,518 million were not recorded in the 2004 financial statements. They
will be recorded upon the approval by the shareholders in 2005. |
| --- | --- |
| (28) | Earnings Per Share |
| | Earnings per share of common stock for the years ended December 31, 2003 and 2004 are
calculated as follows: |

	Millions
	(except number of shares
	and earnings per share)
	2003	2004
(a) Basic earnings per share
Net earnings	W	821,734	1,282,216
Weighted-average number of shares of
common stock (in thousands)		216,106	210,759
Basic earnings per share (in Won)	W	3,802	6,084

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35 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(28) Earnings Per Share, Continued

	Millions
	(except number of shares
	and earnings per share)
	2003	2004
(b) Diluted earnings per share
Net earnings	W	821,734	1,282,216
Adjustments:
Interest expense on convertible notes		51,373	46,662
Net earnings available for common and common
equivalent shares		873,107	1,328,878
Weighted-average number of common and common
equivalent shares (in thousands)		263,556	233,270
Diluted earnings per share (in Won)	W	3,313	5,697

| Diluted earnings per share are calculated based on the effect of potentially dilutive
securities that were outstanding during the year. The denominator for the diluted earnings per
share computation is adjusted to include the number of additional common shares that would have
been outstanding if the potentially dilutive securities had been converted into common stock.
In addition, the numerator is adjusted to include the after-tax amount of interest recognized
associated with convertible notes. |
| --- |
| Potentially dilutive securities as of December 31, 2003 and 2004 are as follows: |

(thousands)
2003	2004
Convertible notes (note 15)	45,770	22,511
Stock options (note 29)	616	512

| | Stock options were not considered in the determination of diluted earnings per share in 2003
and 2004 because of the anti-dilutive effect on the exercise of stock options. |
| --- | --- |
| (29) | Stock Options |
| | The Company granted stock options to its executive officers and directors in accordance with
the stock option plan approved by the Board of Directors. The details of the stock options
granted are as follows: |

	1 st Grant	2 nd Grant	3 rd Grant
Grant date	2002.12.26	2003. 9.16	2003.12.12
Exercise price (in Won)	70,000	57,000	65,000
Number of shares	371,632	34,200	106,141
Exercise period	2004.12.27~2009.12.26	2005.9.17~2010.9.16	2005.12.13~2010.12.12
Valuation method	Fair value	Fair value	Fair value
	(Black-Scholes model)	(Black-Scholes model)	(Black-Scholes model)

The first grant of stock options consisted of 680,000 shares of common stock, including 220,000 shares under performance condition at the option price of W70,000 per share. However, the number of stock options decreased to 371,632 shares and the total cost of compensation decreased from W10,602 million to W8,311 million because of the resignation of two officers and not achieving performance criteria.

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36 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

| (29) |
| --- |
| The second grant of stock options consisted of 36,400 shares of common stock at the option
price of W57,000 per share. However, the number of stock options decreased to 34,200 shares and
the total cost of compensation decreased from W453 million to W426 million because of the
resignation of an outside director. |
| The third grant of stock options consisted of 120,000 shares of common stock, including 40,000
shares under performance condition at the option price of W65,000 per share. As of December 31,
2004, the total shares that are expected to be exercised are 106,141 and the total cost of
compensation is W1,160 million. |
| The options are fully vested upon completion of two years mandatory service periods starting
from the grant dates. The first and third granted option holders can exercise one third of
total options annually from 2004 and 2005, respectively. The second granted options holders can
exercise total options when the options are vested. |
| The Company adopted the fair value method (Black-Scholes model) for the calculation of
compensation costs which are amortized to expense over the option vesting periods. |
| The valuation assumptions of stock options based on the fair value method under the
Black-Scholes model are as follows: |

	1 st Grant	2 nd Grant	3 rd Grant
Risk free interest rate	5.46%	4.45%	5.09%
Expected option life	4.5 years to 5.5 years	4.5 years	4.5 years to 5.5 years
Expected volatility	49.07% ~ 49.90%	34.49%	31.26% ~ 33.90%
Expected dividend
yield ratio	1.10%	1.57%	1.57%
Fair value per option
(in Won)	W22,364	W12,443	W10,926
Total compensation cost
(in millions)	W 8,311	W 426	W 1,160

| For the year ended December 31, 2004, the Company recognized a compensation benefit of W1,167
million because certain directors left the Company prior to completion of mandatory service
periods. |
| --- |
| Changes in the total cost of compensation for the year ended December 31, 2004 are summarized
as follows: |

	Millions
Adjusted total cost of compensation
Total cost of compensation before adjustment	W	12,215
Cost of compensation — forfeited		(2,318	)
		9,897
Accumulated cost recognized in prior periods		(5,479	)
Cost recognized for the year
Cost of
compensation — forfeited		1,167
Cost of compensation for the year		(4,887	)
		(3,720	)
Cost to be recognized in future years	W	698

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37 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(29)	Stock Options, Continued
	In addition, KTF and KTP, subsidiaries of KT, granted stock options to its officers and adopted
the fair value based method for the calculation of compensation expense which is amortized to
expense over the option vesting period. KTF and KTP recognized W2,487 million (accumulated) as
capital adjustments as of December 31, 2004 and recognized stock option expense of W1,590
million and W2,409 million for the years ended December 31, 2003 and 2004, respectively.
(30)	Segment Information
	The Company has two reportable operating segments — wireline communications and PCS services
(including IMT-2000 services). Wireline communications include all services provided to fixed
line customers, including internet services, data communication services, wire and other
facilities, leased line services and telephone services. PCS services (including IMT-2000
services) provides both PCS service and IMT-2000 service through the merger between two
separate legal entities, KTF and KTICOM during 2003. PCS service is a digital wireless
telephone system that uses light handsets with a long battery life to communicate via low-power
antennas. PCS telephones have the capacity to receive and send data as well as voice
transmission. IMT-2000 service is a third-generation, high-capacity wireless communication
system that enables subscribers to utilize a full range of mobile multi-media services
including video phone and wireless data transmission. The operations of all other entities
which fall below the reporting thresholds are included in the “Miscellaneous” segment below,
and include entities providing, among others, submarine cable construction and group telephone
management.
	The Company’s reportable segments consist of separate legal entities that offer different
products and services and/or serve different customers. No single customer accounted for
revenues in excess of 10% of total revenues. The entities are managed differently since they
utilize different technology and marketing strategies and have different capital requirements.
Management primarily evaluates the performance of the segments based on operating income
(loss).
	The Company accounts for intersegment revenues and costs as if the related transactions were
with third parties. The adjustments included in “Reconciling Adjustments,” line item “Other
income (expense), net” include minority interest in earnings of consolidated subsidiaries of
W235,695 million and W148,931 million for the years ended December 31, 2003 and 2004,
respectively, and elimination of the parent company’s equity in net earnings of KTF and other
subsidiaries of W160,161 million and W91,880 million for the years ended December 31, 2003 and
2004, respectively. Reconciling adjustments also include reclassification of amortization of
goodwill between the line items “Other income (expense),
net” and “Operating expenses —
depreciation and amortization” in the amount of W294,306 million and W212,210 million for the
years ended December 31, 2003 and 2004, respectively. Additionally, reconciling adjustments
include intersegment eliminations in all line items.

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38 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(30)
The following table provides information for each operating segment as of and for the year ended December 31, 2003:

	2003 (millions)
	Wireline		PCS				Reconciling
	Communications		Services		Miscellaneous		Adjustments		Consolidated
Operating revenues:
External customers	W	11,090,939		4,520,348		456,492		—		16,067,779
Intersegment		483,610		566,999		462,716		(1,513,325	)	—
		11,574,549		5,087,347		919,208		(1,513,325	)	16,067,779
Operating expenses:
Depreciation and amortization		2,514,299		849,500		101,874		291,553		3,757,226
Other		7,817,106		3,459,638		775,515		(1,564,142	)	10,488,117
		10,331,405		4,309,138		877,389		(1,272,589	)	14,245,343
Operating income (loss)		1,243,144		778,209		41,819		(240,736	)	1,822,436
Interest income		78,670		34,842		12,046		(10,104	)	115,454
Interest expense		(432,200	)	(272,992	)	(10,452	)	10,104		(705,540	)
Other income (expenses), net		400,055		(76,937	)	(55,685	)	(154,418	)	113,015
Earnings (loss) before
income taxes		1,289,669		463,122		(12,272	)	(395,154	)	1,345,365
Income taxes		459,603		51,657		11,671		700		523,631
Net earnings (loss)	W	830,066		411,465		(23,943	)	(395,854	)	821,734
Total assets	W	19,573,181		7,591,888		1,229,309		(2,837,703	)	25,556,675
Capital expenditures	W	2,083,370		953,377		186,830		(14,201	)	3,209,376

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39 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(30)
The following table provides information for each operating segment as of and for the year
ended December 31, 2004:

	2004 (millions)
	Wireline		PCS				Reconciling
	Communications		Service		Miscellaneous		Adjustments		Consolidated
Operating revenues:
External customers	W	11,315,054		5,206,380		546,937		—		17,068,371
Intersegment		535,765		634,890		724,857		(1,895,512	)	—
		11,850,819		5,841,270		1,271,794		(1,895,512	)	17,068,371
Operating expenses:
Depreciation and amortization		2,361,257		1,090,645		135,583		210,003		3,797,488
Other		7,362,443		4,211,186		1,136,658		(1,919,936	)	10,790,351
		9,723,700		5,301,831		1,272,241		(1,709,933	)	14,587,839
Operating income (loss)		2,127,119		539,439		(447	)	(185,579	)	2,480,532
Interest income		102,398		12,691		21,056		(19,420	)	116,725
Interest expense		(450,740	)	(220,606	)	(26,588	)	19,420		(678,514	)
Other income (expenses), net		20,748		(22,914	)	(27,902	)	(28,570	)	(58,638	)
Earnings (loss) before
income taxes		1,799,525		308,610		(33,881	)	(214,149	)	1,860,105
Income taxes		544,003		24,709		9,209		(32	)	577,889
Net earnings (loss)	W	1,255,522		283,901		(43,090	)	(214,117	)	1,282,216
Total assets	W	20,114,036		7,960,430		1,285,758		(2,886,992	)	26,473,232
Capital expenditures	W	1,818,507		945,623		210,482		(3,236	)	2,971,376

(31)
Significant non-cash investing activities for the years ended December 31, 2003 and 2004 are
summarized as follows:

	Millions — 2003		2004
Change in unrealized gains (losses) on available-for-sale securities	W	(13,045	)	4,752
Change in unrealized gains (losses) due to the sales of available-for-sale
securities		(781,406	)	27,844
Available-for-sale securities transferred to treasury stock		730,704		—
Exchange on available-for-sale securities		—		18,798
Construction in progress transferred to property, plant and equipment		2,473,599		2,585,478

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40 KT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued

(32)	Contribution Payments for Research and Development and Donations
	For the years ended December 31, 2003 and 2004, the Company made contributions of W63,407
million and W74,413 million, respectively, to the Korean government (Information and
Telecommunication Improvement Fund), the Korea Electronic Telecommunication Research Institute
(ETRI), and other institutes. In addition, the Company established a labor welfare fund as a
separate entity and contributed W100,000 million and W50,000 million for the years ended
December 31, 2003 and 2004, respectively.
(33)	Contributions Received for Losses on Universal Telecommunications Services
	Starting on January 1, 2000, all telecommunications service providers must contribute towards
the supply of universal telecommunications services in Korea. Telecommunications service
providers designated as universal service providers by the MIC are required to provide
universal telecommunications services, including local services, local public telephone
services, telecommunications services for remote islands and wireless communication services
for ships. The Company has been designated a universal service provider. The losses incurred by
universal service providers in connection with providing these universal telecommunications
services are to be apportioned among the service providers based on their respective annual
revenues. For the years ended December 31, 2003 and 2004, amounts reimbursed to the Company
were W28,539 million and W80,310 million, respectively. As the only universal telecommunication
service provider in Korea, the Company incurred estimated contribution costs of W86,704 million
and W120,915 million in 2003 and 2004 respectively. These costs are subject to review by MIC
before being finalized.
(34)	Fourth Quarter Information (Unaudited)
	Operating revenues, operating income, net earnings and basic earnings
per share are for the three-month periods ended December 31, 2003 and
2004 are as follows:

	Millions
	(except per share data)
	2003	2004
Operating revenues	W	3,977,336	4,187,416
Operating income		491,410	430,921
Net earnings		82,516	383,998
Basic earnings per share		382	1,822

(35)
As described in note 15, on January 4, 2005, the principal amount of US$1,115,105 thousand of
convertible notes and US$500,000 thousand of bonds with warrants was repaid.

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KT CORPORATION
Financial Statements
December 31, 2003 and 2004
(With Independent Auditors’ Report Thereon)

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Independent Auditors’ Report

Based on a report originally issued in Korean

The Board of Directors and Stockholders KT Corporation:

We have audited the accompanying balance sheets of KT Corporation (the “Company”) as of December 31, 2003 and 2004, and the related statements of earnings, appropriation of retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of KT Freetel Co., Ltd. (“KTF”), a 46.9% and 48.7% owned subsidiary at December 31, 2003 and 2004, respectively, as of and for the years ended December 31, 2003 and 2004. Those financial statements were audited by other auditors whose report has been furnished to us, and our report, insofar as it relates to the amounts included for KTF is based solely on the report of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. 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 and significant estimates used by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2004, and the results of its operations, the changes in its retained earnings, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea.

The accompanying financial statements as of and for the year ended December 31, 2004 have been translated into United States dollars solely for the convenience of the reader and have been translated on the basis set forth in note 3 to the financial statements.

