Downloads; and ‘K-Ways Identity, Signage, Websites

Contents

WORDS 04. Vision & Strategy 14. CEO Message 18. Corporate Governance 20. Board of Directors

ACTIONS 28. Our Business 36. Our Value 42. Our Responsibility

RESULTS 48. Financial Review

Company Profile

Just over a decade after the 1997 launch of KT Freetel, the company boasts more than 13 million subscribers and annual revenues of over KRW 8 trillion. Our new mobile communications services, marketed under the brand name “SHOW”, have been welcomed by customers as an integral part of their daily lives. SHOW services are delivered over the company’s next- generation 3G WCDMA network, which we launched in 2007. KTF is becoming a leader in the ICET industry (Information, Communication, Entertainment and Transaction). Our customers rely on us to make their lives more convenient, fruitful and fun, and our innovative spirit knows no bounds. Now, KTF is preparing to make its next leap forward by merging with KT, Korea’s top fixed-line service provider. A winner Words to actions, and to results

KTF is a company that says what we mean, and we do what we say. We promised that we would become a world-class ICET (Information, Communication, Entertainment, and Transaction) company that defines the cutting edge of mobile communications. We said it, and we are doing it.

Here we present the words we have spoken and the promises we made. More important, we share with you the outstanding results we have achieved for our shareholders. KTF brings talent, drive and leadership to the impending merger with KT, and the integrity of our words and deeds will continue on, undiluted, in the strong new company we will build together. KTF sums up its business with the simple, direct phrase “More than mobile”. KTF will be with TRANSACTION our customers through every step of the exciting evolution of humanity’s digital lifestyle. People’s mobile handsets have tremendous capability Information to connect their users to information, communication, I NM E NT E NT RTA entertainment and more than mobile transactions–what we A world-class ICET company call ICET. Our vision is to Vision that makes life more abundant rank among the world’s for its customers leading ICET companies, opening up new horizons and bringing joy to our customers’ lives. I CET Our

Creativity (inventing a new vision for tomorrow) Tapping into new markets by challenging ourselves and creating new business opportunities • Securing future growth engines • Creating value for customers by integrating our services into every part of their lives • Establishing the foundation for ubiquitous wireless transactions

Innovation (leading the market through innovation) COMMUNICATION Sharpening our competitive edge with ever-improving products and services and maximizing customer value te gy • Leading the WCDMA market with unique value offerings

St ra • Catering to large corporate customers • Mounting effective campaigns to attract new customers

Global (developing global competitiveness) Expanding internationally with a willingness to take on the world • Developing new business opportunities as a Mobile Network Operator (MNO) in emerging markets • Diversifying through global export of ICET technology solutions • Gaining momentum for overseas growth based on partnership and cooperation A World-class To secure growth engines for the company’s future, KTF is acquiring ICET Company skills and technologies across the full spectrum of ICET (Information, Communication, Entertainment and Transaction). In our home country and around the world, KTF is determined to bring the wonders of full ICET service to mobile users everywhere.

I/E

INFOTAINMENT (Ubiquitous Digital Entertainment) Showing customers the joy of digital life Responding immediately to customer needs with a ubiquitous network carrying music, games, videos and more

Security • n io t u l

p Personal o

- Hub

•

f E o a

s e

C COMMUNICATION (WCDMA / Mobile Solutions / Digital Ecosystem) Sharing a digital communication lifestyle A wider range of communication options that go beyond basic customer needs to give them everything they want T GLOBAL (Global Communication / Global COMMUNICATION Convergence / Global Platform) Introducing customers worldwide to the wonders of unlimited handheld connectivity Providing an astonishing range of quality ICET services as a personal hub of digital life anytime, anywhere

TRANSACTION (Personal Financial Management / Digital Infrastructure) Realizing the value of unlimited personal freedom G Making financial life more convenient with an ever- growing list of online and offline transaction services KTF does not compete for a small slice of the pie – we bring forward innovations that grow the size of the pie. We have won numerous customer service awards over the years, being recognized by industry experts and consumers alike as a company that puts its customers at the heart of its business. The Far Eastern Economic Review, published by Dow Jones, has called KTF the company “which most innovatively responded to customer needs”. We are especially proud of our No. 1 ranking in the telecom category of the 2008 National Customer Satisfaction Index (NCSI) survey. It is also innovation that propelled KTF to the top of Korea’s WCDMA market. THINKing outside the box

KTF is now gearing up for another innovative leap: a merger with Korea’s No.1 wired communications company. The diversified strengths of the new company will enable us to respond faster and more effectively to changes in market conditions, and establish a better position to take advantage of the era of convergence. KTF is preparing to launch a new smart phone that not only supports KT’s WiBro wireless internet, but also SHOW, KTF’s 3rd-generation mobile communications service. After that, we will proceed quickly with our launch of mobile IPTV and other cutting-edge mobile services. SHOW represents a new concept in digital living. A 3G WCDMA mobile communication service launched in March of 2007, SHOW ambitiously extended the utility of mobile phones beyond voice communication and into the realm of watch-and-enjoy entertainment and video chatting. Leaving behind the crowded 2G market, SHOW brought KTF into a new business paradigm where competition is based on brand identity and customer value. The service immediately dominated the market, capturing 8.27 million subscribers by the end of 2008. Making Making the magic happen

The success of SHOW’s launch owes as much to creative branding as it does to service innovation. The logo design and promotional campaign were carefully crafted to convey not just the enhanced functionality of video telephony, but also the joy of sharing closer connections with people and the world. Beyond advertising, the brand was extended to remodeled storefronts, sales floor layouts and shop interior color schemes. Unique SHOW promo items were distributed; the SHOW umbrella even won a 2008 design award from the Korea Institute of Design Production. LooKing

Just as wireless signals reach beyond the horizon, KTF’s growth ambitions extend beyond our native borders to the global market. Our first expansion is into Southeast Asia, where consumers share similar preferences to Koreans and market entry is smoothed by the ‘Korean Wave’, as the surging popularity of Korean pop culture is known. Then, using Asia as a springboard, KTF will leverage the success of its WCDMA network to bring 3G services to mobile customers in markets worldwide. Along with entertainment and transactions, overseas growth will be one of the company’s top three growth drivers in coming years. into the bigger picture KTF is the manager of Malaysia’s “U-Mobile” service, which is in the process of a remarkably successful entry into the global market. U-Mobile was launched with attractive incentives, such as Malaysia’s first-ever free calls within a network, steep discounts on short messaging services and reduced fees on other call charges. These incentives and direct marketing helped U-Mobile to attract more than 500,000 subscribers by December, 2008, just seven months after its launch. KTF will continue to lead the international penetration of mobile services after the merger with KT. KTF is a company that values its image and reputation as a caring corporate citizen. We are enthusiastic supporters of the arts & culture, and contribute generously to social welfare programs. To boost the effectiveness of our CSR efforts, KTF looks for areas where its competencies as an ICET service provider can add the most value. We also imprint all our customer-centric services and products with our distinctive “Good Time Management” and “Design Management”. Recently, we have amplified our results using the SHOW platform to encourage our customers to join the company’s social contribution campaigns. WorKing for better tommorrow

Following the splash SHOW made in 3G communications, KTF is strengthening SHOW’s brand power with creative social contribution activities that customers can participate in. Together with KTF staff and management, SHOW subscribers traveled to Inner Mongolia to help with tree-planting efforts to combat desertification and reduce the effects of the annual Asian dust storms. Our customers also gave enthusiastic support to the company’s “SHOW Sharing” children’s fundraiser and “SHOW 1004” (1004 is pronounced the same as ‘angel’ in Korean), which provides free video calls for our underprivi- leged neighbors. CEO Message

To our shareholders and customers,

Let me first extend my heartfelt thanks for all the support you have given KTF, and wish you and your family health and happiness in 2009.

Last year, KTF overcame the challenges of the spreading economic downturn to record excellent business results. Service revenue climbed 7.4% in 2008, reaching KRW 5.95 trillion, while total revenue including handset sales rose 14.4% to KRW 8.35 trillion. This was a landmark achievement for our company, representing the first time since KT Freetel’s establishment in 1997 that revenues passed the KRW 8 trillion mark. We also raised our subscriber numbers by 644,499 during 2008, boasting 14,365,233 customers as of year-end.

“SHOW”, the 3G WCDMA brand launched in 2007 after years of careful preparation, solidified its position as a nationally-recognized brand. Leveraging the strong brand recognition of SHOW, KTF has successfully introduced unique new products and service plans such as ‘SHOWKING Sponsor.’ Within just two years after its launch, SHOW gathered 8.27 million subscribers, an amazing rate of growth for a new service. Innovative marketing enabled us to capture a large share of high-value 3G customers, which helped KTF become the only competitor in the domestic market to record positive growth in its 2008 ARPU (average revenue per user). 14 / 15

KTF will soon complete a merger with KT, W hat makes us a winner Korea’s largest fixed-line company, in a move that will create tremendous value for shareholders. KTF 2008 Annual R eport Wireless data revenue increased by 15.3% year-on-year, exceeding even our own expectations. This has given added momentum to our efforts to transform the mobile communications market using SHOW as a driving force for change, and grow both in quantity and quality of our services. Increasingly fierce competition did keep our profitability indicators to lower growth levels than we expected, but we are certain that KTF’s leadership in 3G will drive a strong turnaround in 2009.

All these achievements have been made possible thanks to your endless support as investors and customers. I would like to convey my deepest thanks on behalf of the staff and management of KTF.

The business environment both in Korea and overseas is evolving rapidly. Regulations governing the communications industry change constantly, and the current economic downturn is expected to bring about a shrinkage in the size of the mobile communications market. Digital convergence also looms as a paradigm-shifting force, demanding a speedy technological response and close attention to shifting customer needs. Other matters that we are keeping in focus include global competitiveness, wired/wireless integration and media convergence. One way in which major global players are responding to these challenges is by integrating wired and wireless operators. As a world leader in information & communications technology, Korea is also moving beyond the traditional struggles for market share within a single mobile industry, and seeing competition heating up even between industries.

It is against this backdrop that our company has decided to enter into a merger with KT, Korea’s top wired communications operator. Our combined capabilities will allow us to proceed more effectively with convergence and integration, and secure a strong international position in ICET. The synergy of wired & wireless capabilities under unified 16 / 17

W hat makes us a winner management will ease overseas market penetration, strengthen distribution networks, reduce costs and raise shareholder value. The wireless business will continue to operate independently as a company-in-company, and we have high hopes that SHOW will seize a larger share of the 3G market following the merger. As with the existing KTF, the new company will keep global expansion as one its key goals, particularly through forming strategic alliances with foreign partners having complementary strengths in content, KTF 2008 Annual R eport platform, handsets and equipment.

Distinguished investors and customers,

I am convinced that merging with KT at this time is the best way forward for KTF. The merger will provide a solid platform for sustainable growth and create the maximum value for our customers and shareholders. A successful merge is a process that involves a certain amount of challenge and disruption, but our staff and management are fully prepared and eager to get started with the creation of a stronger and better company. We count on your trust and support during this time, and promise our best efforts to make the merger proceed smoothly and with maximum benefit for all parties. I also assure you that customer satisfaction will remain a top priority, and that service levels will be strictly maintained and the market leadership of SHOW will be protected and promoted.

In closing, I ask for your generous support and patience during the journey that lies ahead for KTF and KT. At the end of it, we will be a more versatile and profitable mobile carrier, and a more valuable company for our shareholders. Once again, I wish all the best for you and your families.

Thank you.

President & CEO, KTF Haing-Min Kwon Corporate Governance

KTF’s management systems are based on an independent Board of Directors that ensures sound management, transparency and the protection of shareholders’ rights.

Management transparency

Three Pillars Independence of KTF Corporate of the Boaard of Governance Directors

Protection of shareholder rights

Board of Directors KTF’s Board of Directors is composed of well-respected individuals with impeccable credentials in finance, management, law and IT. Their role is to protect and grow the company’s corporate value and ensure the primacy of shareholder rights. The BoD takes a hands-on approach to its duties, making tangible contributions to our performance and upholding our reputation for sound governance.

Strengthening the BoD’s Advisory Function The company’s BoD operates four Board Committees: the Audit Committee, the Outside Directors Nominating Committee, the Compensation Committee and the Finance Committee. These Committees work closely with the Board and each other to promote the effective operation of the BoD. The Board is empowered to carry out in-depth monitoring activities to ensure the success of KTF’s Vision 2015 and its ICET and WCDMA business strategies. Corporate management receives and reflects the BoD’s opinions in developing strategies and responding to changes in the operating environment, creating a virtuous circle of advice and feedback between the company’s managers and its Board. 18 / 19

Protecting Shareholder Rights

W hat makes us a winner In accordance with the company’s master plan for enhancing shareholder yields, KTF has increased shareholder return since 2003. Our basic policy is to return 50% of net profit to shareholders if there is no compelling reason to retain the funds. This policy will remain in place following our merger with KT.

Transparent Management

KTF 2008 Annual R eport KTF discloses major management information through the Financial Supervisory Service and the Korea Exchange in a timely manner. It is our policy to voluntarily provide material information to shareholders via the company’s website (www.ktf.com) and maintain a high level of management transparency so as to foster investor trust and thereby raise corporate value.

Outside Evaluation As a result of our steadfast adherence to high standards of governance, KTF has been honored with Best Corporate Governance Awards for six straight years (KOSDAQ, 2003 & Korea Exchange, 2004~2008), in evaluations conducted by the Korea Corporate Governance Service. We also took the Grand Prize at the KCGS’s Management Transparency Awards, showcasing the high level of recognition KTF has earned for its determined efforts to improve transparency. This focus is firmly embedded in our management philosophy, and our commitment to good governance will remain in place during and after the merger with KT.