Without qualifying our opinion, we draw attention to the following:

As discussed in note 2(a) to the financial statements, accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable about Korean accounting procedures and auditing standards and their application in practice.

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As discussed in note 10 to the financial statements, the Company’s revenues and expenses as a result of transactions with its affiliates for the year ended December 31, 2004 amounted to W728,022 million and W1,510,149 million, respectively. Accounts receivable and accounts payable with affiliates and convertible notes of KTF as of December 31, 2004, aggregated W151,191 million, W308,327 million and W347,814 million, respectively. In addition, as of December 31, 2004, the Company provided payment guarantees aggregating W73,066 million for certain affiliates’ indebtedness and contract performance.

Seoul, Korea February 4, 2005

This report is effective as of February 4, 2005, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

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KT CORPORATION

Balance Sheets

December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

Assets	2003		2004		(note 3)
Current assets:
Cash and cash equivalents (notes 4 and 19)	W	653,744		1,604,267	$	1,549.9
Short-term financial instruments (note 5)		2,877		926,872		895.4
Current portion of investment securities (notes 8 and 10):
Available-for-sale securities		276,444		593,528		573.4
Held-to-maturity securities		332		1,522		1.5
Notes and accounts receivable — trade,
less allowance for doubtful accounts of W463,910
in 2003 and W530,110 in 2004 (notes 10 and 19)		1,842,559		1,575,906		1,522.5
Accounts receivable — other,
less allowance for doubtful accounts of
W51,848 in 2003 and W66,967 in 2004 (notes 10 and 19)		267,866		294,869		284.9
Inventories (note 6)		156,918		100,680		97.3
Other current assets (notes 7 and 19)		159,751		198,019		191.2
Total current assets		3,360,491		5,295,663		5,116.1
Investment securities:
Available-for-sale securities (notes 8 and 10)		480,880		124,944		120.7
Held-to-maturity securities (note 8)		3,313		1,839		1.8
Equity securities of affiliates (note 9)		3,168,077		2,845,405		2,748.9
Total investment securities		3,652,270		2,972,188		2,871.4
Property, plant and equipment, at cost (note 11)		34,571,075		34,639,070		33,464.5
Less accumulated depreciation		(23,325,504	)	(24,002,011	)	(23,188.1	)
Net property, plant and equipment		11,245,571		10,637,059		10,276.4
Other assets (notes 12, 19 and 27)		1,314,849		1,209,126		1,168.1
	W	19,573,181		20,114,036	$	19,432.0

See accompanying notes to financial statements.

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KT CORPORATION

Balance Sheets, Continued

December 31, 2003 and 2004

(In millions of Won and U.S. dollars, except share data)

Liabilities and Stockholders' Equity	2003		2004		(note 3)
Current liabilities:
Notes and accounts payable — trade (notes 10 and 19)	W	893,309		683,539	$	660.4
Short-term borrowings (note 13)		250,000		—		—
Current portion of long-term debt (notes 15 and 19)		1,054,287		3,986,227		3,851.1
Accounts payable — other (note 10)		648,133		616,042		595.2
Advance receipts from customers		86,215		98,006		94.7
Accrued expenses (note 10)		141,824		132,741		128.2
Withholdings		68,365		63,262		61.1
Income taxes payable		181,456		258,627		249.9
Other current liabilities (notes 10 and 14)		168,418		305,603		295.1
Total current liabilities		3,492,007		6,144,047		5,935.7
Long-term debt, excluding current portion (notes 15 and 19)		7,711,004		5,014,800		4,844.7
Refundable deposits for telephone installation (note 16)		1,229,712		1,087,276		1,050.4
Accrual for retirement and severance benefits, net (note 17)		197,918		263,531		254.6
Other long-term liabilities (notes 10 and 18)		129,932		157,869		152.6
Total liabilities		12,760,573		12,667,523		12,238.0
Stockholders’ equity:
Common stock of W5,000 par value (note 20)
Authorized — 1,000,000,000 shares
Issued — 284,849,400 shares in 2003 and 2004		1,560,998		1,560,998		1,508.1
Capital surplus (note 21)		1,440,258		1,440,258		1,391.4
Retained earnings:
Appropriated (note 22)		8,025,854		5,431,862		5,247.7
Unappropriated (deficit)		(249,963	)	2,967,275		2,866.7
Capital adjustments:
Treasury stock (note 23)		(3,962,598	)	(3,962,568	)	(3,828.2	)
Unrealized gains (losses) on
available-for-sale securities (note 8)		(44,134	)	3,053		2.9
Unrealized gains on equity securities of affiliates (note 9)		53,105		12,824		12.4
Stock options (note 30)		5,479		9,199		8.9
Loss on retirement of treasury stock (note 23)		(16,391	)	(16,388	)	(15.9	)
Total stockholders’ equity		6,812,608		7,446,513		7,194.0
Commitments and contingencies (note 24)		—		—		—
	W	19,573,181		20,114,036	$	19,432.0

See accompanying notes to financial statements.

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KT CORPORATION

Statements of Earnings

For the years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars, except earnings per share)

	2003		2004		(note 3)
Operating revenues (notes 10 and 25)	W	11,574,549		11,850,819	$	11,449.0
Operating expenses (notes 10 and 26)		10,331,405		9,723,700		9,394.0
Operating income		1,243,144		2,127,119		2,055.0
Other income (expense) (note 10):
Interest income		78,670		102,398		98.9
Interest expense		(432,200	)	(450,740	)	(435.5	)
Equity in losses of affiliates (note 9)		(155,320	)	(235,514	)	(227.5	)
Dividend income		15,198		4,486		4.3
Foreign currency transaction and translation gain (loss), net
(note 19)		(20	)	510,075		492.8
Loss on disposition of property, plant
and equipment, net		(53,594	)	(86,938	)	(84.0	)
Gain (loss) on disposition of available-for-sale
securities, net (note 8)		775,266		(14,131	)	(13.7	)
Impairment loss on available-for-sale securities (note 8)		(39,607	)	(307	)	(0.3	)
Contributions received for losses on universal
telecommunications services (note 33)		66,065		105,867		102.3
Contribution payments for research and development
and donations (note 32)		(168,685	)	(127,320	)	(123.0	)
Prior year’s additional income tax payment (note 27)		(61,835	)	(273	)	(0.2	)
Derivatives transaction and valuation loss, net (note 24)		(151	)	(145,408	)	(140.5	)
Other, net		22,738		10,211		9.9
		46,525		(327,594	)	(316.5	)
Earnings before income taxes		1,289,669		1,799,525		1,738.5
Income taxes (note 27)		459,603		544,003		525.6
Net earnings	W	830,066		1,255,522	$	1,212.9
Basic earnings per share of common stock
in won and U.S. dollars (note 28)	W	3,841		5,957	$	5.75
Diluted earnings per share of common stock
in won and U.S. dollars (note 28)	W	3,344		5,582	$	5.39

See accompanying notes to financial statements.

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KT CORPORATION

Statements of Appropriation of Retained Earnings

For the years ended December 31, 2003 and 2004

Date of Appropriation for 2003 : March 12, 2004 Date of Appropriation for 2004 : March 11, 2005

(In millions of Won and U.S. dollars)

	2003		2004		(note 3)
Unappropriated retained earnings (accumulated deficit):
Balance at beginning of year	W	120,000		1,922,512	$	1,857.3
Interim dividend (note 29)		—		(210,759	)	(203.5	)
Cumulative effect of an accounting change (note 9)		(1,530	)	—		—
Net earnings		830,066		1,255,522		1,212.9
Retirement of treasury stock (notes 20 and 23)		(1,198,499	)	—		—
Balance at end of year before appropriation		(249,963	)	2,967,275		2,866.7
Transfers from reserves (note 22):
Reserve for technology and human resources development		3,334		—		—
Reserve for social overhead capital		3,333		—		—
Reserve for business expansion		2,587,325		—		—
Unappropriated retained earnings available for appropriation		2,344,029		2,967,275		2,866.7
Appropriation of retained earnings (note 22):
Reserve for technology and human resources development		—		350,000		338.1
Reserve for social overhead capital		—		30,000		29.0
Cash dividends (note 29)		421,517		421,518		407.2
		421,517		801,518		774.3
Unappropriated retained earnings to be carried
over to subsequent year	W	1,922,512		2,165,757	$	2,092.4

See accompanying notes to financial statements.

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KT CORPORATION Statements of Cash Flows

For the years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

	2003		2004		(note 3)
Cash flows from operating activities:
Net earnings	W	830,066		1,255,522	$	1,212.9
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation		2,457,584		2,291,428		2,213.7
Amortization		56,715		69,829		67.5
Provision for doubtful notes and accounts
receivable — trade		301,107		238,953		230.9
Provision for doubtful notes and accounts
receivable — other		18,885		58,603		56.6
Provision for retirement and severance benefits		1,038,868		208,665		201.6
Loss on disposition of property, plant and equipment, net		53,594		86,938		84.0
Gain on foreign currency translation, net		(223	)	(555,241	)	(536.4	)
Loss (gain) on disposition of available-for-sale
securities, net		(775,266	)	14,131		13.7
Impairment loss on available-for-sale securities		39,607		307		0.3
Equity in losses of affiliates		155,320		235,514		227.5
Deferred income tax expense		74,681		128,546		124.2
Changes in operating assets and liabilities:
Increase in notes and accounts receivable — trade		(61,732	)	(28,904	)	(27.9	)
Increase in accounts receivable — other		(48,279	)	(65,435	)	(63.2	)
Decrease (increase) in inventories		(163,815	)	56,238		54.3
Increase in other current assets		(1,748	)	(44,352	)	(42.8	)
Decrease in notes and accounts
payable — trade		(46,812	)	(191,116	)	(184.6	)
Decrease in accounts payable — other		(151,762	)	(35,771	)	(34.6	)
Increase (decrease) in withholdings		7,100		(5,103	)	(4.9	)
Increase (decrease) in advance receipts
from customers		(23,753	)	11,791		11.4
Decrease in accrued expenses		(30,918	)	(9,082	)	(8.8	)
Increase (decrease) in income taxes payable		(242,729	)	77,171		74.6
Payment of retirement and severance benefits		(1,001,154	)	(23,205	)	(22.4	)
Increase in deposit for severance benefits insurance		(174,588	)	(119,847	)	(115.8	)
Other, net		80,619		112,769		108.8
Net cash provided by operating activities		2,391,367		3,768,349		3,640.6

See accompanying notes to financial statements.

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KT CORPORATION

Statement of Cash Flows, Continued

For the years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

						2004
	2003		2004			(note 3)
Cash flows from investing activities:
Purchases of property, plant and equipment	W	(2,083,370	)	(1,818,507	)	$ (1,756.8	)
Proceeds from sale of property, plant and equipment		95,154		28,828		27.9
Decrease in accounts receivable — other		527,954		—		—
Decrease in other assets		325,166		28,927		27.9
Decrease (increase) of short-term financial instruments		152,822		(923,995	)	(892.7	)
Purchases of available-for-sale securities		(293,293	)	(492,000	)	(475.3	)
Purchases of held-to-maturity securities		(587	)	(49	)	—
Purchases of equity securities of affiliates		(483,632	)	—		—
Proceeds from sale of available-for-sale securities		186,710		572,338		552.9
Proceeds from maturity on held-to-maturity securities		400		333		0.3
Proceeds from dividends of equity securities of affiliates		959		46,877		45.3
Net cash used in investing activities		(1,571,717	)	(2,557,248	)	(2,470.5	)
Cash flows from financing activities:
Repayment of long-term debt		(1,147,622	)	(1,065,098	)	(1,029.0	)
Decrease in short-term borrowings		(250,000	)	(250,000	)	(241.5	)
Proceeds from issuance of long-term debt		1,277,171		1,836,434		1,774.2
Decrease in refundable deposits for telephone installation		(307,026	)	(142,436	)	(137.6	)
Reacquisition of treasury stock		(412,248	)	—		—
Proceeds from sale of treasury stock		39,312		—		—
Payment of dividends		(213,308	)	(633,171	)	(611.7	)
Other, net		(5,523	)	(6,307	)	(6.2	)
Net cash used in financing activities		(1,019,244	)	(260,578	)	(251.8	)
Net increase (decrease) in cash and cash equivalents		(199,594	)	950,523		918.3
Cash and cash equivalents at beginning of year		853,338		653,744		631.6
Cash and cash equivalents at end of year	W	653,744		1,604,267		$ 1,549.9

See accompanying notes to financial statements.