10.72% 54.25% 2.00 % ● KT ● NTT DoCoMo 1.78 % ● National Pension Service Major ● Qualcomm Inc. 1.25 % 1.08 % Shareholders ● Milgate Master Fund ● Microsoft Corp. ● Others

28.92 % Board of Directors

Haing-Min Kwon Standing Director

• B.A. in Business Administration, Seoul National University, Korea • M.S. in Management Science, KAIST, Korea • Head of Management Analysis Office, Research and Development Division , KT • Manager of Planning Team, Private Operation Promotion Committee, KT • Head of Vision Corporate Strategy Office, KT • Head of Financial Office, KT • Executive Vice President, Group Strategy CFT, KT • Currently CEO & President, KTF

Young Jin Kim Outside Director & Auditor

• B.A. Seoul National University • MBA, Columbia Business School • DBA, Indiana University • Chairman, The Korean Finance Association • Director, The Korea Stock Exchange • Currently Director, The Institute of Finance and Banking, Seoul Nat’l University • Currently Professor of Finance, Seoul National University Jae-Chul Lee Outside Director & Auditor

• B.A. in Law, Seoul National University, Korea • Presiding Judge, Suwon District Court • Representative Director, Shinwon Country Club/Ilshin Leisure • Judge, Request Judging Committee, Gyeonggi Province • L egal Adviser, Gyeonggi Province • Currently Chairman of the Board, Kyonggi University • Currently Representative Lawyer, Law Firm Madang 20 / 21

Deog-Nam Hwang Outside Director & Auditor

• LL . B., Seoul National University, Korea • M.A. in Health Sciences, Yonsei University, Korea • Judge, Seoul High Court of Justice • L egal Secretary, Secretariat, Presidential Office, ROK • Commissioner of Bureau of Administrative Appeals Management under the Prime Minister • Civilian Committee, Regulatory Reform Committee • Currently Civilian Committee,

W hat makes us a winner National Human Rights Commission of Korea • Currently Public Member, National Labor Relations Commission • Currently Lawyer, Law Firm Segye

Ki-Kwon Doh Outside Director & Auditor

• MBA, Duke University Graduate School, USA KTF 2008 Annual R eport • Director of Marketing/Retail Banking/Business, Citibank Korea • Representative Director and President, Citicorp Finance & Securities Ltd. (Thailand) • Representative Director and President, Ssangyong Investment and Securities (Presently Good Morning Shinhan Securities) • Representative and President , Good Morning Shinhan Securities • Currently Chairman, International Youth Fellowship • Currently Chairman & CEO, Unhwabiotech Corp. • Currently Advisor, Hyundai Motor Company(HMC) Investment Securities, Korea

Kiyohito Nagata Non-standing Director

• Ph.D. & M. Eng. in Information and Communications Technology, Graduate School of Engineering, Osaka University • Managing Director, Customer Equipment Development Department, NTT DoCoMo • Currently Senior Vice President and Managing Director, Product Department, NTT Jeong-Soo Suh DoCoMo Non-standing Director

• B.A. in Economics Science, SungGyunKwan University, Korea • MBA, Yonsei University, Korea • Head of Privatization Office, KT • CFO & Vice President Financial Management Office, KT • Managing Director & Senior Vice President, Corporate Strategy Group, KT • Senior Executive Vice President, Corporate Strategy Group, KT • Senior Executive Vice President, Group Strategy CFT, KT • Currently CEO & President, KTH Financial Highlights

(Unit: KRW Million)

2008 2007 2006 Change

Total Revenues 8,346,220 7,293,321 6,507,350 14.4%

Service Revenues 5,984,237 5,571,859 5,219,958 7.4%

Handset Sales 2,361,983 1,721,462 1,287,392 37.2%

Operating Expenses 7,891,839 6,852,421 5,838,604 15.2%

Operating Income 454,381 440,900 668,747 3.1%

Non-operating Income 201,470 66,196 116,509 204.4%

Non-operating Expense 469,496 220,175 271,486 113.2%

Income before Income Tax 186,355 286,922 513,770 -35.1%

Income Tax 21,776 42,777 102,068 -49.1%

Net Income 164,579 244,144 411,702 -32.6%

EBITDA 1,572,260 1,583,236 1,803,738 -0.7%

EBITDA Margin 26.3% 28.4% 34.6% -2.1%p

Dept-to-equity Ratio 84.5% 71.9% 87.2% 12.6%p 22 /23 KTF 2008 Annual Report What makes us a winner 2006 20072008 2006 20072008 412 5,220

244 5,572

Net Income Service Revenues

(Unit: KRW Billion) (Unit: KRW Billion) 5,984 165 2006 20072008 2006 20072008 1,804 738

1,583 790

EBITDA Data Revenues 1,572 (Unit: KRW Billion) (Unit: KRW Billion) 911 2006 20072008 2006 20072008 87 669

72 441

Debt-to-equity Ratio Operating Income

(Unit: %) (Unit: KRW Billion) 454 85 2008 Operation Review

Our Business 29. Market Overview 30. WCDMA 32. Marketing & Branding 34. Overseas Business

more than mobile more than a theory 2008 was another successful year for promoting our ‘More than mobile’ vision of introducing mobile services into every aspect of people’s daily lives. To continue to bring this vision closer to reality for more people, KTF is working hard to be More Competitive, Value-Driven, and Always Responsible in everything we do.

Our Value 37. Corporate Culture 38. Human Resources 40. Good Time & Design Management

Our Responsibility 43. Social Responsibility KTF is the home of a corporate culture that nurtures creativity and mutual TRUST trust. This culture keeps us at the forefront of technological We will recognize and appreciate and service innovation by diversity, respecting others and communicating openly with one giving every member of our another. staff and management the freedom to propose changes that improve service and raise corporate value. This culture and the five core values that define it are shared with KT, and they will remain in place with the new merged enterprise.

Our

ALL FOR CUSTOMERS

We will always see the world through our customers’ eyes, meet their needs and keep our promises to them. INNOVATION

We will be No. 1 in our field and refuse to be satisfied with current success, instead taking action to achieve ever-higher goals.

CREATIVITY

We will keep open minds, explore new ideas and work hard to live up to our values.

OWNERSHIP

We will take ownership of our The core values of KTF are All for Customers, Creativity, jobs with an entrepreneurial spirit, Trust, Innovation and OwNership – which we abbreviate not waiting for others to do our work for us. internally as ACTION. Our culture is strengthened by our willingness to define a clear vision and pursue that vision in our daily work. It is a core competency that helps us to implement our strategies and serve our customers. KTF strives every day to put the ACTION values into practice and establish ourselves as a company where competitiveness and innovation come naturally. Our Business

Goal #1: More competitive to create a strong and diversified business portfolio to drive sustainable growth 28 / 29

The domestic market has made an irreversible shift toward 3G WCDMA. KTF has led that change, establishing itself as a leader in technology and service innovation. Market Overview ( our Business ) KTF is responding to increasing competition in mobile W hat makes us a winner communications with flexibility, creativity and forward-looking innovation. 807 3,300 644 611 KTF 2008 Annual R eport 2,109 1,855 et Gr o w t h i n K T F S ubscr b e rs

2006 2007 2008 Do m e s ti c Mo b i l S ubscr r Gr o w t h ( U nit: Thousands) 2006 2007 2008 N ( U nit: Thousands)

A Paradigm Shift The number of mobile subscribers in the domestic market passed 45 million in 2008, in Mobile up 2.1 million from the previous year and bringing Korea’s mobile penetration rate to 94% Communications of the population. The 3G WCDMA sector saw the highest growth, adding 10.8 million subscribers to reach 16.5 million by year-end. This represents a tectonic shift in customer preferences, with WCDMA market share growing from 13% to 36% in a single year. Of overall market growth in 2008, KTF signed 5.06 million new WCDMA subscribers, bringing the company’s total to 8.27 million and solidifying its place as No. 1 in the market. WCDMA customers now represent 58% of our total customer base.

This trend has had a positive effect on the company’s performance, as WCDMA subscribers are premium customers who use a higher proportion of data services. Among Korea’s three mobile carriers, KTF was the only one to record positive growth in ARPU (average revenue per user) in 2008.

Mobile Service Penetration Rate (% of total population) 61% 68% 70% 76% 79% 83% 90% 94%

2001 2002 2003 2004 2005 2006 2007 2008

Market The combined effects of the global economic downturn and the enforcement of Stabilization to mandatory service terms for mobile subscribers is expected to cause significant shrinkage Bring New Competition in the size of the market during 2009. KTF will endeavor to achieve revenue stabilization through efficiency improvements and postponing aggressive capital investments. It is likely that the level of competition will cool compared with 2008, and that marketing expenditures by all carriers will be more constrained. Competition in terms of product and service quality will remain intense, however, with companies introducing upgraded handsets, new services and new tariff plans.

KTF will be proactive in responding to these changes in our market. We are prepared to launch a new line of handsets and offer customers attractive new service packages following our merger with KT. KTF customers will continue to be able to count on us, as they always have, for top-quality competitive services that meet and exceed their expectations. Two of KTF’s most impressive achievements in 2008 were the topping of KRW 8 trillion in revenue, and being the only mobile carrier to record positive growth in ARPU. WCDMA

The brand power of SHOW will lead the way into the future of mobile communications, and establish KTF’s leadership in WCDMA.

Outstanding KTF’s service revenue in 2008 posted 7.4% growth to KRW 5,984 billion. Business Operating income recorded KRW 454 billion and net income closed at KRW 165 Performance Driven by 3G Leadership billion. Total revenue including handset sales rose 14.4% to KRW 8,346 billion, a landmark achievement in the company’s history as we passed the KRW 8 trillion mark for the first time.

Looking at service revenues in detail, voice sales recorded 6.9% annual growth and interconnection revenues gained 2.7% over the year. Data revenue, however, grew 15.3% to KRW 911 billion, a direct result of the company’s previous efforts and investments in securing leadership of the 3G WCDMA market.

SHOW-On-going 2G services offer just voice calls and limited video capabilities. 3G WCDMA, 3G Power however, is a whole new concept in mobile service. Video calls can be made anywhere, anytime and video contents accessed off the internet thanks to high- speed data transfer and the phenomenon of technological convergence.

SHOW was launched in 2007 to seize the advantage of KTF’s innovative WCDMA technologies. SHOW’s service offerings were unprecedented in the domestic market, introducing Korea’s mobile users to vast new possibilities for their mobile lifestyle. SHOW turned handsets from communication tools into entertainment centers, and it became an iconic lifestyle brand in a remarkably short period of time. It is firmly established as the No.1 3G WCDMA service in the country, after displacing the 2G leader in both brand recognition and subscriber numbers.

WCDMA Market Share Number of WCDMA Subscribers (as of December 31, 2008) (Unit: Thousands) 8,266 10,000 % 50.1 7,408 8,000 SKT 8,239 thousand 6,316 4,840 6,000 49.9% 3,205 4,000 KTF 2,024 8,266 thousand 941 2,000 140 0

07.3 07.6 07.9 07.12 08.3 08.6 08.9 08.12 30 / 31

Focusing on ARPU KTF was the only domestic carrier to raise its ARPU (average revenue per Growth While Reducing user) in 2008, an achievement directly credited to the popularity of SHOW 3G Churn Rates WCDMA service. Despite new discounts on SMS and call charges for users in the same network, and additional benefits offered to customers entering into service contracts, data revenue growth from SHOW services enabled KTF to post a significant increase in 2008 service revenues. 3G WCDMA customers use an average of 5 times more data services than CDMA subscribers and their data ARPU is double. Total ARPU for 3G WCDMA subscribers, including voice revenue, is more

W hat makes us a winner than 30% higher than the ARPU of CDMA customers.

Another important business achievement in 2008 was a significant reduction in our customer churn rate. In April, KTF introduced “SHOWKING Sponsor”, a new service contract system. Since then, more than 80% of new subscribers and existing customers who traded-up their handsets have signed on to SHOWKING Sponsor, and the number of high-yield long-term customers has also grown. In 2007, KTF captured just 18% of net subscriber addition market (excluding KT resales). In 2008, this share increased to 35%. KTF 2008 Annual R eport Expected changes in the regulatory environment in 2009, along with the ongoing economic downturn, make it difficult to predict how the landscape of the communications market will change in the near future. Nevertheless, KTF is prepared to respond flexibly and creatively to changing conditions, and will focus on maintaining profitability with productivity improvements and cost controls. We will also make every effort to drive sales in high-value-added segments by developing and promoting 911 advanced communication and entertainment services. 790 738 608 519

2004 2005 2006 2007 2008 Re v e nu s ( U nit: KRW Billion) Data

KTF will strengthen its leadership and profitability in WCDMA by developing new and innovative services to drive continuing growth. SHOW was launched with a comprehensive marketing campaign that covered everything from ads and logos to store interiors and promo goods, achieving the most successful 3G launch in history.

Marketing & Branding SHOW introduced customers to a vast array of new entertainment options, creating a new concept in mobile lifestyle.

SHOW – the World The SHOW brand was launched concurrently with our WCDMA service to in Your Hand announce that mobile communications had evolved from a ‘talk & listen’ paradigm to a ‘watch & enjoy’ paradigm. The brand was developed over a year of research targeting both specialists and general consumers, steadily crystallizing into a fully- integrated brand image and marketing campaign. SHOW’s ultimately successful launch was targeted at young people, who will be the drivers of WCDMA growth and the early adopters of the new service possibilities.

Logo design is a crucial component of brand recognition. The SHOW brand identity resembles a ‘Play’ button found on entertainment devices. It immediately conveys the meaning of video service and entertainment in general, and the visual impact was softened by using a fun and active font style. KTF is justifiably proud of the SHOW brand and the way in which it was launched, which helped SHOW attract 5 million subscribers faster than any other 3G WCDMA service in the world.

SHOW is Korea’s most recognized mobile brand, with a strong public following based on a series of award-winning TV commercials that reinforce SHOW’s innovative spirit.

SHOW Commercials SHOW has been promoted as a joyful and surprising brand through a series the Most Loved of fun and creative commercials that are imbued with the brand’s innovative spirit. “They Were Heroes to Me” was a series featuring Korea’s national bobsled team, which conveyed the optimistic message that anyone can be a hero and change the world if they try. The series won the Grand Prize at the Korea Advertising Awards. 32 / 33 W hat makes us a winner

SHOW’s service features were highlighted in a humorous series of anecdotal commercials, “The seven-year-old’s SHOW”, “The hundred-year-old’s SHOW”, “The twenty-year-old’s SHOW”, and so on. Surveys conducted by the Korea CM Institute showed that SHOW commercials were the most beloved by the public for both 2007 and 2008, proving the success of KTF’s marketing efforts to reach the KTF 2008 Annual R eport hearts of our customers and the general public.

Trendsetter A mission of our branding operations is to reach the public at multiple con- in Mobile tact points throughout their day. SHOW sales centers have been designed to be Communications uniquely recognizable with dark grey entrances and sliding or folding side win- dows that can be opened during pleasant weather. The shops are inviting and accessible for the public, and products are positioned within reach of seats to make overall consultation and purchasing processes more convenient.

KTF has worked hard to increase the brand value of SHOW and 3G WCDMA services, and this investment will continue to yield benefits well after the company’s merger with KT. SHOW will be a flagship brand of the new company, and continue to represent the novelty, fun and convenience of modern mobile life.

Thanks to KTF’s cutting-edge WCDMA technology, SHOW is introducing people to the boundless possibilities of unlimited mobile information, communication, entertainment and commerce. 34 / 35

With our success in Malaysia, KTF is an early entrant into the global market, and we will aggressively promote our services in selected overseas markets. Overseas Business

KTF has developed world-class core competencies in its home W hat makes us a winner market, and is ready to open up new vistas in wireless living for

customers in Asia and around the world. roaming services. Conexus has a membership of eight companies in nine Asian countries and territories serving approximately 130 million subscribers.