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1

KT CORPORATION

Notes to Financial statements

December 31, 2003 and 2004

| (1) |
| --- |
| KT Corporation (“KT” or the “Company”) commenced operation on January 1, 1982 through the
segregation of specified operations from the Korean Ministry of Information and Communication
(the “MIC”) for the purpose of contributing to the convenience in national life and improvement
of public welfare through rational management of the public telecommunications business and
improvement of telecommunications technology under the Korea Telecom Act. |
| Upon the repeal of the Korea Telecom Act as of October 1, 1997, KT became a government invested
institution regulated by the Korean Commercial Code and changed its name from Korea Telecom to
Korea Telecom Corp. pursuant to an amendment to its Articles of Incorporation. Shares of KT
were listed on the Korea Stock Exchange on December 23, 1998. KT issued 24,282,195 additional
shares on May 29, 1999 and issued American Depository Shares (“ADS”) representing these new
shares and government owned shares. On July 2, 2001, additional ADS representing 55,502,161
government-owned shares were issued. |
| The Korean government has gradually reduced its ownership interest in the Company since
1993 and completed the disposition of all of its equity interest in the Company on May 24,
2002. On March 22, 2002, the Company changed its name from Korea Telecom Corp. to KT
Corporation. |
| Under Korean law, the MIC and other government entities have extensive authority to regulate
KT. The MIC has responsibility for approving rates for local service and interconnection
provided by KT. Beginning in January 1998, KT is allowed to set its own rates for domestic
long-distance service, international long-distance service and other services without approval
from the MIC. |
| In recent years, KT has been subjected to increasing competition as a result of the
government’s issuance of additional licenses to create competition in the telecommunications
market and to foster new telecommunications business areas. Additionally, in June 1997, the MIC
awarded a license to a second carrier to provide local telephone service. This new carrier
commenced operations in 1999. A third carrier commenced international long-distance service in
1997 and domestic long-distance service in 1999. The entry of these new carriers into the local
and long-distance telephone service markets has had, and is expected to continue to have, a
negative impact on KT’s telephone service revenues and profitability. |

(2) Summary of Significant Accounting Policies and Basis of Presenting Financial Statements

| (a) |
| --- |
| The accompanying financial statements have been extracted from KT’s Korean language
financial statements that were prepared using accounting principles, procedures and
reporting practices generally accepted in the Republic of Korea (“Korean GAAP”). The
financial statements have been translated from those issued in the Korean language into the
English language, and have been modified to allow for the formatting of the financial
statements in a manner which is different from the presentation under Korean financial
statements practices. In addition, certain modifications have been made in the
accompanying financial statements to bring the formal presentation into conformity with
practices outside of Korea, and certain information included in the Korean language
statutory financial statements, which management believes is not required for a fair
presentation of KT’s financial position or results of operations, is not presented in the
accompanying financial statements. |
| Accordingly, the accompanying financial statements and their utilization are not designed
for those who are not informed about Korean accounting principles, procedures and practices
and furthermore are not intended to present the financial position and results of
operations and cash flows in accordance with accounting principles and practices generally
accepted in countries and jurisdictions other than the Republic of Korea. |

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2 KT CORPORATION Notes to Financial statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

(a)	Basis of Presenting Financial Statements, Continued
	The accompanying financial statements include only the accounts of KT, and do not
consolidate the accounts of any of KT’s subsidiaries (see note 9). Instead, these entities
are accounted for under the equity method of accounting.
	Effective January 1, 2004, the Company adopted Statements of Korea Accounting Standards No.
10 “Inventories” , No. 12 “Construction — Type Contracts” and No. 13 “Troubled Debt
Restructuring”. The adoption of these standards did not have a significant impact on the
accompanying financial statements.
(b)	Cash Equivalents
	The Company considers short-term financial instruments with maturities of three months or
less at the acquisition date to be cash equivalents.
(c)	Financial Instruments
	Short-term financial instruments are instruments handled by financial institutions which
are held for short-term cash management purposes or will mature within one year, including
time deposits, installment savings deposits and restricted bank deposits.
(d)	Allowance for Doubtful Accounts
	Notes and trade accounts receivable are recorded at the invoiced
amount and do not bear interest. The allowance for doubtful accounts
is the Company’s best estimate of the amount of probable credit losses
in the Company’s existing notes and accounts receivable. The Company
determines the allowance for doubtful notes and accounts receivable
based on an analysis of portfolio quality and historical write-off
experience. Account balances are charged off against the allowance
after all means of collection have been exhausted and the potential
for recovery is considered remote.
(e)	Inventories
	Inventories are stated at the lower of cost or net realizable value. Cost is determined by
the moving-average cost method, except for materials in transit for which cost is
determined by the specific identification method. Net realizable value is the estimated
selling price in the ordinary course of business, less the estimated selling cost.
Effective January 1, 2004, the Company adopted Statement of Korea Accounting Standards
(“SKAS”) No. 10, “ Inventories ”. Through 2003, a valuation loss incurred when the market
value of inventory falls below its carrying amount was reported as non-operating expense.
In 2004, in accordance with SKAS No. 10, the Company included inventory valuation losses in
its cost of PCS handsets sold (“a component of operating expenses”). The Company
recognized inventory valuation costs of W19,184 million included in cost of goods sold for
the year ended December 31, 2004. As allowed by this standard, the Company did not
reclassify prior year balances because the amount was immaterial.
(f)	Investments in Securities
	Upon acquisition, the Company classifies certain debt and equity securities into one of the
three categories: held-to-maturity, available-for-sale, or trading securities. Investments
in debt securities that the Company has the positive intent and ability to hold to maturity
are classified as held-to-maturity. Securities that are bought and held principally for
the purpose of selling them in the near term (thus held for only a short period of time)
are classified as trading securities. Trading generally reflects active and frequent
buying and selling, and trading securities are generally used to generate profit on
short-term differences in price. Investments not classified as either held-to-maturity or
trading securities are classified as available-for-sale securities. Such determination
should be reassessed at each balance sheet date.

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3 KT CORPORATION Notes to Financial statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

(f)	Investments in Securities, Continued
	Trading securities are carried at fair value, with unrealized holding gains and losses
included in earnings. Available-for-sale securities are carried at fair value, with
unrealized holding gains and losses reported as a capital adjustment. Investments in
equity securities that do not have readily determinable fair values are stated at cost.
Declines in value judged to be other-than-temporary on available-for-sale securities are
charged to current results of operations. Realized gains and losses are determined using
the specific identification method based on the trade date of a transaction. Investments in
debt securities that are classified into held-to-maturity are reported at amortized cost at
the balance sheet date and such amortization is included in interest income.
	Marketable securities are at the quoted market prices as of the period end. Non-marketable
debt securities are recorded at the fair values derived from the discounted cash flows by
using an interest rate deemed to approximate the market interest rate. The market interest
rate is determined by the issuers’ credit rate announced by the accredited credit rating
agencies in Korea. Beneficiary certificates which are securities indicating beneficiary
rights on certain investment securities held by the investment management companies are
recorded at fair value as determined by the investment management companies.
	Trading securities are classified as current assets, whereas available-for-sale securities
and held-to-maturity securities are classified as long-term investments. However,
available-for-sale securities whose maturity dates are due within one year from the balance
sheet date or whose likelihood of being disposed of within one year from the balance sheet
date is probable are classified as current assets. Likewise, held-to-maturity securities
whose maturity dates are due within one year from the balance sheet date are classified as
current assets.
(g)	Investment Securities under the Equity Method of Accounting
	For investments in companies, whether or not publicly held, under the Company’s significant
influence, the Company utilizes the equity method of accounting. Significant influence is
generally deemed to exist if the Company can exercise influence over the operating and
financial policies of an investee. The ability to exercise that influence may be indicated
in several ways, such as the Company’s representation on its board of directors, the
Company’s participation in its policy making processes, material transactions with the
investee, interchange of managerial personnel, or technological dependency. Also, if the
Company owns directly or indirectly 20% or more of the voting stock of an investee, the
Company generally presumes that the investee is under significant influence.
	Under the equity method of accounting, the Company’s initial investment is recorded at cost
and is subsequently increased to reflect the Company’s share of the investee income and
reduced to reflect the Company’s share of the investee losses or dividends received. Any
excess in the Company’s acquisition cost over the Company’s share of the investee’s
identifiable net assets is considered as goodwill or other intangibles and amortized by the
straight-line method over the estimated useful life. The amortization of goodwill or other
intangibles is recorded against the equity income (losses) of affiliates. When events or
circumstances indicate that carrying amount may not be recoverable, the Company reviews
goodwill or other intangibles for impairment.
	Some investee companies depreciate their machinery and equipment by the straight-line
method in accordance with Korean GAAP considering the attributes and nature of the
underlying assets. Accordingly, the Company does not conform the depreciation method of
investee to the declining-balance method used by the Company.
	Assets and liabilities of foreign-based companies accounted for using the equity method are
translated at the current rate of exchange at the balance sheet date while profit and loss
items in the statement of operations are translated at the average rate and capital account
at the historical rate. The translation gains and losses arising from collective
translation of the foreign currency financial statements of foreign-based companies are
offset and the balance is accumulated as a capital adjustment.

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4 KT CORPORATION Notes to Financial statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

(g)	Investment Securities under the Equity Method of Accounting, Continued
	Under the equity method of accounting, the Company does not record its share of losses of
an affiliate or subsidiary not consolidated when such losses would make the Company’s
investment in such entity less than zero unless the Company has guaranteed obligations of
the investee or is otherwise committed to provide additional financial support.
(h)	Property, Plant and Equipment
	Property, plant and equipment are stated at cost. Improvements that significantly extend
the life of an asset or add to its productive capacity are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred. Property, plant and equipment
contributed by the government on January 1, 1982 are stated at net revalued amounts.
	Depreciation is computed by the declining-balance method (except for buildings, structures,
underground access to cable tunnels, and concrete and steel telephone poles that are
depreciated using the straight-line method) based on the following estimated useful lives
of the related units of property:

Buildings and structures	5-60
Machinery and equipment:
Underground access to cable tunnels, and concrete
and steel telephone poles	20-40
Other	3-15
Vehicles	3-10
Tools, furniture and fixtures:
Steel safe boxes	20
Tools, computer equipments, furniture and fixtures	2-8

| | Prior to January 1, 2003, the Company capitalized interest costs on all borrowings incurred
prior to completion of the acquisitions, as part of the cost of qualifying assets.
However, effective January 1, 2003, the Company adopted Statement of Korea Accounting
Standards No. 7, “ Capitalization of Financing Costs. ” In accordance with this standard,
the Company elected to no longer capitalize interest costs. Accordingly, the Company
recognizes interest costs and other financial charges on borrowings associated with the
manufacture, purchase, or construction of property, plant and equipment as an expense in
the period in which they are incurred. |
| --- | --- |
| | The Company reviews for the impairment of property, plant and equipment, whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated undiscounted future net
cash flows expected to result from the use of the asset and its eventual disposition are
less than its carrying amount. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. |
| (i) | Contributions Received for Capital Expenditures |
| | Contributions received for capital expenditures are reflected as a reduction from the
acquisition cost of the acquired assets and, accordingly, reduce depreciation expense
related to the acquired assets over their useful lives. Contributions received, which have
yet to be disbursed for capital expenditures, are presented as a deduction of received
assets. |

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5 KT CORPORATION Notes to Financial statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

(j)	Intangible Assets
	Intangible assets, consisting of exclusive rights and deferred
development costs including internal use software, are stated at
cost less accumulated amortization. Amortization is computed by the
straight-line method over periods which range from 3 to 50 years.
The Company has monopolistic and exclusive rights to control
buildings and facilities utilization and copyrights by contract or
related laws. Accordingly, the Company amortizes those intangible
assets over the period of 30 or 50 years based on contract or
related laws.
	The Company charges research and development costs to expense as
incurred. However, the costs which are recoverable from future
earnings are deferred and amortized over their estimated useful
lives. In addition, the internal software development costs, after
technological feasibility test, such as those associated with
Broadband Integrated Services Digital Network (B-ISDN), Integrated
Customer Information System (ICIS) and Enterprise Resource Planning
(ERP), are accounted for as intangible assets and amortized by the
straight-line method over their estimated economic useful lives from
3 to 6 years.
	The Company expensed research and development costs of W232,180
million and W254,360 million for the years ended December 31, 2003
and 2004, respectively. In addition, the Company capitalized
development costs, which consist of software, of W53,824 million and
W87,509 million for the years ended December 31, 2003 and 2004,
respectively.
	The Company reviews for the impairment of intangible assets,
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
(k)	Valuation of Receivables at Present Value
	Receivables arising from extended payment terms which generally involve sales of personal
communication service (“PCS”) handsets, are stated at present value and the difference
between the nominal value and present value is deducted directly from the nominal value of
related receivables and is amortized using the effective interest method over the payment
period. The amount amortized is included in interest income.
(l)	Convertible Notes and Bonds with Warrants
	Effective January 1, 2003, the Company adopted Statement of Korea Accounting Standards No.
9, “ Convertible Securities ” related to convertible bonds, bonds with warrants and
convertible preferred stock, which requires the separate recognition of the convertible
features and warrant rights. However, as allowed by the transition clause of the Statement,
the Company recognizes interest expense on convertible notes and bonds with warrants as
determined using the effective interest method, and amortization of a redemption premium is
recorded as long-term accrued interest expense.
(m)	Retirement and Severance Benefits
	Employees who have been with the Company for more than one year are entitled to lump sum
payments based on current rates of pay and length of service when they leave the Company.
The Company’s estimated liability under the plan which would be payable if all employees
left on the balance sheet date is accrued in the accompanying balance sheets. A portion of
the liability is covered by an employees’ severance pay insurance where the employees have
a vested interest in the deposit with the insurance company. The deposit for severance
benefit insurance is, therefore, reflected in the accompanying balance sheets as a
deduction from the liability for retirement and severance benefits.

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6 KT CORPORATION Notes to Financial statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

(n)	Customer Call Bonus Program
	The Company records an estimated liability for the marketing costs associated with
providing gifts under the customer call bonus program when call bonus points are earned.
The liability is recorded in other long-term liabilities on the accompanying balance
sheets. The liability is adjusted periodically based on points earned, points redeemed and
changes in estimated costs
(o)	Contingent Liabilities
	Contingent losses are generally recognized as a liability when probable and reasonably estimable.
(p)	Revenue Recognition
	Operating revenues are recognized on a service-rendered basis. Revenues from public telephone cards are recognized when a
cardholder places a call. Sales and cost of sales of Personal Communication Service (“PCS”) handsets are recognized when
delivered to customers. The non-refundable service initiation fees for telephone, broadband internet access, PCS services
and leased-line service are recognized as revenue upon receipt.
	Prior to April 15, 2001, customers could choose between alternative plans for initiating
basic telephone services. Under these alternatives, customers could elect to place a fully
refundable deposit (which is reflected as a liability) or pay a reduced non-refundable
service initiation fee (which is included in operating revenues). Prior to this change,
all customers were required to place fully refundable deposits.
	Effective April 15, 2001, the Company revised the telephone installation deposit system.
Under the revised system, new customers are required to pay a non-refundable service
initiation fee. The non-refundable service initiation fee is included in operating revenues
upon commencement of service.
(q)	Foreign Currency Translation
	Monetary assets and liabilities denominated in foreign currencies are translated into
Korean won at the balance sheet date. Unrealized foreign currency translation gains and
losses on monetary assets and liabilities are included in current results of operations. As
of December 31, 2003 and 2004, monetary assets and liabilities denominated in foreign
currencies are translated into Korean won at W1,197.8 to US$1 and W1,043.8 to US$1,
respectively, that are permitted by the Financial Accounting Standards. Non-monetary assets
and liabilities denominated in foreign currencies, which are stated at historical cost, are
translated into Korean won at the foreign exchange rate at the date of the transaction.
	Prior to January 1, 2003, the Company accounted for foreign exchange translation gains and
losses on all borrowings, capitalizing financing costs, as part of the cost of assets.
However, the Company adopted Statement of Korea Accounting Standards No. 7, “ Capitalization
of Financing Costs ,” effective January 1, 2003. In accordance with this standard, all
foreign exchange translation gains and losses are included in the results of operations.
(r)	Derivatives
	Derivative instruments, regardless of whether they are entered into for trading or hedging
purposes, are valued at fair value. Derivative contracts not meeting the requirements for
hedge accounting treatment are classified as trading contracts with the changes in fair
value included in current operations.
	Derivative financial instruments used for hedging purposes are accounted for in a manner
consistent with the accounting treatment appropriate for the transactions being hedged or
associated with such contracts. The instruments are valued at fair value when underlying
transactions are valued at fair value, and resulting unrealized valuation gains or losses
are recorded in current results of operations. For instruments that are not valued at fair
value, unrealized valuation gains or losses are recognized at the time of settlement.

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7 KT CORPORATION Notes to Financial statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

| (s) |
| --- |
| The Company accounts for and classifies its lease transactions as either an operating or
capital lease, depending on the terms of the lease under Korean Lease Accounting Standards
If a lease is substantially noncancellable and meets one or more of the criteria listed
below, the present value of future minimum lease payments is reflected as an obligation
under capital lease. |

| — | Ownership of the leased property shall be transferred to the lessee at
the end of the lease term without additional payment or for a contract price. |
| --- | --- |
| — | The lease has a bargain purchase option. |
| — | The lease term is equal to 75% or more of the estimated economic useful
life of the leased property. |
| — | The present value at the beginning of the lease term of the minimum lease
payments equals or exceeds 90% of the fair value of the leased property. |

| | If the above criteria are not met, the lease is classified as an operating lease and lease
payments are expensed on a straight-line basis over the lease term. |
| --- | --- |
| (t) | Income Taxes |
| | Income tax expense or benefit on earnings includes both current and deferred taxes.
Current tax is the expected tax payable on the taxable income for the year, using tax rates
enacted at the balance sheet date. Deferred tax is provided using the asset and liability
method, providing for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for taxation purposes.
However, deferred taxes are not recognized for temporary differences related to unrealized
gains and losses on available-for-sale securities that are reported in a separate component
of stockholders’ equity. Deferred tax assets and liabilities are measured using tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period of the expected enactment date. |
| | A deferred tax asset is recognized only to the extent that it is probable that such
deferred tax asset is recoverable in a future period. Deferred tax assets are reduced to
the extent that it is no longer probable that the related tax benefit will be realized. |
| (u) | Dividends Payable |
| | Dividends are recorded when approved by the board of directors and stockholders. |
| (v) | Stock Options |
| | The stock option program allows the Company’s officers to acquire shares of the Company. The
option exercise price is generally fixed above the market price of underlying shares at the
date of the grant. The Company values stock options based upon an option-pricing model
(Black-Scholes model) under the fair value method and recognizes this value as an expense
over the period in which the options vest. |
| | When the options are exercised, equity is increased by the amount of the proceeds received
and the values of the options exercised, and by crediting capital surplus. When stock options
are forfeited because the specified vesting requirements are not satisfied, previously
recognized compensation costs and corresponding capital adjustment accounts are reversed to
earnings. When stock options expire unexercised, previously recognized compensation costs and
corresponding capital adjustment accounts are reversed to other capital surplus. |

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8

KT CORPORATION

Notes to Financial statements, Continued

(2) Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

(w)	Earnings Per Share
	Basic earnings per common share are calculated by dividing net
earnings available to common stock by the weighted-average number of
shares of common stock holders outstanding during each period.
Diluted earnings per share are calculated by dividing net earnings
plus interest expenses, net of tax, of the convertible notes
available to common stock holders by the weighted-average number of
shares of common stock outstanding adjusted to include the
potentially dilutive effect of the convertible notes.
	Stock options were not considered when calculating diluted earnings per share because the
exercise price of the stock options was greater than the average market price of the common
share and, therefore the effect would have been antidilutive.
(x)	Use of Estimates
	The preparation of financial statements in accordance with accounting principles generally
accepted in the Republic of Korea requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and related notes to financial
statements. Actual results could differ from those estimates.
(y)	Application of the Statements of Korea Financial Accounting Standards
	The Korean Accounting Standards Board (“KASB”) has published a series of Statements of
Korea Accounting Standards (“SKAS”), which will gradually replace the existing financial
accounting standards, established by the Korea Financial Supervisory Board. SKAS No. 10,
No. 12 and No. 13 were adopted by the Company as of January 1, 2004. SKAS No. 15 “ Equity
Method Accounting, ” No. 16 “ Income Taxes ,” and No. 17 “ Provisions, Contingent Liabilities
and Contingent Assets ” become effective for the Company on January 1, 2005 according to the
effective date set forth by each SKAS. The Company does not expect the adoption of these
standards to have a material impact on the financial statements.

(3)	Basis of Translating Financial Statements
	The financial statements are expressed in Korean Won and, solely for the convenience of the reader, the financial statements as of and for the
year ended December 31, 2004, have been translated into United States dollars at the rate of W1,035.1 to US$1, the noon buying rate in the City
of New York for cable transfers in Won as certified for customs purposes by the Federal Reserve Bank of New York as of December 31, 2004. The
translation should not be construed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or
any other rate.
(4)	Cash and Cash Equivalents
	Cash and cash equivalents as of December 31, 2003 and 2004 are summarized as follows:

	Millions — 2003	2004
Passbook accounts	W	48	46
Cash in transit		541,918	424,884
Time deposits		111,778	1,179,337
	W	653,744	1,604,267

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KT CORPORATION

Notes to Financial statements, Continued

(5)
There are certain amounts included in short-term financial instruments which are restricted in use for expenditures for certain business
purposes as of December 31, 2003 and 2004 as follows:

	Millions — 2003	2004
Short-term financial instruments	W	2,877	5,570

(6)
Inventories as of December 31, 2003 and 2004 are summarized as follows:

	Millions — 2003	2004
Construction and repair materials	W	42,558	17,717
Merchandise		114,360	102,147
Valuation allowance		—	(19,184	)
	W	156,918	100,680

(7)
Other current assets as of December 31, 2003 and 2004 are summarized as follows:

	Millions — 2003	2004
Current portion of long-term loans to employees	W	115,367	115,713
Prepaid expenses		6,157	13,220
Prepayments		20,751	38,902
Accrued interest income		4,237	23,375
Refundable deposits		3,833	3,927
Receivables from interest rate swap (note 24)		2,998	2,102
Receivables from interest rate swaption (note 24)		989	353
Receivables from interest currency swap (note 24)		5,083	—
Short-term loans		240	261
Other		96	166
	W	159,751	198,019

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KT CORPORATION

Notes to Financial statements, Continued

(8)
Investments in securities as of December 31, 2003 and 2004 are summarized as follows:

(a) Available-for-sale securities

(i) Equity securities

of ownership (%)			Millions
2003	2004		2003	2004
Investment assets:
New Skies Satellites N.V.	1.4	—	W	15,917	—
Intelsat Ltd.	0.7	0.7		6,222	6,222
Inmarsat Ventures plc	2.3	—		15,015	—
Inmarsat Group holdings., Ltd.	—	2.3		—	652
Danish Russian Japan Korean Telecommunication
Group	10.0	10.0		307	—
Real Telecom Corporation	6.5	6.5		721	721
Polytech Adventure Town, Inc.	6.7	6.7		200	200
Korea Software Financial Cooperative	1.4	1.4		1,000	1,000
Korea Information Certificate Authority, Inc.	9.4	9.4		2,000	2,000
K-3-I Co., Ltd.	13.0	13.0		300	300
KT Internal Venture Fund No. 1	89.3	89.3		3,303	3,303
KT Internal Venture Fund No. 2	90.0	94.3		3,000	5,000
Mirae Asset Securities Co., Ltd.	4.4	4.4		5,000	5,000
Korea Telecom Venture Fund No. 1	70.0	70.0		14,000	14,000
Sky Life Contents Fund	22.5	22.5		4,500	4,500
ICO Global Communications Ltd.	0.1	0.1		617	617
Information and Communication Financial Cooperative	0.1	0.1		16	16
Korea Information Technology Fund	23.3	23.3		70,000	70,000
Daegu Football Club	1.8	1.8		300	300
Kookmin Credit Information Inc.	13.0	13.0		1,202	1,202
Onse Telecom	—	2.2		—	1,576
Korea Electric Engineers Association	0.2	0.2		20	20
			W	143,640	116,629

| Investments in equity securities above except for New Skies Satellites N.V., that do not have
readily determinable fair values are stated at cost. |
| --- |
| The Company recognized a W4,470 million impairment loss on the investment in Real Telecom
Corporation and a W307 million impairment loss on the investment in Danish Russian Japan Korean
Telecommunication Group for the years ended December 31, 2003 and 2004, respectively. These
charges were related to other-than-temporary declines in the value of the investee companies. |
| The Company and SK Telecom agreed to an equity swap on December 20, 2002 under which each
company sold all of the other’s equity shares it held in the other. According to the
agreement, the Company exchanged 4,457,635 shares of SK Telecom for 15,454,659 shares of
treasury stock plus cash of W211,868 million on December 30, 2002. In addition, the Company
exchanged 3,809,288 shares of SK Telecom for 14,353,674 shares of treasury stock plus cash of
W122,679 million on January 10, 2003 and the Company recognized a gain on disposition of
available-for-sale securities in the amount of W775,241 million for the year ended December 31,
2003. Subsequent to January 10, 2003, the Company no longer has any shares of SK Telecom. |

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KT CORPORATION

Notes to Financial statements, Continued

(8) Investments in Securities, Continued

(a) Available-for-sale securities, Continued

(ii) Debt securities

	Maturity	Millions — 2003	2004
Current assets:
Beneficiary certificates	2005	W	213,064	245,714
Convertible notes of KTF	2005		—	347,814
Equity-linked securities	—		63,380	—
		W	276,444	593,528
Investment assets:
Convertible notes of KTF	—	W	327,240	—
Other	—		10,000	8,315
		W	337,240	8,315

The Company invested in convertible notes issued by KT Freetel Co., Ltd. (“KTF”) in 2002. The details are as follows:

Issuance date:	November 29, 2002
Issuance amount (millions):	W336,200
Nominal interest rate:	1% per annum
Redemption premium:	3% per annum
Maturity date:	November 28, 2005
Conversion price:	W37,200 per share
Market price of KTF as of December 31, 2004:	W24,700 per share
Conversion period:	On or after November 30, 2003
through November 28, 2005
Total number of shares convertible into:	9,037,634 shares of KTF

On April 11, 2002, the Company purchased equity-linked securities from some investment banks. The value of the equity-linked securities were linked to the weighted-average quoted price of SK Telecom stock. The Company’s investments in the equity-linked securities were recorded at fair value and unrealized holding gains and losses were recorded as a separate component of stockholders’ equity. The equity-linked securities were tested for impairment during 2003 because of the significant decrease of the quoted market value of the SK Telecom shares. As a result of this impairment test, the Company recognized an impairment loss amounting to W35,137 million on the equity-linked securities for the year ended December 31, 2003. As of December 31, 2003, the equity-linked securities also had unrealized losses recorded within stockholders’ equity of W34,078 million. During 2004, the Company disposed of its equity-linked securities and recognized a realized loss on disposition of available-for-sale securities amounting to W54,806 million.