Having spent several years building up an international presence, KTF launched its foreign investment program in earnest last year. We joined Japan’s NTT Docomo in a USD 200 billion private equity investment in Malaysia’s U-Mobile 3G operator. We have also seconded our top management team, including the company’s CEO, CTO KTF 2008 Annual R eport and CMO, to U-Mobile. Our goal was to secure 600,000 subscribers within the first year and 1.4 million by the end of the second year. In fact, by December 2, 2008, just seven months after its launch, U-Mobile had already signed on 500,000 customers. There is still ample room for growth, as Malaysia has a market of 22 million subscribers as of September, 2008, with a penetration rate of 81%. After securing our foothold in Southeast Asia, KTF will move ahead with plans to enter major markets, including Exploring Using the momentum gained from our accomplishments in the WCDMA China. The company’s global expansion strategies take a long-term view, and will New Growtah field, KTF will implement its global strategies and secure new profit drivers in Opportunities with continue to be implemented even after the merger with KT. Strategic overseas markets. The company’s Beijing office has been up and running since Partnerships 2002, while we launched KTF Indonesia in 2003 and conducted a large-scale Global Stage consulting project for Indonesia’s Mobile-8 CDMA operator. The Indonesian venture grew into an investment, with KTF now holding a 2.1% share of Mobile-8. We also established Freekoms in 2005, a joint venture with Mobile-8 that provides ring-back tone service. First 1999 - 2006 Ground-breaking Phase Stage • Gathering experience and securing market access In April of 2006, KTF joined the Conexus Mobile Alliance, one of Asia’s • Developing KTF’s overseas business manual and relevant tools largest mobile operator alliances. Our goal in joining the alliance was to form • Recruiting talent and bolstering core competencies win-win relationships with overseas carriers and promote WCDMA-based global • Establishing the basis for win-win partnerships

Second 2007- 2009 Maturity Phase Global Presence Stage • Building a reputation as a leading operator in Asia • Exploring business opportunities as a MNO and MVNO • Diversifying business portfolio through global convergence and export of solutions • Gaining momentum for growth based on value-added KTF will accelerate its entry partnerships into additional Asian markets • Expanding to other regions and form strategic alliances to speed the company’s global Third 2010 - 2015 Growth Phase Stage expansion. • Leveraging strategic alliances to drive continuing expansion • Advancing into overseas MNO and MVNO markets • Investing in growth platforms to build additional revenue generators • Establishing a WCDMA belt by exercising strong leadership in major markets • Firmly establishing a global corporate structure and Overseas Office corporate culture Global Roaming Service Coverage Areas 34 / 35

With our success in Malaysia, KTF is an early entrant into the global market, and we will aggressively promote our services in selected overseas markets. Overseas Business

KTF has developed world-class core competencies in its home W hat makes us a winner market, and is ready to open up new vistas in wireless living for customers in Asia and around the world. roaming services. Conexus has a membership of eight companies in nine Asian countries and territories serving approximately 130 million subscribers.

Second 2007- 2009 Maturity Phase Global Presence Stage • Building a reputation as a leading operator in Asia • Exploring business opportunities as a MNO and MVNO • Diversifying business portfolio through global convergence and export of solutions • Gaining momentum for growth based on value-added KTF will accelerate its entry partnerships into additional Asian markets • Expanding to other regions and form strategic alliances to speed the company’s global Third 2010 - 2015 Growth Phase Stage expansion. • L everaging strategic alliances to drive continuing expansion • Advancing into overseas MNO and MVNO markets • Investing in growth platforms to build additional revenue generators • Establishing a WCDMA belt by exercising strong leadership in major markets • Firmly establishing a global corporate structure and Overseas Office corporate culture Global Roaming Service Coverage Areas Our Value

Goal #2: Value-Driven to unite us in a shared spirit of fun and teamwork 36 /37 KTF 2008 Annual Report What makes us a winner ACTION Values Vision and Sharing Our and Innov Creativity, Trust A Cul Corporate Culture ture of ation DNA ofKTF’s corporateculture. Professionalism, accountabilityandteamwork–theseformthe personal andprofessional goals. that focusesonvision,achievementandthepursuitof KTF fostersanACTION-orientedcorporateculture driving force behindrealizing thecompany’s 2015”. “Vision the is that teamwork for capacity the strengthening trust, that nurtures culture corporate Our trust. mutual without happen cannot turn, in that, and ideas, of exchange the without flourish cannot innovation – process innovation the to communication of importance the understands KTF accessible. and open more rooms conference and offices management make to Policy” Door “Open an using offices, our of layout physical the with even ofallourstrategies. formulation the guide and culture corporate our of foundation the form They vision. shared a and goals common of pursuit in together us bind values ACTION Our OwNership. complete, withnoticeableeffects onefficiency. more and faster sharing information making are tools collaboration online workgroups, and teams Within respect. mutual of ties the strengthen and another one with bond to any workforce entire discuss our helped to have meetings venue The improvement. for open ideas an share and issue have management and staff Here, Meeting”. “SHOW the highestlevelofcustomersatisfaction. providing of purpose singular the for apply we which of all achievement, and innovation of level high a promotes and supports that culture constructive a fostered having of 3P’s essential the optimize will we teamwork Process People, Product. of and proudis KTF and creativity Through customers. our of trust the earn will we other each in trust With Innov Our workplaces follow a policy of open communication. We promote this policy policy this promote We communication. open of policy a follow workplaces Our and Creativity,Trust,Innovation Customers, for All are values core KTF’sfive One way that KTF strengthens its internal culture and raises efficiency is the monthly us. see customers our way the affects together work we way the that believe We ation Strategy Fostering innovative commitment toour PEOPLE talents with core values Establishing customer- centric products and PRODUCT services Maximizing work PROCESS efficiency

( our Value ) 38 / 39

KTF invests in HR development in multiple KTF fosters the core capabilities of ways to help our people develop their full its workforce with systematic training and personal and professional potential. career management programs. Human Resources

Our most valuable assets are our people. KTF supports its employees

to develop into global leaders who will bring success to themselves W hat makes us a winner and to the company.

Personalized KTF encourages its employees to consider their long-term career goals, and then Career collaborates with them to create a career development program that benefits both Management Program parties. The company strives to ensure that job transfers are made in accordance with KTF 2008 Annual R eport the stated plans of affected employees. We also assess our managers and team leaders in terms of their efforts to support the career development of their subordinates.

KTF’s ‘Change & Innovation’ Committee was formed in 2005. Its membership consists of senior executives and department heads, and its mandate is to ensure open Raising Corporate The people that we look for are the type of people who love to take on challenges. communication between all levels of management and create policies and systems to Value by Fostering We recruit workers with creativity and passion, people who take pride in individual and support innovation. A second organization, the “Heart Board”, is comprised of a select a Competitive Workforce shared achievements. Our mission is to nurture specialists with the intuitive ability to look group of young employees who have strong potential to become future leaders of the toward the future and set new standards in information communications. KTF’s training company. Their role is to promote KTF’s five core values and act as champions of Vision programs cover the full spectrum of the ICET industry. The main focuses of KTF’s medium 2015. and long-term HR development plans are talent, business and corporate culture. With One of the greatest assets that KTF will bring to the merger with KT is our these in mind, KTF provides systematic training to nurture the best ICET specialists to professional manpower and the culture that has allowed them to flourish. We have ensure the company’s continuing ability to create value. adopted global standards for training and personal development, and those standards Several top performers each year are provided the opportunity to enter MBA will remain in place once the new company is established. Together with our new programs at domestic and foreign universities, while still more are able to attend colleagues, KTF’s industry professionals will build an integrated communications professional training institutes to develop leadership, technical and management skills. company that will lead the market. KTF also subsidizes 50% of tuition fees for any staff member who enrolls in night school or cyber-university to earn a Bachelor’s or Master’s degree. Strategies to Foster Innovative Leaders

Steps for the “ACTION” Program

• Using open discussion to imbue an enterprise-wide innovative mind-set Understanding Discovering Action 1 Action 2 Relating Personally Action 3 • Building core innovation the Company’s Vision the Core Values in groups by systematically to the Core Values and Core Values Daily Work fostering promising (Offline course) (Online course) (Action Program) • Selecting innovators individuals with the ability to lead KTF in the future Fostering Innovators Implementing • Fostering competencies to drive innovation the Core Values • Supporting organizational Identifying Future Leaders and Achieving Promoting Core change and practicing Putting Change into Practice Vision 2015 KTF operates training programs to help all its staff and management develop innovation Values with their personal and professional skill sets, and to internalize the company’s “Vision 2015” Systematic Training Programs and core values. The “Action 1” online training program was launched in 2006, and has • Finding practical been completed by 99% of our workforce. “Action 2” is an offline program with a focus ways to implement positive changes on practical application of the corporate values to daily work duties. “Action Analysis & • Encouraging bottom-up open communication Meeting” is an ongoing program in which staff and management join together to discuss current issues and make concrete plans to apply the five core values to their everyday job tasks. 38 / 39

Our most valuable assets are our people. KTF supports its employees to develop into global leaders who will bring success to themselves W hat makes us a winner and to the company.

Steps for the “ACTION” Program

KTF’s “Good Time Management” and “Design Management” competencies have been instrumental in strengthening our brand’s power and recognition. We will bring these skills to the merger with KT.

“Good Time Management” and “Design Management” are strengthening customer Good-time & loyalty and helping KTF provide more innovative services.

Design Management W hat makes us a winner

KTF’s customer satisfaction management systems swing into action at the first point of contact, anticipating needs and continually surpassing

customer expectations. “Design Management” We have been striving to meet customers’ expectations and demand for the that Designs Even the value of design, innovation and the way they experience the brands they consume. Invisible KTF’s brand is a major component of the company’s overall corporate value, and a key

KTF 2008 Annual R eport ingredient of that brand is the design element. KTF has its own unique style, and that comes through in our “Good Time Design” management, which encompasses the company’s visual strategies. With creative and liberal use of design tools, we make our workplaces and sales centers more fun and energetic, which makes us a better company both internally and externally. “Good Time KTF’s philosophy of customer satisfaction (CS) management is contained in its Management” straightforward CS motto: “Good Time Management”. Our view is that the moment a KTF operates its own “Five Senses Experience Shop”, which is a workshop that Prioritizes Customer takes a holistic approach to handset design and the user experience. The virtuous Satisfaction customer encounters KTF should be a great moment in their day, a happy and satisfying experience. All of our work processes and organizational focus have been directed cycle of constant feedback and product improvement resulted in the release of “Good toward that moment. KTF will grow as a company by inspiring its staff to take pride in Time Goods”, each of them exquisitely designed to become favorite possessions of bringing joy into our customers’ lives and earning their loyalty. So that KTF will be able their owners. The quality of our design experts recently resulted in KTF’s winning the to count on our customers’ commitment to the company in this era of fierce competition, Grand Prize at the Korea Color Design Awards, in recognition of our sophisticated use we have outlined three action items to help us align ourselves more closely with our of color in design work. Another effective output of our “Good Time Design” research customers. was a redesigning of our sales centers to allow staff more freedom of movement around the sales floor, which we believe was important to KTF’s winning four consecutive top 1. Empathize with Customers finishes in the National Customer Service Index rankings.

KTF continually monitors its CS infrastructure to make sure that everything we do is KTF’s design culture and philosophy will continue to flourish in the new merged geared toward meeting customer needs and bringing joy into their lives. To that end, we company, particularly with respect to protecting and promoting the brand power of established the “Good Time Marketing Academy” to provide training on understanding SHOW. Design has been a major contributor to the success of the company’s marketing customer needs and delivering satisfying CS experiences. We also share our ideas on and customer service campaigns, and will continue helping KTF to deliver a “Good how to promote Good Times by maintaining a culture of open communication among Time” to our customers everywhere we meet them. colleagues, regardless of rank or position.

2. Working with a Customer Focus Good-time Design Management We respond to the Voice of the Customer quickly, politely and effectively by ensuring Coverage Areas that all our work processes are attuned to customer needs. To serve them better, KTF 2D Design Culture operates a variety of programs, including a 24-hour customer complaint hotline, Good- time SMS, Good-time handset insurance policies and other customized services. Organization 3. Establishing the Infrastructure for Systematic CS Management KTF Design

portfolio includes such hits as terrestrial DMB, which is like having a portable TV in your • 2D Design: Brand Identity, Advertisements, Corporate hand; ‘Dosirak’ music portal, providing constant access to music downloads; and ‘K-ways Identity, Signage, Websites

Navigation’, a complete navigation service delivered only through a handset, without • 3D Design: Shops, Good-time, Mobile Phones any additional equipment. Our CS staff are always ready to consult on a large variety of • Culture : The Orange Gallery, Sports Marketing, Design service plans to maximize value and provide the ideal service package for each individual Competitions, Interactive Wall, Industry/Academia customer. Cooperation, Company Buildings and Landscaping 40 / 41

“Good Time Management” and “Design Management” are strengthening customer Good-time & loyalty and helping KTF provide more innovative services.

Design Management W hat makes us a winner

KTF’s customer satisfaction management systems swing into action at the first point of contact, anticipating needs and continually surpassing customer expectations. “Design Management” We have been striving to meet customers’ expectations and demand for the that Designs Even the value of design, innovation and the way they experience the brands they consume. Invisible KTF’s brand is a major component of the company’s overall corporate value, and a key

KTF uses advanced CRM tools to analyze service usage patterns and then propose • O rganization: ODT, Stationery, 3D Design tailored products and services based on individual customer needs. Our product Work Space, Design Frontier, Design Outsourcing portfolio includes such hits as terrestrial DMB, which is like having a portable TV in your • 2D Design: Brand Identity, Advertisements, Corporate hand; ‘Dosirak’ music portal, providing constant access to music downloads; and ‘K-ways Identity, Signage, Websites

Goal #3: Always Responsible

to remain true to our tradition of integrity and sustainability 42 /43 KTF 2008 Annual Report What makes us a winner in CSRActivities Customer Involvemnt Place Country aBette r Making ourHome “Think Korea!”– Social Responsibility our communities. and campaignsthatbenefitsocietybringhappinessto KTF isanactivecontributortosocialwelfare projects support alongtheway. others whenourcustomersaddtheir projects create evenmore benefitsfor KTF’s varioussocialcontribution corporate citizen. responsible and caring a as KTF’simage reaffirming are environment the and citizens its nation, the of behalf on efforts dedicated Our campaigns. environmental and sports, professional and amateur programs, volunteer of variety a support also We Korea. of history and culture unique the on information disseminating and pride national boosting of mission Mecenat activitiesinthecommunicationssector. and projects CSR on focus another,particularly one we to people connect to communication of edge cutting the at works that operator mobile a As causes. deserving many with plant trees and fight desertification, and springtime festivals to benefit seniors and children and seniors benefit to festivals springtime and desertification, fight and trees plant China’sto to Desert trips Kubuqi included have activities Sharing” “SHOW These in. join can customers our that events organize www.show.co.kr to at website SHOW’sofficial uses KTF Customer V educational and programs andfieldtrips for Korean youths. sites historical of preservation the to going proceeds with campaign, this to on signed have subscribers thousand 900 than More charges. service regular customers’ participating to added are month, per 500 KRW about typically Donations, customers. KTF of contributions voluntary the by part large in funded is campaign Korea! Think The ”Think Korea!“ Fundraising Campaign The slogan for KTF’s social contribution works is “Think Korea!”, which clarifies our clarifies which Korea!”, “Think is works contribution KTF’ssocial for slogan The success our of fruits the sharing by citizen corporate model a be to strives KTF olunteerism Organized through SHOW

( our Responsibility ) from low-income families. The site also invites customers to join our volunteer groups on disaster relief efforts and other community support projects.

Youth Hope Sharing Fund

Since 2006, KTF has offered customers the opportunity to participate in social contribution by donating a certain portion of their monthly service charges to the “Youth Hope Sharing Fund”. Administered in cooperation with the National Council of Youth Organizations, the Fund is used to sponsor the education of young people from low-income families.

Preserving History Challenge the Golden Bell – Think Korea! and Promoting Korean Culture KTF has researched and provided history-related questions to the highly popular KBS quiz show “Golden Bell Challenge” since 2005. Our sponsorship of the show is part of the KTF’s Think Korea! program to improve young people’s understanding of Korean history, and prepare them to become the country’s leaders of the future.

Thinko – Youth Protecting History

“Thinko, Youth Protecting History” is an innovative online/offline tool that guides young people through a self-directed learning process. Participants draw up their own study plans, which include field trips and volunteer activities, and KTF helps them complete their program, from preparations to execution and follow-up. Since 2007 we have organized variously-themed programs centering on fortresses and ruins, famous literary figures and general history. 44 /45 KTF 2008 Annual Report What makes us a winner region where manyethnicKoreans live. a with exchanges cultural ongoing of part as China northeastern visited YouthChoir the Olympics Beijing 2008 the During communication. of tool visceral most the is voice, human the especially sound, that premise the under 2006 in founded was YouthChoir” “KTF The KTF Y schools. Asoftheend2008,sixty-fifthStudyRoomwasupandrunning. and centers youth in up set are equipment IT and computers Donated Room”. Study IT “KTF the create to Foundation Beautiful country,the the joined within KTF gap IT the shrink to and adoption technology information for nation 1 No. the as Korea’sstatus Tosolidify KTF ITStudyRoom around theglobe. youths other to knowledge spread to efforts their in experts young 300 about support now programs These firsthand. culture native their experience and Korea to come to countries foreign in residing youths Korean ethnic of travel the sponsored has KTF 2005 Since Fostering PrideamongKorean Y outh Choir outh Abroad grow intoresponsible citizenswith esteem andnationalprideamong a varietyofsocialcontribution KTF ishelpingyoungpeople programs thatpromote self- Korea’s youth.

“KTF Hope Volunteers” KTF launched its first volunteer group in 2002, followed by the Social Contribution Team in – the Volunteer 2004. As of now, an average of 100 teams and 800 volunteers are engaged in volunteering Community on sites in need of their help.

Supporting the Development of Tomorrow’s Leaders

KTF volunteers undertake projects with a uniquely KTF-oriented focus, seeking always to leverage the company’s particular skills and capabilities as an advanced mobile operator. We have defined five broad areas for support: youth education, youth global leadership, cultural activities targeting youths, nationwide student exchange and volunteer programs, and youth counseling programs. Beyond these areas, our staff and management also participate in various programs to provide financial and logistical support to worthy charities.

“Think Korea!” Scholarship Program

The KTF Hope Volunteers have been donating a portion of their monthly paychecks since 1997 to fund scholarships for some 200 teenage heads-of-households, descendants of Korean independence fighters and ethnic Koreans living overseas. The program raises about KRW 200 million every year. We also formed the “Think Korea Matching Fund”, which donates 100 percent of its proceeds to helping troubled youths develop as future pillars of society.

Sports Marketing In 2003 we formed the KTF Magic Wings, a professional basketball team that epitomizes our respect for passionate competition and fair play. We also strongly support Korean LPGA golfers, such as Kim Mi-hyun, in order to raise our brand recognition using the worldwide platform of professional golf.

Green Campaign The area that KTF has selected for the company’s Green Campaign is desertification. KTF has led teams on expeditions to the Inner Mongolia region of northern China to plant trees along the rim of the Kubuqi Desert. The trees are intended to act as a soil stabilizer and windbreak against the annual dust storms that originate in the region and spread airborne dust and pollutants around the world. 46 / 47

W hat makes us a winner 2008 CSR Highlights

January • Opened the 54th KTF IT Study Room (Youth Study Room

KTF 2008 Annual R eport in Jincheon)

• Volunteer training began for new recruits (Jan. 16)

• Inaugural Honors and Award Ceremony of Think Korea! – Youth Protecting History (Jan.28) July • Opened the 60th KTF IT Study Room (Youth Center in February • Opened the 55th KTF IT Study Room (Youth Study Room Ansan) in Gwangju) • Held the Korean Youth Exchange Camp for KTF Hope • L aunched “SHOW Sharing” website to organize Volunteers customers’ volunteer efforts (www.show.co.kr) August • Opened the 61st KTF IT Study Room (Youth Study Room March • Opened the 56th KTF IT Study Room (Child Care Center in Wando, South Jeolla Province)

in Gwangju) • Korea-China Youth Peace Camp co-organized by KTF - • Recruitment began for the first SHOW Sharing program: VANK (Aug. 4~7)

an expedition to plant trees in Inner Mongolia • KTF Youth Choir participates in Korea-China cultural exchanges (Aug. 12~19/Harbin, Yanji, China) April • Performed upgrades for 6 KTF IT Study Rooms

• Carried out the first Show Sharing project in China September • Opened the 62nd KTF IT Study Room (Child Care Center (Apr. 2~4) in Hannuri School, Seoul)

• Conducted the Think Korea! – Goguryeo Heritage May • Opened the 57th KTF IT Study Room (Youth Study Room Protection Campaign (1st phase: Sept. 7 / 2nd phase: in Daedeok-eop, South Jeolla Province) Sept. 27) • Held mobile phone training sessions for the elderly in conjunction with the “Happy Show Sharing Festival” October • Opened the 63rd KTF IT Study Room (Seongdong Foreign Workers Center in Seoul) • Selected scholarship winners of the Youth Hope Sharing Fund awards • Implemented SHOW Sharing Project (Oct. 5~6 / Oct. 18 / 23~24) June • Opened the 59th KTF IT Study Room (Child Care Center • Held 3rd Think Korea! – Protecting Goguryeo (Oct. 25 / in Cheolwon) Horogoru Castle) • Conducted the 7th and 8th KTF Korean Culture Class (Jun. 25~28) November • Opened the 64th KTF IT Study Room (Gaon School in Daegu)

• Completed production of 12 episodes of “Think Korea!”

• Conducted 3rd Saeteomin Youth IT Class (Nov. 24)

December • Opened 65th KTF IT Study Room (Child Care Center in Muju)

• Conducted eleven SHOW sharing campaigns

• L aunched SHOW’s Hope Concert on a 76-stop Nationwide Tour Contents

04. Management’s Discussion & Analysis 11. Independent Auditors’ Report 12. Financial Statements 55. Internal Accounting Control System Review Report 2008 Financial Review

MANAGEMENT’S DISCUSSION & ANALYSIS

1. Performance Summary

Total revenues in 2008 rose to KRW 8,346,220 million, passing the KRW 8 trillion mark for the first time in the company’s history. Service revenue recorded a 7.4% increase YoY to KRW 5,984,237 million, while handset sales rose 37.2% to KRW 2,361,983 million. Total operating expenses amounted to KRW 7,891,839 million for the year, a gain of 15.2% over 2007. The increase was due primarily to higher marketing expenses in the first half, which rose in response to intensifying competition for new customers. Accordingly, total operating income closed up 3.1% YoY at KRW 454,381 million. Meanwhile, the company recorded a net non-operating loss of KRW 268,026 million, as non-operating expenses, including equity method losses and losses on disposition of tangible assets, grew by 113.2% YoY. As a result, net income before taxes closed at KRW 186,355 million, down 35.1% YoY, while net income posted a 32.6% decline to KRW 164,579 million.

EBITDA, which measure operating income exclusive of depreciation and amortization adjustments that do not trigger cash flows, amounted to KRW 1,572,260 million, down 0.7% from the previous year. EBITDA margin, calculated as EBITDA’s share of service revenues, contracted 2.1%p YoY to close at 26.3%.

(Unit: KRW Million)

YoY Change

Income Statement Summary 2008 2007 Amount %

Revenue 8,346,220 7,293,321 1,052,899 14.4

Service Revenue 5,984,237 5,571,859 412,378 7.4

Handset Sales 2,361,983 1,721,462 640,521 37.2

Operating Expense 7,891,839 6,852,421 1,039,418 15.2

Operating Income 454,381 440,900 13,481 3.1

Net Non-operating Gain/Loss -268,026 -153,904 -114,122 74.2

Non-operating Income 201,470 66,271 135,199 204.0

Non-operating Expense 469,496 220,175 249,321 113.2

Income before Tax 186,355 286,922 -100,567 -35.1

Tax Expense 21,776 42,777 -21,001 -49.1

Net Income 164,579 244,144 -79,565 -32.6

EBITDA 1,572,260 1,583,236 -10,976 -0.7

(Unit: %)

Key Ratios 2008 2007 yoY Change

Operating Profit Margin 7.6% 7.9% -0.3%p

EBITDA margin 26.3% 28.4% -2.1%p

Net Profit Margin 2.8% 4.4% -1.6%p

* Key ratios are calculated on the basis of service revenue, not total revenue.

05 / 05

2. Service Revenue Analysis

Service revenue includes revenues from voice, data, interconnection, resale and other sales, and excludes handset sales. Among 2008 What makes us a winner service revenue, voice sales increased 6.9%, data sales gained 15.3% and interconnection charges rose 2.7% YoY. The strong rise in data sales was the result of KTF’s successful strategy of migrating subscribers to its 3G WCDMA services, which raised overall data traffic volumes. Resale revenue and other sales increased by 5.2% and 15.0% YoY, respectively, bringing total service revenue to KRW 5,984,237 million, up 7.4% from the previous year.

Looking at voice sales in detail, monthly fees edged up 4.3% YoY in line with a rise in the number of high ARPU customers. Air-time charges also rose by 13.6% due to higher subscriber numbers and increased voice traffic per subscriber. Other voice sales recorded 56.8% growth, bolstered by sharp increases in the number of international roaming customers as 3G WCDMA services gained in

KTF 2008 Annual Report popularity.

Among data sales, steady growth was recorded in monthly fees, messaging fees, wireless data charges and content sales. Wireless data fees led with 19.9% YoY growth, in line with the increase in 3G WCDMA subscriber numbers. Content sales advanced 14.7% YoY as download hit rates increased, and messaging fees showed relatively high growth of 8.2% YoY, despite a 33% reduction in SMS (short messaging service) charge in January of 2008.

Handset sales reached KRW 2,361,983 million for the year, up 37.2% from 2007 as the higher demand for handsets followed the company’s aggressive marketing efforts to attract new subscribers and encourage existing 2G customers to upgrade to 3G handsets.

(Unit: KRW Million)

YoY Change

Revenue Analysis 2008 2007 Amount %

Voice Revenue 3,289,537 3,077,847 211,690 6.9

Monthly Fees 1,867,026 1,790,487 76,539 4.3

Air-time Charges 1,458,993 1,284,476 174,517 13.6

Value-added Services 128,542 144,820 -16,278 -11.2

Others 97,804 62,391 35,413 56.8

(Sales Discount) (262,828) (204,328) -58,500 28.6

Data Revenue 911,395 790,397 120,998 15.3

Monthly Fees 279,199 233,900 45,299 19.4

Messaging Fees 263,533 243,636 19,897 8.2

Wireless Data Fees 247,961 206,823 41,138 19.9

Contents Sales 90,886 79,253 11,633 14.7

Others 29,816 26,785 3,031 11.3

Interconnection Revenue 1,032,429 1,005,251 27,178 2.7

Resale Revenue 559,407 531,813 27,594 5.2

Others 191,468 166,551 24,917 15.0

Subscription Fees 105,593 97,387 8,206 8.4

Others 85,876 69,164 16,712 24.2

Total Service Revenue 5,984,236 5,571,859 412,377 7.4

Handset Sales 2,361,983 1,721,462 640,521 37.2

Total Revenue 8,346,220 7,293,321 1,052,899 14.4

MANAGEMENT’S DISCUSSION & ANALYSIS

3. Service Operating Expenses

Service operating expenses amounted to KRW 5,529,856 million for 2008, up 7.8% over 2007 (after deducting handset manufacturers’ subsidies from marketing expenses). The largest contributor to the total was marketing expenses, which rose 18.1% YoY as the company engaged in fierce competition to secure subscribers ahead of the launch of a service contract system in April, 2008. As the competitive pressure eased in the second half, marketing expenses were reined in during the third quarter.

Most other non-marketing expenses, including salaries and commissions, posted modest growth rates of less than the growth in service revenues. Network-related expenses, including depreciation, lease line expenses, utilities and facilities maintenance were all down slightly from 2007 totals. However, as interconnection rates edged upward last year, this expense increased by 13.9%. International interconnection expenses also recorded a 28.9% YoY gain as the number of international telephony and global roaming service users increased sharply.

(Unit: KRW Million)

YoY Change

Operating Expenses 2008 2007 Amount %

Salaries 250,322 241,062 9,260 3.8

Commissions 497,328 465,683 31,645 6.8

Interconnection Fees 824,545 724,237 100,308 13.9

International Interconnection 28,161 21,849 6,312 28.9

Content Providers 41,857 54,681 -12,824 -23.5

Rent 162,352 157,796 4,556 2.9

Depreciation & Amortization 1,117,879 1,142,335 -24,456 -2.1

Lease Lines 375,298 386,542 -11,244 -2.9

Electricity/Water/Light & Heat 69,669 70,161 -492 -0.7

Repair & Maintenance 67,749 72,853 -5,104 -7.0

Marketing * 1,886,848 1,597,349 289,499 18.1

Bad Debt Provision 45,214 45,467 -253 -0.6

Taxes & Dues 29,700 37,755 -8,055 -21.3

Universal Service Obligations 9,376 18,000 -8,624 -47.9

Others 123,558 95,188 28,370 29.8

Service-related Operating Expenses 5,529,856 5,130,959 398,897 7.8

* Marketing expenses are adjusted to reflect subsidies paid by handset manufacturers.

07 / 07

4. Marketing Expense Analysis

Marketing expenses, comprising the largest share of total operating expenses, totaled KRW 1,886,848 million in 2008, up 18.1% YoY. What makes us a winner The gain is attributable to the intense competition to lock in subscribers in the first half. Accordingly, marketing expenses as a share of service revenue rose 2.8%p to 31.5% for the year.