(iii)
Changes in unrealized gains (losses) on available-for-sale securities
for the year ended December 31, 2004 are summarized as follows:

Beginning balance	Millions — W	(44,134
Realized losses on disposition of securities		27,844
Changes in unrealized gains and losses, net		19,343
Net balance at end of year	W	3,053

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KT CORPORATION

Notes to Financial statements, Continued

(8) Investments in Securities, Continued

(b) Held-to-maturity securities

	Millions — 2003	2004
Current assets:
Government and municipal bonds	W	332	1,522
Investment assets:
Government and municipal bonds	W	3,313	1,839

(9)
Investments in affiliated companies accounted for using the equity method as of December 31,
2003 and 2004, are summarized as follows:

			Millions
ownership (%)			2003			2004
2003	2004		Net asset		Book value	Net asset		Book value
Listed:
KT Freetel Co., Ltd. (“KTF”)	46.9	48.7	W	1,474,420		2,643,593	1,549,990		2,428,061
KT Hitel Co., Ltd. (“KTH”)	65.9	65.9		130,181		131,787	109,569		110,853
KT Submarine Co., Ltd. (“KTSC”)	36.9	36.9		23,311		23,023	22,710		22,542
Unlisted:
KT Infotech Corporation	15.6	15.6		4,350		3,955	3,334		3,059
Korea Telephone Directory Co., Ltd.	34.0	34.0		8,601		8,601	8,777		8,777
KT Powertel Co. (“KTP”)	44.9	44.9		39,148		39,148	43,313		43,313
KT Networks Corporation	100.0	100.0		76,442		76,401	72,508		72,157
KT Linkus Co.	93.8	93.8		81,047		79,026	60,138		58,943
KT China Co., Ltd. (“KTCC”)	100.0	100.0		1,341		1,341	1,044		1,044
KT Realty Development and
Management Co., Ltd.	19.0	19.0		1,964		1,921	2,172		2,172
Korea Telecom America, Inc. (“KTAI”)	100.0	100.0		3,088		3,088	2,864		2,864
Korea Telecom Philippines, Inc. (“KTPI”)	100.0	100.0		(59,544	)	—	(76,208	)	—
KT Commerce, Inc. (“KTC”)	19.0	19.0		468		257	30		—
Mongolian Telecommunications Co.	40.0	40.0		4,982		4,982	8,183		8,183
New Telephone Company (“NTC”)	72.5	72.5		41,623		39,311	55,464		53,979
Korea Telecom Japan Co., Ltd. (“KTJ”)	100.0	100.0		(1,416	)	—	(1,138	)	—
Korea Digital Satellite Broadcasting Co.
(“KDB”)	27.4	27.4		37,156		86,630	(2,008	)	—
Korea Information Data Corp.	19.0	19.0		6,864		6,864	9,138		9,138
Korea Information Service Corp.	19.0	19.0		4,552		4,552	6,007		6,007
KT Instrument & Communication Corp.	19.0	19.0		309		309	354		354
Korea IT Venture Partners Inc.	28.0	28.0		9,227		9,227	9,228		9,228
KBSi Co., Ltd. (formerly, Crezio.com)	32.4	32.4		1,386		1,386	1,667		1,667
Bank Town Co., Ltd.	19.0	19.0		443		432	569		569
eNtoB Corp.	15.6	15.6		2,243		2,243	2,495		2,495
			W	1,892,186		3,168,077	1,890,200		2,845,405

On March 6, 2003, KTICOM was merged into KTF. This transaction was done by KTF issuing an additional 7,082,476 shares of its common stock to the minority shareholders of KTICOM, which resulted in a decrease in the Company’s equity ownership interest. In addition, during 2003, the Company acquired an additional 15,532,846 shares of KTF for W399,996 million, increasing its equity ownership interest to 46.9%.

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KT CORPORATION

Notes to Financial statements, Continued

| (9) |
| --- |
| In 2004, KTF reacquired 7,073,200 shares of its common stock and retired these treasury shares
amounting to W149,800 million by a charge to retained earnings. Accordingly, the Company’s
equity ownership interest in KTF increased from 46.9% to 48.7%. |
| KTP acquired Anam Telecom Ltd. on February 5, 2003. As a result, the Company’s equity ownership
interest decreased to 44.9%. |
| In March 2003, the Company invested W1,245 million in KTCC, which is a wholly-owned subsidiary
located in China. |
| In December 2003, the Company purchased an additional 11,770,000 shares of KDB for W82,390
million including W49,119 million of investor level goodwill. After making this cash purchase,
the Company’s equity ownership interest increased to 27.4%. In 2004, the Company impaired
investor level goodwill of W37,030 million related to KDB due to continuous operating losses.
This impairment loss was recorded as a component of equity losses of affiliates. In addition,
in 2004, KDB issued 11,875,000 shares of callable preferred stock, which has no voting rights,
amounting to W94,028 million to a third party. In the calculation of the Company’s equity
ownership interest in KDB’s net assets, the Company excluded the proceeds from the preferred
stock issuance. |
| Investments in affiliated companies under the equity method of accounting as of December 31, 2003 are as follows: |

	Millions
		Equity in		Equity				Dividends
		retained		income (loss)		Unrealized		received		Book
	Cost	earnings (deficit)		in 2003		gains (losses)		in 2003		value
Listed*:
KT Freetel Co., Ltd.	W	3,463,803	(720,298	)	(163,286	)	63,374		—		2,643,593
KT Hitel Co., Ltd.		67,780	57,768		10,336		(4,097	)	—		131,787
KT Submarine Co., Ltd.		8,085	12,807		1,741		794		(404	)	23,023
Unlisted:
KT Infotech Corporation		3,011	1,155		(170	)	19		(60	)	3,955
Korea Telephone
Directory Co., Ltd.		6,800	1,583		218		—		—		8,601
KT Powertel Co.		55,135	(21,773	)	3,356		2,430		—		39,148
KT Networks Corporation		49,800	30,168		(3,597	)	30		—		76,401
KT Linkus Co., Ltd.		50,861	20,509		2,102		5,554		—		79,026
KT Commerce, Inc.		1,330	(576	)	(496	)	(1	)	—		257
KT China Co., Ltd.		1,245	—		144		(48	)	—		1,341
KT Realty Development and
Management Co., Ltd.		760	743		424		(6	)	—		1,921
Korea Telecom America, Inc.		4,783	(4,775	)	97		2,983		—		3,088
Korea Telecom Philippines, Inc.		2,481	(2,481	)	—		—		—		—
Mongolian Telecommunications Co.		3,450	5,935		440		(4,348	)	(495	)	4,982
Korea Digital Satellite Broadcasting
Co.		131,890	(19,580	)	(25,420	)	(260	)			86,630
Korea Information Data Corp.		3,800	1,420		1,644		—		—		6,864
Korea Information Service Corp.		2,850	764		904		34		—		4,552
KBSi Co., Ltd.		4,760	(2,607	)	(767	)	—		—		1,386
Bank Town Co., Ltd.		190	218		24		—		—		432
eNtoB Corp.		2,500	(815	)	558		—		—		2,243
New Telephone Company		33,064	3,578		15,470		(12,801	)	—		39,311
Korea Telecom Japan Co., Ltd.		6,586	(6,586	)	—		—		—		—
KT Instrument & Communication
Corp.		95	115		99		—		—		309
Korea IT Venture Partners, Inc.		9,000	(80	)	859		(552	)	—		9,227
	W	3,914,059	(642,808	)	(155,320	)	53,105		(959	)	3,168,077

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14

KT CORPORATION

Notes to Financial statements, Continued

| (9) |
| --- |
| * The quoted market values (based on closing KOSDAQ prices) of KTF, KTH and KTSC as of December
31, 2003 are W1,712,126 million, W180,863 million and W10,511 million, respectively. |
| Effective January 1, 2003, KT’s subsidiaries adopted Statement of Korea Accounting Standards
No. 3, “ Intangible Assets .” In accordance with this standard, the cumulative effect on prior
years of this change in the accounting has been credited to retained earnings. Therefore, under
the equity method of accounting, the Company has charged W1,530 million in the retained
earnings of investee companies to retained earnings. |
| Investments in affiliated companies under the equity method of accounting as of December 31,
2004 are as follows: |

	Millions
		Equity in		Equity				Dividends
		retained		income (loss)		Unrealized		received		Book
	Cost	earnings (deficit)		in 2004		gains (losses)		in 2004		value
Listed*:
KT Freetel Co., Ltd.	W	3,463,803	(883,584	)	(143,369	)	36,031		(44,820	)	2,428,061
KT Hitel Co., Ltd.		67,780	68,104		(19,415	)	(5,616	)	—		110,853
KT Submarine Co., Ltd.		8,085	14,144		(392	)	705		—		22,542
Unlisted:
KT Infotech Corporation		3,011	925		1,082		(235	)	(1,724	)	3,059
Korea Telephone
Directory Co., Ltd.		6,800	1,801		176		—		—		8,777
KT Powertel Co.		55,135	(18,417	)	4,165		2,430		—		43,313
KT Networks Corporation		49,800	26,571		(4,185	)	(29	)	—		72,157
KT Linkus Co., Ltd.		50,861	22,611		(20,083	)	5,554		—		58,943
KT Commerce, Inc.		1,330	(1,072	)	(258	)	—		—		—
KT China Co., Ltd.		1,245	144		(137	)	(208	)	—		1,044
KT Realty Development and
Management Co., Ltd.		760	1,167		367		(8	)	(114	)	2,172
Korea Telecom America, Inc.		4,783	(4,678	)	190		2,569		—		2,864
Korea Telecom Philippines, Inc.		2,481	(2,481	)	—		—		—		—
Mongolian Telecommunications
Co.		3,450	5,880		4,662		(5,590	)	(219	)	8,183
Korea Digital Satellite
Broadcasting Co.		131,890	(45,000	)	(86,890	)	—		—		—
Korea Information Data Corp.		3,800	3,064		2,274		—		—		9,138
Korea Information Service Corp.		2,850	1,668		1,489		—		—		6,007
KBSi Co., Ltd.		4,760	(3,374	)	279		2		—		1,667
Bank Town Co., Ltd.		190	242		137		—		—		569
eNtoB Corp.		2,500	(257	)	252		—		—		2,495
New Telephone Company		33,064	19,048		23,680		(21,813	)	—		53,979
Korea Telecom Japan Co., Ltd.		6,586	(6,586	)	—		—		—		—
KT Instrument &
Communication Corp.		95	214		45		—		—		354
Korea IT Venture Partners, Inc.		9,000	779		417		(968	)	—		9,228
	W	3,914,059	(799,087	)	(235,514	)	12,824		(46,877	)	2,845,405

| * The quoted market values (based on closing Korea Stock Exchange and KOSDAQ prices) of
KTF, KTH and KTSC as of December 31, 2004 are W2,214,110 million, W100,669 million and W9,524
million, respectively. |
| --- |
| In prior years, the investments in KTPI and KTJ were reduced to nil due to continuous operating
losses. As a result, the Company discontinued the use of the equity method of accounting for
these investments as the Company does not provide any guarantees or have any commitments to
provide additional financial support for these entities. |

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15

KT CORPORATION

Notes to Financial statements, Continued

(10) Transactions and Balances with Affiliated Companies

(a) Significant transactions which occurred in the normal course of business with affiliated companies for the years ended December 31, 2003 and 2004 are summarized as follows:

Affiliated company	Income Statement Items	Millions — 2003	2004
KT Freetel Co., Ltd.	Operating revenue	W	411,098	443,354
	Operating expense		563,262	628,428
	Interest income from KTF		10,103	10,307
	Contributions received for losses on
	universal telecommunications services		44,250	25,557
KT Hitel Co., Ltd.	Operating revenue		3,260	2,163
	Operating expense		18,585	27,897
KT Networks Corporation	Operating revenue		28,412	51,667
	Operating expense		56,828	131,420
KT Linkus Co., Ltd.	Operating revenue		16,634	17,350
	Operating expense		123,631	112,435
KTF Technologies Inc.	Operating revenue		23	248
	Operating expense		35,914	101,385
KT Commerce, Inc.	Operating revenue		1,331	1,683
	Operating expense		21,509	113,052
Korea Digital Satellite
Broadcasting Co.	Operating revenue		47,337	131,685
	Operating expense		246	1,299
Korea Information Data Corp.	Operating revenue		8,942	10,676
	Operating expense		96,944	102,624
KT Realty Development and
Management Co., Ltd.	Operating revenue		287	820
	Operating expense		66,361	74,058
Korea Information Service Corp.	Operating revenue		6,480	7,934
	Operating expense		66,148	71,778
KT Infotech Corporation	Operating revenue		121	51
	Operating expense		59,097	43,499
eNtoB Corp.	Operating expense		33,101	86,406
Other	Operating revenue		17,677	24,527
	Operating expense		22,822	15,868
Total	Revenue	W	595,955	728,022
	Expense	W	1,164,448	1,510,149

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16

KT CORPORATION

Notes to Financial statements, Continued

(10) Transactions and Balances with Affiliated Companies, Continued

(b) Significant account balances which occurred in the normal course of business with affiliated companies as of December 31, 2003 and 2004 are summarized as follows:

Affiliated company — KT Freetel Co., Ltd.	Balanced sheet Items — Notes and accounts receivable – trade	2003 — W	18,693	41,911
	Convertible notes		327,240	347,814
	Notes and accounts payable – trade		106,202	113,702
	Key money deposits		48,895	41,599
KT Hitel Co., Ltd.	Notes and accounts receivable – trade		5,005	1,134
	Accrued expenses		2,090	3,920
KT Networks Corporation	Notes and accounts receivable – trade		5,126	5,338
	Accounts payable – other		33,528	35,170
KT Linkus Co., Ltd.	Notes and accounts receivable – trade		2,233	112
	Notes and accounts payable – trade		19,024	22,389
Korea Telecom Philippines, Inc.	Accounts receivable– other		19,179	16,713
KTF Technologies Inc.	Notes and accounts receivable – trade		—	368
	Notes and accounts payable – trade		14,709	2,584
KT Commerce, Inc.	Notes and accounts receivable – trade		4,623	3,509
	Notes and accounts payable – trade		8,672	11,141
Korea Digital Satellite
Broadcasting Co.	Notes and accounts receivable – trade		4,079	54,664
	Accounts payable - other		19	20
Korea Information Data Corp.	Notes and accounts receivable – trade		840	884
	Accounts payable – other		13,169	14,757
KT Realty Development and
Management Co., Ltd.	Accounts payable – other		12,664	6,633
Korea Information Service Corp.	Notes and accounts receivable – trade		676	236
	Accounts payable – other		8,852	9,538
KT Infotech Corporation	Notes and accounts receivable – trade		10	—
	Accounts payable – other		19,348	23,374
eNtoB Corp.	Accounts payable – other		16,462	16,669
Other	Accounts receivable		22,013	26,322
	Accounts payable		4,988	6,831
Total	Accounts receivable	W	82,477	151,191
	Convertible notes	W	327,240	347,814
	Accounts payable	W	308,622	308,327