In detail, subscriber acquisition costs and subscriber retention expense climbed 24.5% and 13.1%, respectively, while advertising expense fell 15.0% YoY.

(Unit: KRW Million)

KTF 2008 Annual Report YoY Change

Breakdown of Marketing Expenses 2008 2007 Amount % Subscriber Acquisition Costs 1,265,174 1,015,945 249,229 24.5

Subscriber Retention Expense 513,114 453,676 59,438 13.1

Advertising Expense 108,560 127,729 -19,169 -15.0

Net Marketing Expenses 1,886,848 1,597,349 289,499 18.1

Marketing Expense / Service Revenue 31.5% 28.7% 2.8%p

5. Interconnection Revenue & Expense

Interconnection revenue showed a slight increase of 2.7% YoY to KRW 1,032,429 million, as higher air-time billings more than offset a 2.3% drop in the interconnection rate. Interconnection expense recorded a 13.9% yearly gain to KRW 824,545 million, due mainly to increases in interconnection rates for land to mobile (LM) traffic and outgoing traffic to SK Telecom subscribers, along with the overall increase in outgoing traffic. Net interconnection income therefore totaled KRW 207,884 million, down 26.0% YoY.

(Unit: KRW Million)

YoY Change

Breakdown of Interconnection Revenue 2008 2007 Amount % Total Interconnection Revenue 1,032,429 1,005,251 27,178 2.7

LM Income 310,072 313,568 -3,496 -1.1

MM Income 722,357 691,684 30,673 4.4

Total Interconnection Expense 824,545 724,237 100,308 13.9

LM Expense 147,169 125,648 21,521 17.1

MM Expense 677,375 598,768 78,607 13.1

Net Interconnection Income 207,884 281,015 -73,131 -26.0

Net LM Income 162,902 188,099 -25,197 -13.4

Net MM Income 44,981 92,916 -47,935 -51.6

MANAGEMENT’S DISCUSSION & ANALYSIS

6. Non-Operating Accounts

Non-operating accounts recorded 2008 losses of KRW 268,026 million, up 74.1% from the previous year. The result was mainly caused by the weak performance of the company’s subsidiaries, leading to higher recognized losses on the equity method accounts.

(Unit: KRW Million)

YoY Change

Non-Operating Income (Loss) 2008 2007 Amount % Interest Income 24,602 22,526 2,076 9.2

Interest Expense 132,589 127,258 5,331 4.2

Net Interest Income (Loss) -107,987 -104,732 -3,255 3.1

F/X-related Gain 7,730 459 7,271 1584.1

F/X-related Loss 140,683 877 139,806 15,941.4

Net F/X-related Gain (Loss) -132,953 -418 -132,535 31,706.9

Equity-method Gain 2,565 7,603 -5,038 -66.3

Equity-method Loss 107,636 25,702 81,934 318.8

Net Equity-method Gain (Loss) -105,071 -18,099 -86,972 480.5

Other Non-operating Income 166,574 35,608 130,966 367.8

Other Non-operating Expense 88,589 66,338 22,251 33.5

Net Other Non-operating Gain (Loss) 77,985 -30,730 108,715 -353.8

Total Non-operating Income 201,470 66,196 135,274 204.4

Total Non-operating Loss 469,496 220,175 249,321 113.2

Net Total Non-Operating Income (Loss) -268,026 -153,979 -114,047 74.1

7. EBITDA & CAPEX

Operating income increased by KRW 13,481 million in 2008, while EBITDA edged down 0.7% to KRW 1,572,260 million. The difference was mainly attributable to a year-on-year fall in depreciation & amortization expenses of KRW 24,456 million. EBIDTA margin accordingly dropped 2.1%p YoY to 26.3%. Operating income, however, began recovering strongly from the third quarter of 2008, and significant gains are therefore expected in both EBITDA and EBITDA margin in 2009. Meanwhile, CAPEX investments amounted to KRW 963,492 million, a reduction of 13.2% from the previous year. The decline is due to lower network investment requirements following the completion of nationwide coverage for 3G WCDMA services.

(Unit: KRW Million)

YoY Change

EBITDA & CAPEX 2008 2007 Amount % Depreciation & Amortization 1,117,879 1,142,335 -24,456 -2.1

Operating Income 454,381 440,900 13,481 3.1

EBITDA 1,572,260 1,583,236 -10,976 -0.7

EBITDA Margin 26.3% 28.4% -2.1%p

CAPEX 963,492 1,109,841 -146,349 -13.2

09 / 09

8. Balance Sheet Summary

The company’s total assets at year-end 2008 came to KRW 8,056,122 million, up 8.0% YoY. The largest share of the increase came What makes us a winner from a KRW 441,407 million YoY rise in current assets. Total liabilities recorded KRW 3,690,273 million, a gain of 18.2% from 2007. Looking at the liabilities in detail, current liabilities rose 13.0% due an increase in the current portion of long-term debts. Non-current liabilities climbed 25.4% on a larger volume of bonds issued. The net debt-to-asset ratio, calculated as [(interest bearing debts – cash equivalents) / equity] increased by 13.7%p YoY to 34.2%. The company’s current ratio was also up 10.5%p to 108.3%.

(Unit: KRW Million)

YoY Change KTF 2008 Annual Report Balance Sheet Summary 2008 2007 Amount % Current Assets 2,199,857 1,758,450 441,407 25.1

Quick Assets 1,989,491 1,635,214 354,277 21.7

Inventories 210,366 123,236 87,130 70.7

Non-current Assets 5,856,266 5,702,255 154,011 2.7

Investment Assets 396,903 267,729 129,174 48.2

Tangible Assets 4,165,339 4,242,514 -77,175 -1.8

Intangible Assets 780,242 875,302 -95,060 -10.9

Other Non-current Assets 513,781 316,710 197,071 62.2

Total Assets 8,056,122 7,460,705 595,417 8.0

Current Liabilities 2,031,871 1,798,821 233,050 13.0

Non-current Liabilities 1,658,403 1,322,444 335,959 25.4

Total Liabilities 3,690,273 3,121,265 569,008 18.2

Capital Stock 1,044,181 1,044,181 0 0.0

Capital Surplus 1,728,150 1,728,150 0 0.0

Capital Adjustment 153 2,010 -1,857 -92.4

Accumulated Other Comprehensive Income -10,046 4,540 -14,586 -321.3

Retained Earnings 1,603,411 1,560,559 42,852 2.7

Total Shareholders’ Equity 4,365,849 4,339,440 26,409 0.6

(Unit: %)

Key Financial Ratios 2008 2007 yoY Change

Net Debt to Equity Ratio 34.2% 20.5% 13.7%p

Debt-to-Equity Ratio 84.5% 71.9% 12.6%p

Current Ratio 108.3% 97.8% 10.5%p

MANAGEMENT’S DISCUSSION & ANALYSIS

9. Operating Results

As of year-end 2008, KTF had 14,365,233 subscribers, numbering 644,499 more than a year earlier. By network, the number of 3G WCDMA subscribers recorded a 157.9% jump to 8,266,081, while 2G WCDMA subscriber numbers fell 42% to 6,099,152. 3G WCDMA subscribers as a share of the total KTF subscribers accordingly rose from 23% in 2007 to 58% in 2008.

ARPU (average monthly revenue per user) posted a 3.4% YoY increase to KRW 31,728 in line with strong revenue generation by 3G customers. KTF is the only company in the domestic industry to have positive ARPU growth in 2008, despite the introduction of discount rate plans and SMS rate cuts, which caused other competitors to suffer falls in revenues.

(Unit: 1,000 Persons)

Subscribers 4Q/2008 3Q/2008 2Q/2008 1Q/2008 4Q/2007

Total Subscribers 14,365 14,259 14,165 13,940 13,721

Resale Subscribers 2,834 2,860 2,906 2,939 2,927

Total of Quarterly New Subscription 1,463 1,788 2,350 2,343 1,838

Total of Quarterly Cancellation 1,356 1,695 2,125 2,124 1,701

Total of Quarterly Net Addition 107 93 225 219 137

KTF-only (excluding resale subscribers) 11,531 11,398 11,259 11,002 10,794

Total of Quarterly New Subscription 1,163 1,448 1,939 1,880 1,466

Total of Quarterly Cancellation 1,030 1,309 1,681 1,672 1,339

Total of Quarterly Net Addition 133 139 258 208 126

(Unit: 1,000 Persons)

Subscriber Distribution by Network 4Q/2008 3Q/2008 2Q/2008 1Q/2008 4Q/2007

WCDMA 8,266 7,408 6,316 4,840 3,205

CDMA 6,099 6,851 7,849 9,100 10,516

Total 14,365 14,259 14,165 13,940 13,721

* Including resale subscribers

(Unit: KRW)

Quarterly ARPU Trends 4Q/2008 3Q/2008 2Q/2008 1Q/2008 4Q/2007

ARPU (excluding interconnection fee) 31,963 31,893 32,012 31,044 31,064

ARPU (including interconnection fee) 40,049 39,630 39,945 38,323 39,063

Data ARPU (net) 6,957 7,036 6,901 6,620 6,435

Data as % of Total ARPU (net) 22% 22% 22% 21% 21%

Data ARPU (gross) 7,630 7,757 7,521 7,200 7,274

Data as % of Total ARPU (gross) 24% 24% 23% 23% 23%

* Excluding resale subscribers

10 / 11

Report of Independent Auditors What makes us a winner the

To the Board of Directors and Shareholders of KT Freetel Co., Ltd. We have audited the accompanying non-consolidated balance sheet of KT Freetel Co., Ltd. as of December 31, 2008, and the related non-consolidated statements of income, appropriations of retained earnings, changes in shareholders’ equity and cash flows for the year then ended, expressed in Korean won. 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 audit. The financial statements of the Company as of and for the year ended December 31, 2007, presented herein for comparative purposes, were KTF 2008 Annual Report audited by other auditors whose report dated January 25, 2008, expressed an unqualified opinion on those statements.

We conducted our audit in conformity 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 used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the non-consolidated financial statements as of and for the year ended December 31, 2008, referred to above present fairly, in all material respects, the financial position of KT Freetel Co., Ltd. as of December 31, 2008, and the results of its operations, the changes in its retained earnings, changes in shareholders’ equity and cash flows for the year then ended in conformity with accounting principles generally accepted in the Republic of Korea.

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, changes in shareholders’ equity and cash flows in conformity with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of Korea. In addition, the procedures and practices used 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 who are informed about Korean accounting principles or auditing standards and their application in practice.

Seoul, Korea February 24, 2009

This report is effective as of February 24, 2009, 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 non-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.

NON-CONSOLIDATED BALANCE SHEETS December 31, 2008 and 2007

(in millions of Korean won)

2008 2007

ASSETS

Current assets Cash and cash equivalents 316,425 284,854 Short-term investment securities (Note 5) 80,299 2,970 Trade accounts and notes receivable, net (Notes 4, 10, 15 and 24) 1,355,344 1,150,574 Other accounts receivable, net (Note 24) 41,805 34,256 Prepaid expenses 23,824 15,107 Inventories, net (Note 20) 210,366 123,236 Short-term loans receivable (Note 9) 2,339 3,559 Deferred income tax assets, net (Notes 2 and 21) 142,705 120,450 Other current assets 26,750 23,444 Total current assets 2,199,857 1,758,450 Non-current assets Long-term financial instruments (Note 3) 10 16 Long-term investment securities (Note 5) 13,468 25,458 Long-term loans receivable (Note 9) 56,784 34,209 Equity method investments (Note 6) 189,234 189,368 Long-term trade accounts and notes receivable, net (Notes 4 and 10) 211,533 42,512 Guarantee deposits (Note 24) 206,060 223,032 Deferred income tax assets, net (Note 21) 92,322 47,331 Property and equipment, net (Note 7) 4,165,339 4,242,514 Intangible assets, net (Note 8) 780,242 875,302 Other non-current assets (Note 25) 141,274 22,513 Total non-current assets 5,856,266 5,702,255 Total assets 8,056,123 7,460,705

Liabilities and Shareholders’ Equity

Current liabilities Trade accounts and notes payable (Notes 15 and 24) 249,765 393,932 Other accounts payable (Notes 15 and 24) 612,078 631,875 Accrued expenses (Note 26) 188,143 167,728 Withholdings 147,236 122,110 Income taxes payable (Note 21) 63,265 41,633 Current portion of debentures, net (Note 11) 589,879 319,944 Current portion of long-term borrowings (Note 11) 37,725 - Current portion of other long-term accounts payable, net (Notes 10 and 12) 128,723 108,920 Current portion of reserve for liabilities (Note 13) 5,084 4,332 Other current liabilities 9,973 8,347 Total current liabilities 2,031,871 1,798,821

12 / 13

(in millions of Korean won)

2008 2007 What makes us a winner

Non-current liabilities Debentures, net (Note 11 and 15) 1,173,071 859,037 Long-term borrowings, net (Note 11) 88,025 - Other long-term accounts payable, net (Notes 10 and 12) 295,732 406,288 Accrued severance benefits, net (Note 14) 41,066 51,616 Reserve for liabilities (Note 13) 58 454 4 048

KTF 2008 Annual Report Long-term guarantee deposits (Note 24) 2,055 1,455 1,658,403 1,322,444 Commitments and contingencies (Note 25) Shareholders’ equity Capital stock Common stock (Notes 1 and 16) 1,044,181 1,044,181 Capital surplus Paid-in capital in excess of par value 1,728,150 1,728,150 Capital adjustments Treasury stock (Note 17) (1,722) (2,078) Loss on disposal of treasury stock (58) - Stock compensation (Note 19) 4,589 4,088 Other capital adjustments (2,657) - Accumulated other comprehensive income (loss) (Note 22) Unrealized gain (loss) on valuation of available-for-sale securities, net (6,424) 5,515 Loss on valuation of derivatives, net (Note 25) (9,473) - Net accumulated comprehensive income (expense) of equity method investees, net (Note 6) 5,852 (975) Retained earnings (Note 18) Statutory reserve 43,194 43,194 Voluntary reserve 1,373,051 1,350,000 Unappropriated retained earnings 187,166 167,365 Total Shareholders’ equity 4,365,849 4,339,440 Total liabilities and shareholders’ equity 8,056,123 7,460,705

The accompanying notes are an integral part of these non-consolidated financial statements.

Non-Consolidated Statements of Income Years ended December 31, 2008 and 2007

(in millions of Korean won, except per share amounts)

2008 2007

Operating revenue (Note 24) 8,346,220 7,293,321 Operating expenses (Notes 20, 24 and 27) 7,891,839 6,852,421 Operating income 454,381 440,900 Non-operating income Interest income 24,602 22,526 Gain on disposal of short-term investment securities 3,302 4,538 Gain on disposal of long-term investment securities 463 1,267 Gain on equity method investments (Note 6) 2,565 7,603 Dividend income 450 295 Foreign exchange gains 6,879 458 Gain on foreign currency translation (Note 15) 851 1 Gain on disposal of property and equipment (Note 7) 585 590 Gain on disposal of intangible assets, net (Note 8) 1,100 192 Gain on valuation of derivatives (Note 25) 145,686 476 Others 14,987 28,250 201,470 66,196 Non-operating expense Interest expense (132,589) (127,258) Loss on disposal of long-term investment securities (229) - Loss on equity method investments (Note 6) (107,636) (25,702) Foreign exchange losses (7,551) (629) Loss on foreign currency translation (Note 15) (133,131) (248) Donations (15,177) (16,123) Loss on disposal of property and equipment (Note 7) (44,045) (43,998) Loss on disposal of intangible assets, net (Note 8) (393) (37) Loss on impairment of property and equipment (Note 7) (18,828) - Others (9,917) (6,180) (469,496) (220,175) Income before income taxes 186,355 286,921 Income tax expense (Note 2 and 21) 21,776 42,777 Net income 164,579 244,144

Basic earnings per share (Note 23) 866 1,252 Diluted earnings per share (Note 23) 866 1,252

The accompanying notes are an integral part of these non-consolidated financial statements.

14 / 15

Non-Consolidated Statements of Appropriations of Retained Earnings Years ended December 31, 2008 and 2007 (Date of appropriations : March 27, 2009 and March 14, 2008 for the years ended December 31, 2008 and 2007, respectively)

(in millions of Korean won)

2008 2007 What makes us a winner Retained earnings before appropriations Unappropriated retained earnings carried over from prior year 17,365 17,291 Cumulative effect of changes in accounting principles (Note 2) 5,222 - Retirement ot treasury stock (Note 17) (126,949) (94,070) Net income 164,579 244,144 60,217 167,365

KTF 2008 Annual Report Transfer from volutary reserve Reserve for business expansion 126,949 - 187,166 167,365 Appropriation of retained earnings Reserve for business expansion 170,000 150,000 Unappropriated retained earnings to be carried forward to the subsequent year 17,166 17,365

The accompanying notes are an integral part of these non-consolidated financial statements.

Non-Consolidated Statements of Changes in Shareholders’ Equity Years ended December 31, 2008 and 2007

(in millions of Korean won)

Accumulated other Capital Capital comprehensive Retained Capital stock surplus adjustments income earnings Total

Balances at January 1, 2007 1,044,181 1,728,150 3,188 6,643 1,527,869 4,310,031 Dividends - - - - (117,383) (117,383) Net income - - - - 244,144 244,144 Loss on valuation of available-for-sale securities - - - (1,375) - (1,375) Decrease in stock options - - (1,178) - (1,178) Acquisition of treasury stocks - - (94,071) - - (94,071) Retirement of treasury stocks - - 94,071 - (94,071) - Change in equity method investees with net accumulated comprehensive - - - (160) - (160) Change in equity method investees with net accumulated comprehensive expense - - - (568) - (568) Balances at December 31, 2007 1,044,181 1,728,150 2,010 4,540 1,560,559 4,339,440

Balances at January 1, 2008 1,044,181 1,728,150 2,010 4,540 1,560,559 4,339,440 Cumulative effect of changes in accounting principles - - (2,657) 1,703 5,222 4,268 Adjusted balances 1,044,181 1,728,150 (647) 6,243 1,565,781 4,343,708 Net income - - - - 164,579 164,579 Loss on valuation of available-for-sale securities - - - (11,939) - (11,939) Gain on valuation of derivatives - - - (9,473) - (9,473) Disposal of treasury stocks - - 356 - - 356 Loss on disposal of treasury stocks - - (58) - - (58) Acquisition of treasury stocks - - (126,949) - - (126,949) Retirement of treasury stocks - - 126,949 - (126,949) - Stock compensation cost - - 502 - - 502 Change in equity method investees with net accumulated comprehensive income - - - 3,680 - 3,680 Change in equity method investees with net accumulated comprehensive expense - - - 1,443 - 1,443 Balances at December 31, 2008 1,044,181 1,728,150 153 (10,046) 1,603,411 4,365,849

The accompanying notes are an integral part of these non-consolidated financial statements.

16 / 17

Non-Consolidated Statements of Cash Flows Years ended December 31, 2008 and 2007

(in millions of Korean won)

2008 2007 What makes us a winner Cash flows from operating activities Net income 164,579 244,144 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 1,011,753 1,037,852 Amortization 106,126 104,483 Amortization of discounts on debentures 1,290 1,057 Amortization of discounts on other long-term accounts payable 19,247 22,216 KTF 2008 Annual Report Provision for severance benefits 18,267 18,439 Loss on valuation of inventories 4,311 8,609 Stock compensation costs 502 43 Bad debt expense 45,214 45,467 Gain on valuation of derivatives (145,686) - Loss on valuation of equity method investments, net 105,072 18,099 Loss on foreign currency translation, net 132,280 247 Gain on disposal of short-term investment securities (3,302) (4,538) Loss on disposal of property and equipment, net 43,460 43,407 Loss on impairment of property and equipment 18,828 - Gain on disposal of long-term investment securities (463) (1,267) Others 1,191 33 1,358,090 1,294,147 Changes in operating assets and liabilities Decrease (increase) in trade accounts and notes receivable (246,654) 13,285 Decrease in other accounts receivable 5,203 31,901 Increase in prepaid expenses (6,705) (1,610) Increase in inventories (91,441) (1,571) Decrease (increase) in accrued income (944) 2,558 Increase in advance payments (3,467) (2,783) Decrease (increase) in long-term trade accounts and notes receivable (157,273) 11,289 Decrease (increase) in other non-current assets 15,286 (16,850) Increase in deferred income tax assets (56,116) (29,737) Payment of severance benefits (28,942) (9,854) Decrease (increase) in National Pension Fund deposits 120 (52) Increase (decrease) in trade accounts and notes payable (144,110) 89,123 Decrease in other accounts payable (19,557) (200,531) Increase in accrued expenses 20,878 45,083 Increase in withholdings 24,960 23,633 Increase (decrease) in income taxes payable 21,631 (2,271) Increase (decrease) in other current liabilities 1,626 (21,892) Increase (decrease) in reserve for liabilities 1,318 (7,884) Increase in other long-term liabilities 604 (4,045) (663,583) (82,208) Net cash provided by operating activities 859,086 1,456,083

Non-Consolidated Statements of Cash Flows (continued) Years ended December 31, 2008 and 2007

(in millions of Korean won)

2008 2007

Cash flows from investing activities Decrease in short-term loans 24,754 9,908 Decrease in short-term financial instruments 450 140,000 Acquisition of short-term financial instruments (450) (50,000) Proceeds from disposal of short-term investment securities 609,380 1,171,558 Acquisition of short-term investment securities (685,000) (966,481) Proceeds from disposal of long-term investment securities 1,728 1,384 Acquisition of long-term investment securities (3,754) (1,288) Proceeds from disposal of property and equipment 5,534 2,592 Acquisition of property and equipment (963,492) (1,111,763) Proceeds from disposal of intangibles 2,916 374 Acquisition of intangibles (12,026) (25,088) Acquisition of equity method securities (100,100) (104,026) Increase in long-term loans receivable (46,109) (22,802) Others (245) 1,700 Net cash used in investing activities (1,166,414) (953,932) Cash flows from financing activities Proceeds from short-term borrowings 285,314 - Repayment of short-term borrowings (285,314) - Repayment of current portion of debentures (320,000) (500,000) Repayment of current portion of other long-term accounts payable (110,000) (90,000) Proceeds from long-term borrowings 99,537 - Proceeds from debentures 796,311 - Acquisition of treasury stock (126,949) (94,070) Payment of dividends - (117,384) Net cash provided by (used in) financing activities 338,899 (801,454) Net increase (decrease) in cash and cash equivalents 31,571 (299,303) Cash and cash equivalents (Note 29) Beginning of the year 284,854 584,157 End of the year 316,425 284,854

The accompanying notes are an integral part of these non-consolidated financial statements.

18 / 19

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

1. The Company

What makes us a winner KT Freetel Co., Ltd. (the “Company”) was incorporated on January 3, 1997, under the Commercial Code of the Republic of Korea to engage in providing personal communications service (“PCS”), value added services, and sale and lease of personal communication devices. The Company had its shares listed on the Korean Securities Dealers Association Automated Quotation System (the “KOSDAQ”) in December 1999. On April 19, 2004, the Company transferred from the KOSDAQ to the Korea Stock Exchange.

As of December 31, 2008, the Company’s shareholders are as follows:

Number of Shares Percentage of Ownership (%)

KT Corporation 102,129,938 54.25% KTF 2008 Annual Report NTT DoCoMo, Inc. 20,176,309 10.72% National Pension Service 3,759,131 2.00% Qualcomm Inc. 3,346,810 1.78% Millgate Master Fund Ltd. 2,350,000 1.25% Microsoft Corp. 2,030,000 1.08% Others 54,481,903 28.92% Total 188,274,091 100.00%

2. Summary of Significant Accounting Policies

Basis of Financial Statement Presentation The Company maintains its accounting records in Korean won and prepares statutory financial statements in Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been condensed, restructured and translated into English from the Korean language financial statements. Certain information attached to the Korean language non- consolidated financial statements, but not required for a fair presentation of the company’s financial position, results of operations, or cash flows, is not presented in the accompanying non-consolidated financial statements.

The following is a summary of significant accounting policies followed by the Company in the preparation of its financial statements. These policies have been consistently applied to all the years presented, unless otherwise stated.

In 2008, the Company adopted the following new Statements of Korean Financial Accounting Standards (SKFAS) issued by the Korea Accounting Standards Board:

• Korea Accounting Institute Opinion 06-2, Deferred Income Taxes on Investments in Subsidiaries, Associates and Interests in Joint Ventures • SKFAS No. 16, Income Tax and Deferred Income Tax (As Revised) • SKFAS No. 15, Equity Method (As Revised)

The Company adopted Korea Accounting Institute Opinion 06-2, as revised, on February 22, 2008. The prior year financial statements have not been restated to reflect the changes in accordance with Korea Accounting Institute Opinion 06-2. Instead, the effect of change was reflected in the beginning balance as of January 1, 2008. The effect of the change was an increase in retained earnings as of January 1, 2008, by ￦4,555 million. In addition, income tax expense for year ended December 31, 2008, decreased by ￦3,210 million and retained earnings and deferred income tax assets as of December 31, 2008, increased by ￦7,765 million, respectively.

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

Reclassification of Prior Year Financial Statements Certain prior year accounts, presented herein for comparative purposes, have been reclassified to conform to current year’s financial statement presentation. Such reclassification does not impact the net income or net assets reported in the prior year.

Revenue Recognition Revenue is the gross inflow of economic benefits arising in the ordinary course of the Company’s activities and is measured as the fair value of the consideration received or receivable for the sale of goods and services in the said ordinary course of the Company’s activities. Revenue is shown as net of value-added tax, sales discounts and sales returns. The Company recognizes revenue when the amount of revenue can be reliably measured, and it is probable that future economic benefits will flow into the Company.

Revenue from the sale of goods are recognized when the significant risks and rewards of ownership of goods are transferred to the buyer. Revenue from the rendering of services is recognized under the percentage-of-completion method, under which revenue is generally recognized based on the costs incurred to date as a percentage of the total estimated costs to be incurred.

Interest income is recognized using the effective interest method. Dividend income is recognized when the rights to receive such dividends and amounts thereof are determined. Royalty income is recognized on an accrual basis in accordance with the substance of relevant contracts.

Cash and Cash Equivalents Cash and cash equivalents include cash on hand and in banks, and financial instruments with maturity of three months or less at the time of purchase. These financial instruments are readily convertible into cash without significant transaction costs and bear low risks from changes in value due to interest rate fluctuations.

Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts and notes receivable. Allowances are calculated based on the estimates made through a reasonable and objective method.

Inventories The quantities of inventories are determined using the perpetual method and periodic physical inventory count, while the costs of inventories are determined using the moving-weighted average method. Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expense. Replacement cost is used for the estimate of net realizable value of raw materials. If, however, the circumstances which caused the valuation loss cease to exist, the valuation loss is reversed up to the original carrying amount before valuation. The said reversal is deducted from cost of sales.

Investments in Securities Costs of securities are determined using the moving-weighted average method.

Investments in equity securities or debt securities are classified into trading securities, available-for-sale securities and held-to-maturity securities, depending on the acquisition and holding purpose. Investments in equity securities of companies, over which the Company exercises a significant control or influence, are recorded using the equity method of accounting. Trading securities are classified as current assets while available-for-sale securities and held-to-maturity securities are classified as long-term investments, excluding those securities that mature or are certain to be disposed of within one year, which are then classified as current assets.

Held-to-maturity securities are measured at amortized cost while available-for-sale and trading securities are measured at fair value. However, non-marketable securities, classified as available-for-sale securities, are carried at cost when the fair values are not readily determinable.

Gains and losses related to trading securities are recognized in the income statement, while unrealized gains and losses of available-for- sale securities are recognized under other comprehensive income and expense. Realized gains and losses on available-for-sale securities are recognized in the income statement.

20 / 21

Equity-Method Investments Investees over which the Company can exercise significant influence should reflect any changes in equity after the initial purchase date.

What makes us a winner Under the equity method, the Company records changes in its proportionate ownership in the book value of the investee in current operations, as capital adjustments or as adjustments to retained earnings, depending on the nature of the underlying change in the book value of the investee. All other changes in equity should be accounted for under other comprehensive income and expense.

Property and Equipment Property and equipment are stated at cost, which includes acquisition cost, production cost and other costs required to prepare the asset for its intended use. It also includes the present value of the estimated cost of dismantling and removing the asset, and restoring the site at the end of the asset’s useful life or lease period, provided it meets the criteria for recognition of provisions. KTF 2008 Annual Report Property and equipment are stated net of accumulated depreciation calculated using straight-line method based on the following estimated useful lives:

Estimated Useful Lives

Buildings and structures 15~30 years Machinery 8 years Vehicles 4~8 years Others 4~8 years

Expenditures incurred after the acquisition or completion of assets are capitalized if they enhance the value of the related assets over their recently appraised value or extend the useful life of the related assets. Routine maintenance and repairs are charged to expense as incurred.

Intangible Assets Intangible assets are stated at cost, which includes acquisition cost, production cost and other costs required to prepare the asset for its intended use. Intangible assets are stated net of accumulated amortization calculated using straight-line method based on the following estimated useful lives:

Estimated Useful Lives

Industrial property rights 5~10 years Facility usage rights 10~20 years Frequency usage rights 13 years Development costs 2 years Others 5 years

Development costs which are individually identifiable and directly related to a new technology or to new products which carry probable future benefits are capitalized as intangible assets. Amortization of development cost begins at the commencement of the commercial production of the related products or use of the related technology.