(c) As of December 31, 2004, the Company has provided guarantees of the following affiliates’ indebtedness and contract performance as follows:

Affiliated company
KTSC	W60,540
NTC	12,526
	W73,066

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17

KT CORPORATION

Notes to Financial statements, Continued

(11) Property, Plant and Equipment

(a) Property, plant and equipment as of December 31, 2003 and 2004 are summarized as follows:

	Millions
	2003		2004
Land	W	1,002,186		1,015,119
Buildings and structures		3,908,118		4,170,154
Machinery and equipment		28,056,035		27,993,970
Vehicles		63,809		62,162
Tools, furniture and fixtures		1,153,082		1,129,429
Construction in progress		387,845		268,236
		34,571,075		34,639,070
Less accumulated depreciation		(23,325,504	)	(24,002,011	)
Net property, plant and equipment	W	11,245,571		10,637,059

| | Property, plant and equipment are insured against fire damage up to an amount of W651,275
million and W709,060 million as of December 31, 2003 and 2004, respectively.
Additionally, the Company maintains insurance policies covering loss and liability arising
from automobile accidents. |
| --- | --- |
| (b) | Officially Declared Value of Land |
| | The officially declared value of land at December 31, 2004, as announced by the Ministry
of Construction and Transportation, is as follows: |

	Millions — Book value	Declared value
Head office	W	130,469	393,695
Metropolitan District		395,860	2,140,817
Busan District		98,425	391,993
Jeonnam District		90,550	212,339
Daegu District		116,754	266,344
Chungnam District		47,598	140,581
Jeonbuk District		47,587	114,511
Kangwon District		43,679	81,867
Chungbuk District		29,426	77,105
Cheju District		14,771	30,463
	W	1,015,119	3,849,715

The officially declared value, which is used for government purposes, is not intended to represent fair value.

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18

KT CORPORATION

Notes to Financial statements, Continued

(12)
Other assets as of December 31, 2003 and 2004 are summarized as follows:

	Millions — 2003	2004
Deferred income tax asset, net (note 27)	W	313,913	250,661
Long-term loans to employees		556,740	434,816
Intangible assets, net		247,826	299,106
Leasehold rights and deposits		99,549	106,453
Other long-term loans		36,137	8,386
Long-term accounts receivable — trade		14,538	59,457
Long-term accounts receivable — other		3,869	3,647
Other		42,277	46,600
	W	1,314,849	1,209,126

(13)
Short-term borrowings (all of which mature within one year) as of December 31, 2003 and 2004 are summarized as follows:

Debt instrument/Lender	Maturity	Interest rate per — annum	Millions — 2003	2004
Commercial paper	2004	4.12~4.17 %	W	250,000	—

(14)
Other current liabilities as of December 31, 2003 and 2004 are summarized as follows:

	Millions — 2003	2004
Key money deposits	W	147,395	147,006
Payables from interest currency swap (note 24)		—	99,615
Payables from interest swap (note 24)		16,077	7,278
Payables from currency swap (note 24)		3,554	40,799
Payable from currency forward (note 24)		—	10,025
Other		1,392	880
	W	168,418	305,603

(15)
Long-term debt as of December 31, 2003 and 2004 is summarized as follows:

	Interest rate — per annum	Maturity date	Millions — 2003	2004
Local currency (Won) debt :
Bonds	4.15%~9.20%	2005-2014	W	4,420,000	4,420,000
Convertible notes	3.00%	2005		1,322,563	1,322,530
Information and
Telecommunication
Improvement Fund	3.63%~4.28%	2006-2009		107,275	79,818
				5,849,838	5,822,348

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19

KT CORPORATION

Notes to Financial statements, Continued

(15) Long-term Debt, Continued

	Interest rate — per annum	Maturity date	Millions — 2003	2004
Foreign currency (U.S. dollars) debt:
Convertible notes	0.25%	2007	W	1,483,628	1,178,759
Bonds with warrants	4.30%	2005		598,900	521,900
Yankee bonds	7.50%~7.63%	2006-2007		419,230	365,330
Loans	Libor+0.45%	2005		239,560	208,760
Bonds	Libor+0.80%	2006		179,670	156,570
MTNP notes	5.88%~6.50%	2014-2034		—	730,660
				2,920,988	3,161,979
Total				8,770,826	8,984,327
Add: Premium on bonds				30,239	50,387
Less: Current portion				1,054,287	3,995,904
Discount on bonds				35,774	24,010
			W	7,711,004	5,014,800

| In June 2004, the Company established a US$1 billion Medium Term Note Program (MTNP). As of
December 31, 2004, the Company has issued notes in the amount of US$700 million with a fixed
interest rate under the MTNP. The notes are listed on the Singapore Stock Exchange. As of
December 31, 2004, the unused portion of the MTNP amounts to US$300 million. |
| --- |
| On January 4, 2002, the Company issued convertible notes with a face amount of US$1,317,800
thousand. Holders of convertible notes are entitled to convert notes into shares of the
Company’s common stock from January 4, 2003 to January 1, 2007. In November 2004, certain
holders of the convertible notes elected their option to redeem these convertible notes. As a
result, as described in note 35, on January 4, 2005, the principal amount of US$1,115,105
thousand was repaid. During 2002 and 2003, the Company purchased and retired convertible notes
with a face value of US$191,450 thousand. |
| During 2002, bonds with warrants were issued in connection with a strategic alliance with
Microsoft Corp. Holders of bonds with warrants were entitled to exercise the warrants from
January 4, 2003 to December 31, 2003. The warrants expired on December 31, 2003 without being
exercised. The bonds of W521,900 million issued to Microsoft Corp. were repaid on January 4,
2005. |
| On May 25, 2002, the Company issued convertible notes with a face amount of W1,397,349 million. Holders of the convertible notes are entitled to convert
notes into shares of the Company’s common stock from September 25, 2002 to April 25, 2005. The exchange price was W59,400 per share of common stock, which
allowed the bondholders to obtain up to 23,524,392 shares. During 2002, 2003 and 2004, due to early retirement of the convertible notes and 13,705 shares
of common stock converted, the number of shares allowed to the holders was reduced to 22,264,813 shares. The convertible notes, if not converted, will be
redeemed at 104.438% of their principal amount at maturity date. The Company recognizes interest expense on the convertible notes using the effective
interest method, and amortization of the redemption premium is recorded as accrued interest expense. Since the issuance of the notes through December 31,
2004, the Company has purchased and retired convertible notes with a face value of W74,000 million and exchanged convertible notes with a face value of
W819 million with the Company’s shares. |
| On December 18, 2003, the Company purchased and retired convertible notes issued on January 4, 2002 with a face value of US$83,700 thousand for US$85,839
thousand with a gain on retirement of convertible notes of W7,441 million. |

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20

KT CORPORATION

Notes to Financial statements, Continued

(15)
Aggregate principal maturities for the Company’s long-term debt as of December 31, 2004 are as follows:

Fiscal year ending December 31,	Millions
2005	W	3,945,517
2006		809,720
2007		743,830
2008		532,667
2009		401,900
Thereafter		2,550,693
	W	8,984,327

(16)	Refundable Deposits for Telephone Installation
	Through September 15, 1998, KT collected deposits for telephone installation in accordance with the Korea Public Telecommunication Business Law. Such
deposits (which are reflected as a liability) are to be refunded without interest to the telephone subscribers upon termination of service. For changes in
site classifications of telephones that were installed prior to January 1, 1990, KT is obligated to refund the original deposit received plus the increased
deposit due to changes in site classifications.
	Beginning on September 15, 1998, KT allowed customers to choose between alternative plans for basic telephone service. Under such plan, customers were
permitted the option to either place fully refundable deposits or pay a reduced non-refundable service initiation fee. The non-refundable service
installation fees were recorded as operating revenues. Refundable deposits continue to be subject to the same provisions as described above. Effective
April 15, 2001, all new customers are required to pay a non-refundable service initiation fee.
(17)	Retirement and Severance Benefits
	Changes in retirement and severance benefits for the years ended December 31, 2003 and 2004 are summarized as follows:

	Millions
	2003		2004
Estimated severance benefits liability at beginning of year	W	654,792		692,506
Provision for the year		1,038,868		208,665
Payments		(1,001,154	)	(23,205	)
Estimated severance benefits liability at end of year		692,506		877,966
Deposit for severance benefits insurance		(494,588	)	(614,435	)
Net balance at end of year	W	197,918		263,531

In September 2003, the Company offered a voluntary early retirement plan (the “Plan”) to its employees. Under the terms of the Plan, employees participating in the Plan would receive additional amounts of retirement and severance benefits. For the year ended December 31, 2003, the Company recorded costs of W831,535 million related to this Plan covering approximately 5,500 employees.

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21

KT CORPORATION

Notes to Financial statements, Continued

(18)
Other long-term liabilities as of December 31, 2003 and 2004 are summarized as follows:

	Millions — 2003	2004
Accrual for customer call bonus points	W	93,790	112,968
Key money deposits from customers		16,466	12,694
Advance receipts		17,099	16,390
Other		2,577	15,817
	W	129,932	157,869

(19)
Assets and liabilities denominated in foreign currency as of December 31, 2003 and 2004 are summarized as follows:

	2003			2004
	Foreign			Foreign
	currency	Won		Currency	Won
	(USD in	equivalent		(USD in	equivalent
	thousand)	(in million)		thousand)	(in million)
Assets:
Cash and cash equivalents	$ 26,395	W	31,616	$ 54,932	W	57,339
Short-term financial instruments	—		—	298,239		311,302
Accounts receivable — trade	184,580		221,090	211,596		220,864
Accounts and
notes receivable —
other	16,012		19,179	16,012		16,713
Short-term loans	200		240	250		261
Long-term loans	30,169		36,137	23,310		24,331
	$ 257,356	W	308,262	$ 604,339	W	630,810
Liabilities:
Accounts and
notes payable —
trade	$ 185,410	W	222,085	$ 195,551	W	204,116
Long-term debt, including
current
portion	1,200,000		1,437,360	1,900,000		1,983,220
Convertible notes	1,126,350		1,483,628	1,126,350		1,178,759
	$ 2,511,760	W	3,143,073	$ 3,221,901	W	3,366,095

Prior to January 1, 2004, convertible notes are not subject to foreign currency translation because convertible notes are regarded as non-monetary foreign currency liabilities in accordance with Korean GAAP. However, in November 2004, certain holders of the convertible notes elected their option to redeem these convertible notes. As a result of the election by the note holders, the convertible notes are subject to foreign currency translation as of December 31, 2004. Accordingly, the Company has recognized a foreign currency translation gain of W304,870 million for the year ended December 31, 2004.

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22

KT CORPORATION

Notes to Financial statements, Continued

(20)
The composition of holders of common stock as of December 31, 2003 and 2004 are summarized as follows:

2003	2004	2003	2004
Employee Stock Ownership
Associations	16,394,226	16,174,934	5.76 %	5.68 %
National Pension Corporation	9,461,792	10,654,638	3.32 %	3.74 %
Treasury stock	74,090,974	74,090,418	26.01 %	26.01 %
Others, including private companies	184,902,408	183,929,410	64.91 %	64.57 %
	284,849,400	284,849,400	100.00 %	100.00 %

Changes in common stock for the years ended December 31, 2003 and 2004 are as follows:

shares issued		Millions
Balance at January 1, 2003	309,077,659	W	1,560,998
Retirement of treasure stock on January 6, 2003	15,454,659		—
Retirement of treasure stock on June 20, 2003	2,937,000		—
Retirement of treasure stock on December 9, 2003	5,836,600		—
Balance at December 31, 2003	284,849,400	W	1,560,998
—		—
Balance at December 31, 2004	284,849,400	W	1,560,998

| | As allowed by the Securities Exchange Law of the Republic of Korea, the Company retired its
treasury shares by a charge to retained earnings rather than its common stock. |
| --- | --- |
| (21) | Capital Surplus |
| | Capital surplus as of December 31, 2003 and 2004 is summarized as follows: |

	Millions — 2003	2004
Paid-in capital in excess of par value	W	1,440,258	1,440,258

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23

KT CORPORATION

Notes to Financial statements, Continued

(22)
Retained earnings appropriated to various restricted reserves as of December 31, 2003 and
2004 are summarized as follows:

	Millions — 2003	2004
Involuntary reserve:
Legal reserve	W	780,499	780,499
Voluntary reserve:
Reserve for business rationalization		443,416	443,416
Reserve for technology and human resource development		3,334	—
Reserve for social overhead capital		3,333	—
Reserve for business expansion		6,587,325	4,000,000
Reserve for redemption of telephone bonds		207,947	207,947
	W	8,025,854	5,431,862

| | Retained earnings appropriated to the legal reserve are restricted in use as cash dividends
under the applicable laws and regulations of the Republic of Korea. The Korean Commercial Code
requires the Company to appropriate to a legal reserve an amount equal to at least 10% of the
cash dividend amount at the end of the year for each accounting period until the reserve equals
50% of stated capital. The legal reserve may be used to reduce a deficit or may be transferred
to stated capital. |
| --- | --- |
| | The Company is allowed to appropriate from retained earnings amounts necessary to establish
reserves for business expansion and research and development at its own discretion. These
reserves may be used for research, development and facilities expansion of the Company. |
| | Under the Special Tax Treatment Control Law, the Company is allowed to make certain deductions
from taxable income. However, the Company is required to appropriate retained earnings in the
amount of tax benefits obtained and transfer such amount into reserves for social overhead
capital and technology and human resources development. |
| | Through 2001, under the Special Tax Treatment Control Law, investment tax credits were allowed
for certain investments. However, the Company was required to transfer from retained
earnings the amount of tax benefits obtained into a reserve for business rationalization.
Effective December 11, 2002, the Company is no longer required to establish a reserve for
business rationalization despite tax benefits received for certain investments, and
consequently the existing balance is now regarded as a voluntary reserve. |
| (23) | Treasury Stock |

(a)	Trust fund
	During 2000, in order to stabilize the price of the Company’s common stock in the market,
the Company established a treasury stock fund of W100 billion. This trust fund is managed
by a bank, which is used primarily as a vehicle for trading the common stock of the
Company. The trust fund (which is recorded at cost) held treasury stock of 1,259,170
shares as of December 31, 2003 and 2004, respectively.
(b)	Issuance to the notes holders
	During 2004, certain holders of convertible notes (as described in note 15), which were
issued on May 25, 2002, converted their notes into shares of the Company’s common stock.
As part of this transaction, 556 shares of treasury stock were issued to the note holders.