Non-Capitalization of Interest Expense The Company expenses interest it incurs on borrowings used to finance the cost of manufacturing, acquisition, and construction of inventory and property and equipment that require more than one year to complete from the initial date of manufacture, acquisition, and construction.

Valuation of Assets and Liabilities at Present Value Receivables and payables resulting from long-term installment payment transactions, long-term cash loans or other similar borrowings, are valued at their present values, discounted at an appropriate discount rate when the difference between the nominal value and present value is material. The present value discounts are amortized or recovered using the effective interest rate method and are recognized as interest income or expense over the term of the contract.

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

Impairment of Assets When the book value of an asset is significantly greater than its recoverable value due to obsolescence, physical damage or an abrupt decline in the market value of the asset, the said decline in value is deducted from the book value to agree with recoverable amount and is recognized as an asset impairment loss for the period. When the recoverable value subsequently exceeds the book value, the impairment amount is recognized as gain for the period to the extent that the revised book value does not exceed the book value that would have been recorded without the impairment. Reversal of impairment of goodwill is not allowed.

Derivatives All derivative instruments are accounted for at their fair value according to the rights and obligations associated with the derivative contracts. The resulting changes in fair value of derivative instruments are recognized either under the income statement or shareholders’ equity, depending on whether the derivative instruments qualify as a cash flow hedge. Fair value hedge accounting is applied to a derivative instrument purchased with the purpose of hedging the exposure to changes in the fair value of an asset or a liability or a firm commitment that is attributable to a particular risk. The resulting changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized under the shareholders’ equity under accumulated other comprehensive income and expense.

Discounts on Debentures Discounts on debentures are amortized over the term of the debentures using the effective interest rate method. Amortization of the discount is recorded as part of interest expense.

Accrued Severance Benefits Employees and directors with at least one year of service are entitled to receive a lump-sum payment upon termination of their employment with the Company based on their length of service and rate of pay at the time of termination. Accrued severance benefits represent the amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the balance sheet date.

The Company deposits certain portion of severance benefits to National Pension Service according to National Pension Law. The deposit amount is presented as a deduction from accrued severance benefits.

Provisions and Contingent Liabilities When there is a probability that an outflow of economic benefits will occur due to a present obligation resulting from a past event, and whose amount is reasonably estimable, a corresponding amount of provision is recognized in the financial statements. However, when such outflow is dependent upon a future event, is not certain to occur, or cannot be reliably estimated, a disclosure regarding the contingent liability is made in the notes to the financial statements.

Translation of Assets and Liabilities Denominated in Foreign Currencies Monetary assets and liabilities denominated in foreign currencies are translated into Korean won at the rates of exchange(2008: ￦1257.5/US$1; 2007: ￦938.2/US$1) in effect at the balance sheet date, and the resulting translation gains and losses are recognized in current operations.

Currency Translation for Foreign Operations Assets and liabilities of a foreign branch or company subject to the equity method of accounting for investments are translated into Korean won at the rates of exchange in effect at the balance sheet date, while their equity is translated at the exchange rate at the time of transaction, and income statement accounts at the average rate over the period. Resulting translation gains and losses are recorded as accumulated other comprehensive income and expense. Corresponding gains and losses are recognized as gain or loss when the foreign branch or company is liquidated or sold.

22 / 23

Income Tax and Deferred Income Tax Income tax expense includes the current income tax under the relevant income tax law and the changes in deferred tax assets or liabilities.

What makes us a winner Deferred tax assets and liabilities represent temporary differences between financial reporting and the tax bases of assets and liabilities. Deferred tax assets are recognized for temporary differences which will decrease future taxable income or operating loss to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized. Deferred tax effects applicable to items in the shareholders’ equity are directly reflected in the shareholders’ equity.

Share-based Payments In case of equity-settled share-based payment, the fair value of the goods or employee services received in exchange for the grant of the options is recognized as an expense and a capital adjustment. If the fair value of goods or employee services cannot be estimated reliably,

KTF 2008 Annual Report the fair value is estimated based on the fair value of the equity granted.

For cash-settled share-based payment, the fair value of the obligation the Company will assume is determined by the fair value of the goods or employee services received in exchange for the grant of the options. Until the liability is settled, the Company is required to measure the fair value at balance sheet date and at settlement date. The change in fair value is recognized as an expense.

Share-based payment transactions with an option for the parties to choose between cash and equity settlement are accounted for based on the substance of the transaction.

Approval of Non-Consolidated Financial Statements The December 31, 2008 non-consolidated financial statements of the Company were approved at the Board of Directors’ meeting on January 20, 2009.

3. Restricted financial instruments

As of December 31, 2008 and 2007, long-term financial instruments represent key money deposits required to maintain checking accounts and, accordingly, the withdrawal of such deposits is restricted.

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

4. Trade Accounts and Notes Receivable

Short-term and long-term trade accounts and notes receivables as of December 31, 2008 and 2007, consist of the following:

(in millions of Korean won)

2008 2007

Current assets Accounts receivable 1,552,470 1,363,405 Less: Allowance for doubtful accounts (182,022) (208,939) Less: Present value (15,104) (3,892) 1,355,344 1,150,574 Non-current assets Accounts receivable 235,065 46,659 Less: Allowance for doubtful accounts (1,538) - Less: Present value (21,994) (4,147) 211,533 42,512 1,546,877 1,193,086

5. Securities (excluding Equity Method Investments)

Available-for-sale securities as of December 31, 2008 and 2007, consist of the following:

(in millions of Korean won)

2008 2007

Short-term investment securities Beneficiary certificates 80,177 - Equity securities - 2,091 Government and public bonds 122 879 80,299 2,970 Long-term investment securities Equity securities 9,910 24,233 Investments in funds 705 1,055 Convertible bond 2,800 - Government and public bonds 53 170 13,468 25,458 93,767 28,428

24 / 25

Equity securities included in long-term investment securities as of December 31, 2008 and 2007, consist of the following: What makes us a winner

2008 (in millions of Korean won)

Percentage Market or Unrealized of ownership Acquisition net asset Carrying gain (loss (%) cost value value on valuation

Marketable securities Zakang Inc. 0.02 300 1 1 (299) Gaeasoft Co., Ltd. 2.01 532 282 282 (250) KTF 2008 Annual Report KRTnet Corp. 7.39 1,954 1,833 1,832 (121) PT. Mobile-8 Telecom (Note 25) 2.30 10,069 2,322 2,322 (7,747) Show Mirae Asset PEF 1 - 249 253 253 4 13,104 4,691 4,691 (8,413) Marketable securities Mondex Korea Co., Ltd. 6.02 920 - - - The Radio News Co., Ltd. 10.73 624 - - - Prime Venture Capital Co., Ltd. 2.67 1,000 186 - NAZCA Entertainment Co., Ltd. 7.13 500 424 46 - Toysoft Co., Ltd 8.78 500 92 28 - CXP, Inc. 12.06 1,200 1 50 - IMM Investment Corp. 1.09 500 241 210 - Vacom Wireless, Inc. 16.77 1,880 1516 641 - Neighbor System, Inc. 10.40 525 453 525 - Entaz Co., Ltd. 8.67 1,000 919 1,000 - Others - 4,348 4,400 2,719 - 12,997 8,232 5,219 - 26,101 12,923 9,910 (8,413)

The fair values of non-marketable equity securities could not be reliably estimated due to the lack of financial information of the said companies. Accordingly, these equities were presented at their acquisition cost.

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

2007 (in millions of Korean won)

Percentage Market or Unrealized of ownership Acquisition net asset Carrying gain (loss (%) cost value value on valuation

Marketable securities Zakang Inc. 0.04 300 6 6 (295) Gaeasoft Co., Ltd. 2.01 532 756 756 224 KRTnet Corp. 7.39 1,954 4,122 4,122 2,168 Geotel Corp. 7.83 1,143 4,322 4,322 3,179 PT.Mobile-8 Telecom (Note 24) 2.30 10,069 10,508 10,508 439 13,998 19,714 19,714 5,715 Marketable securities Mondex Korea Co., Ltd. 6.02 920 - - - The Radio News Co., Ltd. 10.73 624 - - - Prime Venture Capital Co., Ltd. 2.67 1,000 194 - - NAZCA Entertainment Co., Ltd. 7.13 500 154 46 - Toysoft Co., Ltd 8.78 500 29 29 - CXP, Inc. 12.06 1,200 8 50 - IMM Investment Corp. 1.09 500 233 210 - Vacom Wireless, Inc. 16.77 1,880 1,122 641 - Neighbor System, Inc. 10.40 525 451 525 - Entaz Co., Ltd. 10.14 1,000 828 1,000 - Others - 3,648 3,158 2,018 - 12,297 6,177 4,519 - 26,295 25,891 24,233 5,715

Maturities of debt securities as of December 31, 2008 and 2007, consist of the following:

(in millions of Korean won)

2008 2007

Acquisition Carrying Acquisition Carrying cost value cost value

Government and Public bonds Within 1 year 122 122 879 879 Over 1 year and within 5 years 40 40 159 159 Over 5 years 13 13 11 11 175 175 1,049 1,049 Convertible bond Over 1 year and within 5 years 2,800 2,800 - - 2,975 2,975 1,049 1,049

26 / 27

Investments in funds in long-term investment securities as of December 31, 2008 and 2007, consist of the following:

2008 (in millions of Korean won) What makes us a winner

Percentage of Acquisition Carrying ownership (%) cost value

CEC Mobile Ltd. 16.67 4,456 - Engineering Financial Cooperative 0.01 16 16 KTOA - 689 689 5,161 705 KTF 2008 Annual Report 2007 (in millions of Korean won)

Percentage of Acquisition Carrying ownership (%) cost value

CEC Mobile Ltd. 16.67 4,456 - Engineering Financial Cooperative 0.01 16 16 MIC2001-4TG Venture 5.00 350 350 KTOA - 689 689 5,512 1,055

Beneficiary certificates in short-term investment securities as of December 31, 2008, consist of the following:

2008 (in millions of Korean won)

Carrying value Unrealized Acquisition before gain (loss) on cost valuation Market value valuation

Korea Development Bank W-PEF no.148 30,000 30,000 30,095 95 Korea Development Bank W-PEF no.153 50,000 50,000 50,082 82 80,000 80,000 80,177 177

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

The changes in accumulated gains (losses) on valuation of marketable securities and beneficiary certificates for the years ended December 31, 2008 and 2007, consist of the following:

2008 (in millions of Korean won)

Beginning Increase Ending balance (Decrease) Realized balance Beneficiary certificates - 176 - 176 Infravalley Co., Ltd 1,891 - (1,891) - Zakang Inc. (294) (4) - (298) Gaeasoft Co., Ltd. 224 (474) - (250) KRTnet Corp. 2,168 (2,290) - (122) Geotel Corp. 3,179 - (3,179) - PT. Mobile-8 Telecom 439 (8,185) - (7,746) Show Mirae asset PEF 1 - 4 - 4 7,607 (10,773) (5,070) (8,236) Tax effect (2,092) 1,812 5,515 (6,424)

2007 (in millions of Korean won)

Beginning Increase Ending balance (Decrease) Realized balance Beneficiary certificates 1,031 - (1,031) - Infravalley Co., Ltd - 1,891 - 1,891 Zakang Inc. (287) (7) - (294) Gaeasoft Co., Ltd. 551 (328) - 223 KRTnet Corp. 2,247 (78) - 2,169 Geotel Corp. 2,707 1,362 (891) 3,178 PT. Mobile-8 Telecom 3,254 (2,815) - 439 9,503 25 (1,922) 7,606 Tax effect (2,613) (2,091) 6,890 5,515

28 / 29

6. Equity-Method Investments

What makes us a winner Equity method investments as of December 31, 2008 and 2007, consist of the following:

2008 (in millions of Korean won)

Percentage of ownership Acquisition Net asset Carrying Market Investe (%) cost value value value

Korea Digital Satellite Broadcasting Co., Ltd. 1 1.82 9,954 1,761 1,761 - KTF Technologies Co., Ltd. 74.94 17,221 18,807 5,666 -

KTF 2008 Annual Report KTFMhows Co., Ltd. 51.00 2,550 3,199 3,199 - Harex Info Tech., Ltd. 21.17 3,375 248 631 - Korea IT Fund 1 10.00 30,000 33,272 33,272 - ENtoB Corp. 1 3.13 500 848 848 - PT. KTF Indonesia 99.00 234 139 139 - Boston Enterprise Partners 39.02 8,000 4,281 4,281 - Sidus FNH Corp. 1 15.30 8,400 2,064 4,389 -

KTF-CJ Music Contents Investment Fund (Centurion music 1) 50.00 5,000 5,038 5,038 - Sidus FNH-BENEX Cinema fund1 1 6.67 2,000 1,616 1,616 - KTF M&S Co., Ltd. 100.00 100,000 33,103 21,614 - KTF-DoCoMo Mobile Investment Fund 45.00 4,500 4,439 4,439 - KTF MUSIC Co., Ltd. 35.28 19,526 7,500 16,464 7,494 U MOBILE SDN. BHD.2 16.50 96,700 33,102 82,663 - Shinhan-KTF Mobilecard Co., Ltd. 50.00 1,000 708 708 - KT Data systems Co., Ltd. 20.00 2,400 2,506 2,506 - 311,360 152,631 189,234 7,494

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

2007 (in millions of Korean won)

Percentage of ownership Acquisition Net asset Carrying Market Investe (%) cost value value value

Korea Digital Satellite Broadcasting Co., Ltd. 1 1.82 9,954 - - - KTF Technologies Co., Ltd. 74.94 17,221 40,372 30,270 - KTFMhows Co., Ltd. 51.00 2,550 3,044 3,044 - Harex Info Tech., Ltd. 21.17 3,375 417 1,183 - Korea IT Fund 1 10.00 30,000 33,248 33,248 - Korea Telecom Strategy Fund1 10.00 2,000 - - - ENtoB Corp. 1 3.13 500 755 755 - PT. KTF Indonesia 99.00 234 472 472 - Boston Enterprise Partners 39.02 8,000 7,149 7,149 - Sidus FNH Corp. 1 15.30 8,400 2,688 6,176 -

KTF-CJ Music Contents Investment Fund (Centurion music 1) 50.00 5,000 5,011 5,011 - Sidus FNH-BENEX Cinema fund1 1 6.67 2,000 1,993 1,993 - KTF M&S Co., Ltd. 100.00 100,000 82,226 76,051 - KTF-DoCoMo Mobile Investment Fund 45.00 4,500 4,491 4,491 - KTF MUSIC Co., Ltd. 35.28 19,526 8,320 19,525 22,898 213,260 190,186 189,368 22,898

1 The Company’s percentage of ownership in these investees is less than 20%. However, the equity method was applied as the combined percentage of owner ship, including KT Corporation’s ownership in these investees, was over 20%.