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24

KT CORPORATION

Notes to Financial statements, Continued

(23) Treasury Stock, Continued

(c)	Purchase and retirement of treasury stock
	The Company and SK Telecom agreed to an equity swap on December 20, 2002, under which each
company sold all of the other’s equity shares it held in the other. According to the
agreement, the Company exchanged 4,457,635 shares of SK Telecom for 15,454,659 shares of
the Company’s common stock and cash of W211,868 million on December 30, 2002 and retired
these treasury stock for W786,666 million by a charge to retained earnings on January 6,
2003. In addition, on January 10, 2003, the Company exchanged 3,809,288 shares of SK
Telecom for 14,353,674 shares of the Company’s common stock amounting W730,704 million and
cash of W122,679 million.
	During 2003, the Company initiated a stock buyback and retirement program approved by the
Board of Directors. The Company reacquired 8,773,600 shares of treasury stock during 2003
and retired these treasury shares amounting to W411,833 million by a charge to retained
earnings. As of December 31, 2004, no amounts under the stock buyback and retirement
programs are outstanding.
(d)	Sale and contribution to Employee Stock Ownership Association
	On August 28, 2003, the Company sold 1,803,296 shares of treasury stock to the KT employee
stock ownership association (“ESOA”). The difference between carrying value and the fair
value of W13,886 million was recorded as a loss on retirement of treasury stock and the
difference between the fair value and the sales proceeds of W40,754 million was expensed.

Changes in treasury stock for the years ended December 31, 2003 and 2004 were as follows:

Number				Number
of shares		Millions		of shares		Millions
Balance at beginning of year	76,988,771	W	4,112,225		74,090,974	W	3,962,598
Purchase of the Company’s common
stock	23,127,274		1,142,537		—		—
Issuance to convertible note holders	(2,356	)	(127	)	(556	)	(30	)
Purchase by trust fund, net	8,840		414		—		—
Retirement of treasury stock	(24,228,259	)	(1,198,499	)	—		—
Sale and contribution to ESOA	(1,803,296	)	(93,952	)	—		—
Balance at end of year	74,090,974	W	3,962,598		74,090,418	W	3,962,568

(24) Commitments and Contingencies

| (a) |
| --- |
| On February 20, 2001, the Fair Trade Commission alleged that the Company had unfairly
assisted its affiliates by paying them unreasonably high service fees through the violation
of the Fair Trade Laws. The Fair Trade Commission imposed a fine of approximately W30,700
million, and the Company made a provision of W30,700 million for this claim during 2001.
In October 2004, the Seoul High Court partially reversed the Fair Trade Commission’s
decision and decreased the fine from W30,700 million to W2,400 million. As of December 31,
2004, the ruling of the Seoul High Court’s decision is not reflected in the accompanying
financial statements. The Company believes that the Fair Trade Commission will appeal to
the Supreme Court of Korea. |

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25

KT CORPORATION

Notes to Financial statements, Continued

(24) Commitments and Contingencies, Continued

(a)	Legal matters, Continued
	The Company is also in litigation as a defendant in other cases for damages allegedly
resulting from various claims, disputes and legal actions in the normal course of
operations. These claims amounted to W100,629 million as of December 31, 2004. Management
believes that the ultimate settlement of these matters, and the matters described in the
previous paragraph, will not have a material adverse effect on the Company’s financial
position, results of operations or cash flows.
(b)	As of December 31, 2004, the Company guarantees lease payables of Hanwha S&C to KT
Networks Corporation amounting W4,577 million.
(c)	Interest rate swaption
	During 2002, the Company entered into interest rate swaption contract with Citibank for
variable rates of interest in place of fixed rates of interest. Details of the interest rate
swaption contract outstanding as of December 31, 2004 are as follows:

Bank	Swaption premium — (millions)	rate (3 months)		Variable interest — rate (3 months)	Exercise date	Type
Citibank	W	1,913	1.975 %	91-Day CD rate	April 25, 2005	Selling

| | Under the interest rate swaption contract, the Company recognized a valuation gain of W2,448
million and a valuation loss of W(636) million for the years ended December 31, 2003 and
2004, respectively. |
| --- | --- |
| (d) | Interest rate swap |
| | During 2002, 2003 and 2004, the Company entered into various interest rate swap contracts
with financial institutions for variable rates of interest in place of fixed rates of
interest. Details of these interest rate swap contracts as of December 31, 2004 are as
follows: |

	Nominal — premium	Fixed — amount	interest		Variable interest	Terminal
Bank	(millions)	(millions)	rate		rate	date
J.P. Morgan	$1.6	US$	150	7.50 %	6-month LIBOR +4.32%	June 1, 2006
J.P. Morgan	$0.5	US$	200	7.63 %	6-month LIBOR +4.61%	April 15, 2007
Citibank	—	W	110,000	5.29 %	3-month LIBOR +1.47%	April 30, 2008
Shinhan Bank	—	W	180,000	6.35 %	3-month LIBOR +2.47%
					+Contingent spread	September 30, 2007
Shinhan Bank	—	W	57,810	4.70 %	6-month LIBOR + 0.69%	June 24, 2009
UBS Bank	—	W	57,810	4.70 %	6-month LIBOR + 0.69%	June 24, 2009
UBS Bank	—	W	57,810	4.64 %	6-month LIBOR + 0.69%	June 24, 2009
BNP Paribas
Bank	—	W	110,000	5.29 %	3-month LIBOR +1.54%	April 30, 2008
CSFB	—	W	57,810	4.64 %	6-month LIBOR +0.69%	June 24, 2009

| Under the interest rate swap contracts, the Company recognized a valuation loss and gain
of W(13,645) million and W222 million, respectively, for the year ended December 31, 2003,
and a valuation loss and gain of W(2,943) million and W12,427 million, respectively, for the
year ended December 31, 2004. |
| --- |
| In addition, the Company settled two contracts and three contracts in 2003 and 2004,
respectively, and recognized a transaction gain of W8,170 million and a transaction loss of
W(1,252) million for the years ended December 31, 2003 and 2004, respectively. |

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26

KT CORPORATION

Notes to Financial statements, Continued

(24) Commitments and Contingencies, Continued

| (e) |
| --- |
| During June 2003, the Company entered into two currency swap contracts for principal and
interest denominated in Korean Won in place of principal and interest of long-term debt
denominated in U.S. dollars. Details of these currency swap contracts as of December 31,
2004 are as follows: |

	Contract — amount	Fixed — amount		Receiving	Paying	Terminal
Bank	(millions)	(millions)		Interest rate	Interest rate	date
J.P. Morgan	US$50	W	59,750	4.30% (US$) per year	6.17% (Won) per year	January 3, 2005
J.P. Morgan	US$150	W	179,760	3-month LIBOR + 0.80%(US$)	3-month LIBOR +2.64% (Won)	June 24, 2006

| | Under the currency swap contracts, the Company recognized a valuation loss of W(2,429)
million and a valuation loss of W(37,244) million for the years ended December 31, 2003 and
2004, respectively. |
| --- | --- |
| (f) | Interest currency swap |
| | The Company entered into five interest currency swap contracts with financial institutions
for principal and the fixed rate of interest denominated in Korean Won in place of
principal and the variable rate of interest of long-term debt denominated in U.S. dollars
in October 2003. The principal amounts in Korean Won will be adjusted according to the
foreign exchange rate of the terminal date within certain ranges. In addition, the Company
entered into five interest currency swap contracts with financial institutions for
principal and interest denominated in Korean Won in place of principal and interest of
long-term debt denominated in U.S. dollars in 2004. Details of these interest currency
swap contracts as of December 31, 2004 are as follows: |

	Contract — amount	Amount		Fixed — interest	Variable — interest	Terminal
Bank	(millions)	(millions)		rate (1 year)	rate (6 months)	date
J.P. Morgan	US$50	W	55,000~60,000	4.3%(US$)	6-month LIBOR +4.55% (Won)	January 3, 2005
J.P. Morgan(*)	US$100	W	115,620	5.9%(US$)	6-month LIBOR +1.87% (Won)
				5.5%(Won)		June 24, 2014
J.P. Morgan(**)	US$200	W	231,240	5.5%(Won)	6-month LIBOR +0.69% (Won)
					5.9%-Contingent Spread (US$)	June 24, 2014
Merrill Lynch	US$100	W	116,400	5.0%(Won)	5.9%-Contingent Spread (US$)	June 24, 2014
Merrill Lynch	US$50	W	53,325	4.7%(Won)	5.9%-Contingent Spread (US$)	June 24, 2014
Citibank	US$25	W	27,500~30,000	4.3%(US$)	6-month LIBOR +4.45% (Won)	January 3, 2005
UBS Bank	US$25	W	27,500~30,000	4.3%(US$)	6-month LIBOR +4.45% (Won)	January 3, 2005
Deutsche Bank	US$50	W	55,000~60,000	4.3%(US$)	6-month LIBOR +4.57% (Won)	January 3, 2005
Deutsche Bank	US$50	W	53,325	4.7%(Won)	5.9%-Contingent Spread (US$)	June 24, 2014
Shinhan Bank	US$50	W	55,000~60,000	4.3%(US$)	6-month LIBOR +4.45% (Won)	January 3, 2005

| () The interest will be received at 5.9% (US$) every six months and paid at
6-month LIBOR + 1.87% (Won) over the first five years. Then, the interest will be
received at 5.9% (US$) every six months and paid at 5.5% (Won) per year over the
following five years. |
| --- |
| (*) The interest will be received at 5.9%-Contingent spread (US$) every six
months and paid at 6-month Libor +0.69% (Won) over the first five years. Then, the
interest will be received at 5.9%-Contingent spread (US$) every six months and paid at
5.5% (Won) per year over the following five years. |

Under the interest currency swap contracts, the Company recognized a valuation loss of W(5,083) million and W(105,899) million for the years ended December 31, 2003 and 2004, respectively.

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27

KT CORPORATION

Notes to Financial statements, Continued

(24) Commitments and Contingencies, Continued

| (g) |
| --- |
| The Company entered into eight currency forward contracts with financial institutions in
order to pay back convertible notes and bonds with warrants, which were issued on January
4, 2002. Details of these currency forward contracts outstanding as of December 31, 2004
are as follows: |

	Fixed
	amount
Bank	(millions)		Terminal date
Shinhan Bank	US$	118	January 3, 2005
Shinhan Bank	US$	82	January 3, 2005
Kookmin Bank	US$	100	January 3, 2005
Kookmin Bank	US$	100	January 3, 2005
Citibank	US$	100	January 3, 2005
Citibank	US$	100	January 3, 2005
UBS	US$	100	January 3, 2005
J.P. Morgan	US$	170	January 3, 2005

| | Under the currency forward contracts, the Company recognized a valuation loss of W(10,025)
million and a valuation gain of W164 million, respectively, for the year ended December 31,
2004. |
| --- | --- |
| (h) | Loans and Borrowings |
| | As of December 31, 2004, the Company has entered into bank overdraft agreements with two
banks for borrowings up to W750,000 million and a collection agreement for foreign currency
denominated checks up to US$1 million with Korea Exchange Bank. In addition, the Company
has received letter of credits up to US$35 million with four banks. |
| | In October 2004, the Company has entered into revolving stand-by credit line agreements
with 12 banks for borrowing up to US$200 million. However, as of December 31, 2004, no
amounts are outstanding. |
| (i) | Guarantee Provided by a Third Party |
| | As of December 31, 2004, three financial institutions are providing guarantees for the
Company covering contract biddings up to US$7,403 thousand, SAR8,093 thousand and W57,701
million. |
| (j) | Lease |
| | The Company has capital lease agreements with GE Capital Korea Ltd. for certain machinery
and equipment, which acquisition cost amounts to W22,860 million. Depreciation on the
machinery and equipment for the years ended December 31, 2003 and 2004 amounted to W312
million and W 4,505 million, respectively. Annual future minimum payments under the
lease agreements as of December 31, 2004 are as follows: |

Fiscal year ending December 31, — 2005	Millions — W	4,955
2006		4,955
2007		4,955
2008		4,782
Thereafter		2,123
Less : amount representing interest		(1,683	)
	W	20,087

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28

KT CORPORATION

Notes to Financial statements, Continued

(25)
Operating revenues for the years ended December 31, 2003 and 2004 are as follows:

	Millions — 2003	2004
Internet services	W	2,349,185	2,638,581
Data communication services		1,420,569	1,348,084
Telephone services		6,791,717	6,326,579
Wireless services		681,346	1,118,476
Satellite services		120,269	119,759
System integration services		115,480	191,122
Real estate rental services		48,356	69,753
Other		47,627	38,465
	W	11,574,549	11,850,819

(26)
Operating expenses for the years ended December 31, 2003 and 2004 are as follows:

	Millions — 2003	2004
Salaries and wages	W	1,793,867	1,661,418
Compensation expense (note 30)		5,376	3,720
Provision for retirement and severance benefits,
including early retirement payments		1,038,868	208,665
Employee benefits		546,394	450,748
Communications		41,895	44,617
Utilities		138,682	143,476
Taxes and dues		88,668	92,364
Rent		47,428	85,319
Depreciation		2,457,584	2,291,428
Amortization		56,715	69,829
Repairs and maintenance		373,541	418,881
Automobile maintenance		18,365	17,495
Commissions		613,200	658,998
Advertising		152,782	142,930
Education and training		50,867	41,576
Research and development		232,180	254,360
Travel		30,655	29,830
Supplies		32,305	23,556
Interconnection charges		1,025,216	869,606
Cost of PCS handsets sold		275,902	554,847
Cost of services		437,706	493,790
International settlement payment		185,448	189,938
Commissions for system integration service		113,607	192,671
Promotion		235,621	372,417
Sales commission		108,792	235,116
Provision for doubtful accounts		301,107	238,953
Other		48,620	62,752
		10,451,391	9,849,300
Less: amounts included in construction in
progress		119,986	125,600
	W	10,331,405	9,723,700

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29

KT CORPORATION

Notes to Financial statements, Continued

(26)	Operating Expenses, Continued
	In September 2003, the Company offered a voluntary early retirement plan (the “Plan”) to its
employees. Under the terms of the Plan, employees participating in the Plan would receive
additional amounts of retirement and severance benefits. For the year ended December 31, 2003,
the Company recorded costs of W831,535 million related to this Plan covering approximately
5,500 employees.
(27)	Income Taxes

(a) The Company is subject to a number of income taxes based upon taxable income which results in the following normal tax rates (including resident tax):

Taxable earnings — Up to W100 million	16.5 %	14.3 %
Over W100 million	29.7 %	27.5 %

The components of income tax expense for the years ended December 31, 2003 and 2004 are as follows:

	Millions — 2003	2004
Current income tax expense	W	384,922	415,457
Deferred income tax expense		74,681	128,546
	W	459,603	544,003

(b) The provision for income taxes calculated using the normal tax rates differs from the actual provision for the years ended December 31, 2003 and 2004 for the following reasons:

	Millions
	2003		2004
Provision for income taxes
at normal tax rates	W	383,032		534,459
Tax effect of prior year’s additional
income tax payment		18,365		81
Tax effect of permanent differences, net		43,680		13,698
Effect of tax rate change		32,985		770
Investment tax credit		(152,041	)	(174,968	)
Write off of deferred tax asset		133,582		169,963
Actual provision for income taxes	W	459,603		544,003

The effective tax rates, after adjustments for certain differences between amounts reported for financial accounting and income tax purposes, were approximately 35.6% and 30.2% for the years ended December 31, 2003 and 2004, respectively.

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30

KT CORPORATION

Notes to Financial statements, Continued

(27) Income Taxes, Continued

(c) The tax effects of temporary differences that result in significant portions of deferred income tax assets and liabilities as of December 31, 2003 and 2004 are presented below:

	Millions
	2003		2004
Deferred income tax assets:
Allowance for doubtful accounts	W	124,705		128,403
Refundable deposits for telephone installation		20,022		18,157
Equity in losses of affiliates		219,749		351,155
Investment securities		46,477		19,119
Accrual for customer call bonus points		25,792		31,398
Accrued expense		18,585		6,606
Tax credit carryforwards		—		34,393
Other, net		25,117		36,280
Total deferred income tax assets		480,447		625,511
Deferred income tax liabilities:
Accumulated depreciation		30,784		61,738
Accrued interest income		2,168		9,567
Total deferred income tax liabilities		32,952		71,305
Write-off		(133,582	)	(303,545	)
Deferred income tax asset, net	W	313,913		250,661

| | The Company concluded that it was not probable that it would be able to realize the tax benefit
of its equity in losses of affiliates within the near future which is construed usually to mean
5 years and, therefore, wrote off the related deferred income tax assets in the amount of
W133,582 million and W169,963 million by a charge to deferred income tax expense for the years
ended December 31, 2003 and 2004, respectively. |
| --- | --- |
| | During 2003, the Korea National Tax Service initiated a tax audit of the Company for the
periods from 1998 to 2002. In September 2003, the Company received a final notice from the
Korea National Tax Service asserting income tax deficiencies. As a result of the tax audit, the
Company paid W67,410 million which consisted of W1,639 million of deferred income tax asset and
W65,771 million of prior year’s income tax expense for the year ended December 31, 2003. For
the year ended December 31, 2004, the Company recognized a deferred income tax asset of W65,294
million and a prior year’s income tax expense of W273 million, respectively, from cash payment
related to the tax audit of stock transaction incurred in 2000. |
| (28) | Earnings Per Share |
| | Earnings per share of common stock for the years ended December 31, 2003 and 2004 are
calculated as follows: |

(a) Basic earnings per share

	Millions
	(except number of shares
	and earnings per share)
	2003	2004
Net earnings	W	830,066	1,255,522
Weighted-average number of shares
common stock (in thousands)		216,106	210,759
Basic earnings per share (in Won)	W	3,841	5,957

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31

KT CORPORATION

Notes to Financial statements, Continued

(28) Earnings Per Share, Continued

(b) Diluted earnings per share

	Millions
	(except number of shares
	and earnings per share)
	2003	2004
Net earnings	W	830,066	1,255,522
Adjustments:
Interest expense on convertible notes		51,373	46,662
Net earnings available for common and common
equivalent shares		881,439	1,302,184
Weighted-average number of common and common
equivalent shares (in thousands)		263,556	233,270
Diluted earnings per share (in Won)	W	3,344	5,582

| Diluted earnings per share are calculated based on the effect of potentially dilutive
securities that were outstanding during the year. The denominator for the diluted earnings per
share computation is adjusted to include the number of additional common shares that would have
been outstanding if the potentially dilutive securities had been converted into common stock.
In addition, the numerator is adjusted to include the after-tax amount of interest recognized
associated with convertible notes. |
| --- |
| Potentially dilutive securities as of December 31, 2003 and 2004 are as follows: |

(thousands)
2003	2004
Convertible notes (note 15)	45,770	22,511
Stock options (note 30)	616	512

| | Stock options were not considered in the determination of diluted earnings per share in 2003
and 2004 because of the anti-dilutive effect on the exercise of stock options. |
| --- | --- |
| (29) | Dividends |

| (a) |
| --- |
| On July 29, 2004, an interim dividend was declared by the Board of Directors and the
Company paid this dividend to common shareholders on August 13, 2004. Dividends relating
to each of the following year’s earnings based upon the par value of common stock are as
follows: |

2003	2004	2003	2004
Dividends paid	—	20.0 %	W-	210,759

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32

KT CORPORATION

Notes to Financial statements, Continued

(29) Dividends, Continued

(b) Dividends are generally proposed based on each year’s earnings and are declared, recorded and paid in the subsequent year. Dividends relating to each of the following year’s earnings based upon the par value of common stock are as follows:

2003	2004		Millions — 2003	2004
Dividends proposed	40.0 %	40.0 %	W	421,517	421,518

| | Proposed dividends of W421,518 million were not recorded in the 2004 financial statements. They
will be recorded upon the approval by the shareholders in 2005. |
| --- | --- |
| (30) | Stock Options |
| | The Company granted stock options to its executive officers and directors in accordance with the
stock option plan approved by the Board of Directors. The details of the stock options granted
are as follows: |

	1 st Grant	2 nd Grant	3 rd Grant
Grant date	2002.12.26	2003. 9.16	2003.12.12
Exercise price (in Won)	70,000	57,000	65,000
Number of shares	371,632	34,200	106,141
Exercise period	2004.12.27~2009.12.26	2005.9.17~2010.9.16	2005.12.13~2010.12.12
Valuation method	Fair value (Black-Scholes model)	Fair value (Black-Scholes model)	Fair value (Black-Scholes model)

| The first grant of stock options consisted of 680,000 shares of common stock, including 220,000
shares under performance condition at the option price of W70,000 per share. However, the
number of stock options decreased to 371,632 shares and the total cost of compensation
decreased from W10,602 million to W8,311 million because of the resignation of two officers and
not achieving performance criteria. |
| --- |
| The second grant of stock options consisted of 36,400 shares of common stock at the option price
of W57,000 per share. However, the number of stock options decreased to 34,200 shares and the
total cost of compensation decreased from W453 million to W426 million because of the
resignation of an outside director. |
| The third grant of stock options consisted of 120,000 shares of common stock, including 40,000
shares under performance condition at the option price of W65,000 per share. As of December 31,
2004, the total shares that are expected to be exercised are 106,141 and the total cost of
compensation is W1,160 million. |
| The options are fully vested upon completion of two years mandatory service periods starting
from the grant dates. The first and third granted option holders can exercise one third of total
options annually from 2004 and 2005, respectively. The second granted options holders can
exercise total options when the options are vested. |
| The Company adopted the fair value method (Black-Scholes model) for the calculation of
compensation costs which are amortized to expense over the option vesting periods. |

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33

KT CORPORATION

Notes to Financial statements, Continued

(30)
The valuation assumptions of stock options based on the fair value method under the
Black-Scholes model are as follows:

	1 st Grant	2 nd Grant	3 rd Grant
Risk free interest rate	5.46%	4.45%	5.09%
Expected option life	4.5 years to 5.5 years	4.5 years	4.5 years to 5.5 years
Expected volatility	49.07% ~ 49.90%	34.49%	31.26% ~ 33.90%
Expected dividend
yield ratio	1.10%	1.57%	1.57%
Fair value per option
(in Won)	W22,364	W12,443	W10,926
Total compensation cost
(in millions)	W8,311	W426	W1,160

| For the year ended December 31, 2004, the Company recognized a compensation benefit of W1,167
million because certain directors left the Company prior to completion of mandatory service
periods. |
| --- |
| Changes in the total cost of compensation for the year ended December 31, 2004 are summarized
as follows: |

	Millions
Adjusted total cost of compensation
Total cost of compensation before adjustment	W	12,215
Cost of compensation — forfeited		(2,318	)
		9,897
Accumulated cost recognized up to prior periods		(5,479	)
Cost recognized for the year
Cost of compensation — forfeited		1,167
Cost of compensation for the year		(4,887	)
		(3,720	)
Cost recognized in future years	W	698

(31)
Significant non-cash investing activities for the years ended December 31, 2003 and 2004 are summarized as follows:

	Millions
	2003		2004
Changes in unrealized gains (losses) on available-for-sale
securities	W	5,534		19,343
Realized gains (losses) on disposition of available-for-sale
securities		(781,406	)	27,844
Available-for-sale securities transferred to
treasury stock		730,704		—
Changes in unrealized gains (losses) on equity securities
of affiliates		46,573		(40,281	)
Exchange on available-for-sale securities		—		18,798
Construction-in-progress transferred to property,
plant and equipment		2,022,603		1,842,446

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34

KT CORPORATION

Notes to Financial statements, Continued

(32)	Contribution Payments for Research and Development and Donations
	For the years ended December 31, 2003 and 2004, the Company made donations of W63,407 million and W74,413 million, respectively, to the
Korean government (Information and Telecommunication Improvement Fund), the Korea Electronic Telecommunication Research Institute (ETRI)
and other institutes. In addition, the Company established a labor welfare fund as a separate entity and contributed
W100,000 million and W50,000 million for the years ended December 31, 2003 and 2004, respectively.
(33)	Contributions Received for Losses on Universal Telecommunications Services
	Starting on January 1, 2000, all telecommunications service providers must contribute towards
the supply of universal telecommunications services in Korea. Telecommunications service
providers designated as universal service providers by the MIC are required to provide
universal telecommunications services, including local services, local public telephone
services, telecommunications services for remote islands and wireless communication services
for ships. The Company has been designated a universal service provider. The losses incurred
by universal service providers in connection with providing these universal telecommunications
services are to be apportioned among the service providers based on their respective annual
revenues. For the years ended December 31, 2003 and 2004, amounts reimbursed to the Company
were W66,065 million and W105,867 million, respectively. In addition, estimated incurred
contribution costs were W86,704 million and W120,915 million in 2003 and 2004, respectively.
These costs are subject to review by the MIC before being finalized.
(34)	Fourth Quarter Information (Unaudited)
	Operating revenues, operating income, net earnings and basic earnings per share for the three-month periods ended December
31, 2003 and 2004 are as follows:

	Millions
	(except per share data)
	2003	2004
Operating revenues	W	2,862,822	2,871,159
Operating income		389,171	287,250
Net earnings		81,581	396,186
Basic earnings per share		382	1,880

(35)
As described in note 15, on January 4, 2005, the principal amount of US$1,115,105 thousand of convertible notes and
US$500,000 thousand of bonds with warrants was repaid.

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link1 "SIGNATURES"

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: May 11, 2005

KT Corporation
By:	/s/ Wha Joon Cho
Name:	Wha Joon Cho
Title:	Managing Director