2 The Company’s percentage of ownership in this investee is less than 20%. However, the equity method was applied as the Company can exert influence through its seat in the investee’s board of directors.

30 / 31

Changes in equity-method investments for the years ended December 31, 2008 and 2007, consist of the following:

(in millions of Korean won)

What makes us a winner 2008

January 1, Gain (loss) Other December 31, Investe 2008 Acquisitions on valuation adjustment 2008

Korea Digital Satellite Broadcasting Co., Ltd. - - 1,435 326 1,761 KTF Technologies Co., Ltd. 30,270 - (24,113) (491) 5,666 KTFMhows Co., Ltd. 3,044 - 154 1 3,199 Harex Info Tech., Ltd. 1,183 - (552) - 631

KTF 2008 Annual Report Korea IT Fund 33,248 - 751 (727) 33,272 ENtoB Corp. 755 - 92 1 848 PT. KTF Indonesia 471 - (399) 67 139 Boston Enterprise Partners 7,149 - (2,868) - 4,281 Sidus FNH Corp. 6,176 - (1,788) 1 4,389

KTF-CJ Music Contents Investment Fund (Centurion music 1) 5,011 - 27 - 5,038 Sidus FNH-BENEX Cinema Fund 1,993 - (377) - 1,616 KTF M&S Co., Ltd. 76,051 - (54,437) - 21,614 KTF-DoCoMo Mobile Investment Fund 4,491 - (52) - 4,439 KTF MUSIC Co., Ltd 19,526 - (3,060) (2) 16,464 U MOBILE SDN. BHD. - 96,700 (19,699) 5,662 82,663 Shinhan-KTF Mobilecard Co.,Ltd. - 1,000 (292) - 708 KT Data Systems Co., Ltd. - 2,400 106 - 2,506 189,368 100,100 (105,072) 4,838 189,234

2007 (in millions of Korean won)

January 1, Gain (loss) Other December 31, Investe 2007 Acquisitions on valuation adjustment 2007

KTF Technologies Co., Ltd. 25,450 - 4,871 (50) 30,270 KTFMhows Co., Ltd. 2,666 - 378 - 3,044 Harex Info Tech., Ltd. 1,902 - (719) - 1,183 Korea IT Fund 30,483 - 2,271 493 33,248 Korea Telecom Strategy Fund 1,837 (1,837) - - - ENtoB Corp. 673 - 83 - 755 PT. KTF Indonesia 1,052 - (196) (385) 471 Boston Enterprise Partners 8,014 - (864) - 7,149 Sidus FNH Corp. 7,264 - (1,089) - 6,176

KTF-CJ Music Contents Investment Fund (Centurion music 1) 5,025 - (14) - 5,011 Sidus FNH-BENEX Cinema Fund 2,007 - (14) - 1,993 KTF M&S Co., Ltd. - 100,000 (22,797) (1,152) 76,051 KTF-DoCoMo Mobile Investment Fund - 4,500 (9) - 4,491 KTF MUSIC Co., Ltd. - 19,526 - - 19,526 86,373 122,189 (18,099) (1,094) 189,368

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

For the years ended December 31, 2008 and 2007, the details of changes in differences between the initial purchase price and the Company’s initial proportionate ownership in the net book value of the investee are as follows:

2008 (in millions of Korean won)

January 1, Other December 31, Investee 2008 Addition Amortization adjustment 2008

KTF Technologies Co., Ltd. 286 - - (286) - Harex Info Tech., Ltd. 766 - (383) - 383 Sidus FNH Corp. 3,487 - (1,162) - 2,325 KTF MUSIC Co., Ltd 11,206 - (2,241) - 8,965 U MOBILE SDN. BHD. - 58,307 (8,746) - 49,561 15,745 58,307 (12,532) (286) 61,234

2007 (in millions of Korean won)

January 1, Other December 31, Investee 2007 Addition Amortization adjustment 2007

KTF Technologies Co., Ltd. (41) - 327 - 286 Harex Info Tech., Ltd. 1,148 - (382) - 766 Sidus FNH Corp. 4,650 - (1,163) - 3,487 KTF MUSIC Co., Ltd - 11,206 - - 11,206 5,757 11,206 (1,218) - 15,745

For the years ended December 31, 2008 and 2007, the details of the elimination of unrealized gains or losses arising from intercompany transactions according to the equity method accounting are as follows:

(in millions of Korean won)

2008 2007

Investee Inventories Intangibles Total Inventories Intangibles Total

KTF Technologies Co., Ltd. 13,141 - 13,141 10,388 - 10,388 KTF M&S Co., Ltd. 10,764 726 11,490 6,175 - 6,175 23,905 726 24,631 16,563 - 16,563

The Company discontinued applying the equity method on investments in Korea Digital Satellite Broadcasting Co., Ltd. as the investee’s book value was below zero. The unrecognized equity loss not reported in the accompanying financial statements was ￦147 million until 2007. In 2008, the Company resumed recognizing its share in those profits because the investee’s profits exceeded the accumulated unrecognized equity loss.

32 / 33

A summary of financial information of equity method investee as of and for the years ended December 31, 2008 and 2007, consists of the following: What makes us a winner

2008 (in millions of Korean won)

Total Total Net Income Investee assets liabilities Revenue (loss) Korea Digital Satellite Broadcasting Co., Ltd. 503,529 281,659 289,493 26,789 KTF Technologies Co., Ltd. 117,161 92,063 360,963 (28,504) KTFMhows Co., Ltd. 12,210 5,937 16,365 301 Harex Info Tech., Ltd. 2,252 1,082 2,798 (801) KTF 2008 Annual Report Korea IT Fund 332,724 - 19,742 7,518 ENtoB Corp. 79,327 52,189 756,984 2,625 PT. KTF Indonesia 285 144 355 (403) Boston Enterprise Partners 11,482 512 345 (7,408) Sidus FNH Corp. 18,222 4,732 16,474 (4,083)

KTF-CJ Music Contents Investment Fund (Centurion music 1) 10,126 50 621 (10) Sidus FNH-BENEX Cinema Fund 24,243 - 1,601 (5,649) KTF M&S Co., Ltd. 143,363 110,260 458,735 (49,122) KTF-DoCoMo Mobile Investment Fund 10,378 515 417 (116) KTF MUSIC Co., Ltd 30,156 8,901 33,786 (2,319) U MOBILE SDN. BHD. 307,425 106,809 27,314 (66,379) Shinhan-KTF mobilecard Co., Ltd. 1,509 93 34 (583) KT Data systems Co., Ltd. 41,861 29,334 58,905 527 1,646,253 694,280 2,044,932 (127,617)

2007 (in millions of Korean won)

Total Total Net Income Investee assets liabilities Revenue (loss) Korea Digital Satellite Broadcasting Co., Ltd. 513,708 341,515 387,393 38,199 KTF Technologies Co., Ltd. 164,591 110,715 455,996 10,905 KTFMhows Co., Ltd. 9,873 3,904 15,077 741 Harex Info Tech., Ltd. 3,544 1,573 5,626 (1,589) Korea IT Fund 332,476 - 33,644 22,710 ENtoB Corp. 64,663 40,494 553,608 2,653 PT. KTF Indonesia 545 69 359 (197) Boston Enterprise Partners 18,832 512 1,319 (2,215) Sidus FNH Corp. 27,439 9,868 22,604 478

KTF-CJ Music Contents Investment Fund (Centurion music 1) 10,133 112 - 8 Sidus FNH-BENEX Cinema Fund 30,043 151 1,150 (209) KTF M&S Co., Ltd. 100,057 17,831 103,720 (16,622) KTF-DoCoMo Mobile Investment Fund 10,083 104 - (20) KTF MUSIC Co., Ltd. 35,723 12,144 26,800 (12,820) 1,321,710 538,992 1,607,296 42,022

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

7. Property and Equipment

Changes in property and equipment for the years ended December 31, 2008 and 2007, are as follows:

2008 (in millions of Korean won)

Land Buildings Structures Machinery

Balance as of January 1, 2008 119,032 265,159 74,753 3,490,305 Acquisition 8 38,015 12 7,359 Disposal (298) (1,004) (663) (41,911) Depreciation - (13,081) (4,116) (878,702) Impairment - - - (18,827) Reclassification - 46,571 5,372 816,468 Balance as of December 31, 2008 118,742 335,660 75,358 3,374,692 Acquisition cost 118,742 413,800 111,884 9,410,439 Accumulated depreciation - (78,140) (36,526) (6,035,747)

2008 (in millions of Korean won)

Construction- Vehicles Others in-progress Total

Balance as of January 1, 2008 2,938 207,449 82,877 4,242,513 Acquisition 129 41,322 915,555 1,002,400 Disposal (63) (5,044) (12) (48,994) Depreciation (2,086) (113,768) - (1,011,753) Impairment - - - (18,827) Reclassification 966 80,291 (949,668) - Balance as of December 31, 2008 1,884 210,251 48,752 4,165,339 Acquisition cost 13,795 963,218 48,752 11,080,630 Accumulated depreciation (11,911) (752,967) - (6,915,291)

2007 (in millions of Korean won)

Land Buildings Structures Machinery

Balance as of January 1, 2007 119,301 270,126 72,099 3,481,712 Acquisition - 220 37 16,949 Disposal (231) (243) (1,073) (43,069) Depreciation - (11,038) (3,826) (927,097) Impairment - - - - Reclassification (38) 6,094 7,516 961,810 Balance as of December 31, 2007 119,032 265,159 74,753 3,490,305 Acquisition cost 119,032 331,296 107,362 9,198,985 Accumulated depreciation - (66,137) (32,609) (5,708,680)

34 / 35

2007 (in millions of Korean won)

What makes us a winner Construction- Vehicles Others in-progress Total

Balance as of January 1, 2007 1,751 176,601 94,854 4,216,444 Acquisition 128 2,744 1,091,685 1,111,763 Disposal (121) (1,182) - (45,919) Depreciation (1,043) (94,848) - (1,037,852) Impairment - - - - Reclassification 2,224 124,134 (1,103,662) (1,922) KTF 2008 Annual Report Balance as of December 31, 2007 2,939 207,449 82,877 4,242,514 Acquisition cost 13,752 959,658 82,877 10,812,962 Accumulated depreciation (10,813) (752,209) - (6,570,448)

In accordance with the lease contracts, the Company has to dismantle and remove certain telecommunication equipment, and restore the site at the end of either the equipment’s useful life or lease period. The Company recorded the estimated site restoration costs of ￦38,908 million, included under ‘others’. Assumptions used for estimating site restoration costs are as follows:

Expected cash flows (before inflation) ￦66,069 million Average inflation 3.5% Expected cash flows (after inflation) ￦83,223 million Discount rate 5.51~11.18% Present Value of Restoration Reserve ￦38,908 million

As of December 31, 2008, the value of the Company’s land, as determined by the local government in Korea for property tax assessment purposes, was ￦181,810 million (2007: ￦142,527 million).

As of December 31, 2008, property and equipment are insured against fire and other casualty losses for up to ￦1,122,353 million.

For the year ended December 31, 2008, the Company assessed the potential impairment of certain 2G telecommunication equipment due to technical obsolescence. The carrying value of that equipment was reduced to the estimated realizable value, and an impairment loss amounting to ￦18,828 million was recorded as a reduction in the carrying value of the related assets and charged to current operations.

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

8. Intangible Assets

Changes in intangible assets for the years ended December 31, 2008 and 2007, are as follows:

2008 (in millions of Korean won)

Industrial property rights Facility usage rights Frequency usage rights

Balance as of January 1, 2008 4,444 9,458 834,319 Acquisition 877 146 - Disposal (261) (14) - Amortization (790) (1,841) (93,528) Reclassification 114 - - Balance as of December 31, 2008 4,384 7,749 740,791 Acquisition cost 7,418 18,897 1,216,223 Accumulated amortization (3,034) (11,148) (475,432)

2008 (in millions of Korean won)

Development costs Others Total

Balance as of January 1, 2008 1,338 25,743 875,302 Acquisition - 11,003 12,026 Disposal - (1,933) (2,208) Amortization (996) (8,971) (106,126) Reclassification 634 500 1,248 Balance as of December 31, 2008 976 26,342 780,242 Acquisition cost 3,438 53,140 1,299,117 Accumulated amortization (2,462) (26,798) (518,875)

2007 (in millions of Korean won)

Industrial property rights Facility usage rights Frequency usage rights

Balance as of January 1, 2007 3,476 7,597 927,847 Acquisition 1,720 3,783 - Disposal - (26) - Amortization (752) (1,896) (93,528) Reclassification - - - Balance as of December 31,2007 4,444 9,458 834,319 Acquisition cost 7,402 18,773 1,216,223 Accumulated amortization (2,958) (9,315) (381,904)

36 / 37

2007 (in millions of Korean won)

What makes us a winner Development costs Others Total Balance as of January 1, 2007 758 13,934 953,612 Acquisition 70 19,514 25,087 Disposal - (193) (219) Amortization (795) (7,512) (104,483) Reclassification 1,305 - 1,305 Balance as of December 31,2007 1,338 25,743 875,302 Acquisition cost 2,804 46,280 1,291,482 KTF 2008 Annual Report Accumulated amortization (1,466) (20,537) (416,180)

Details of significant intangible assets are as follows:

(in millions of Korean won)

Carrying value Description Remaining years for amortization 2008 2007

Frequency usage rights 2GHz Frequency use rights 740,791 834,319 7.92

Research and development cost incurred for the year ended December 31, 2008, amounted to ￦5,338 million (2007: ￦5,836 million), all of which were charged to current operations as ordinary research and development costs.

9. Loans to Employees

As of December 31, 2008, the Company has provided loans of ￦218 million (2007: ￦313 million) to its employees for purchase of the Company’s stock.

10. Present Value of Assets and Liabilities

Assets and liabilities measured at present value as of December 31, 2008 and 2007, are as follows:

2008 (in millions of Korean won)

Discount Nominal Present rate Period value value Differences

Trade accounts and notes receivable 5.51% 2009 465,854 450,750 15,104 Current portion of other long-term accounts payable 9.93% 2009 130,000 128,723 1,277 Long-term trade accounts and notes receivable 5.51% 2010~2011 235,065 213,071 21,995 Other long-term accounts payable 9.93% 2010~2011 320,000 295,732 24,268

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

2007 (in millions of Korean won)

Discount Nominal Present rate Period value value Differences

Trade accounts and notes receivable 5.43% 2008 218,491 214,600 3,892 Current portion of other long-term accounts payable 9.93% 2008 110,000 108,920 1,080 Long-term trade accounts and notes receivable 5.43% 2009 ~ 2010 46,659 42,512 4,147 Other long-term accounts payable 9.93% 2009 ~ 2011 450,000 406,288 43,712

11. Long-Term Debts

Long-term debts as of December 31, 2008 and 2007, consist of the following:

(in millions of Korean won)

Annual interest rates (%) as of December 31, 2008 2008 2007

Won currency debentures 44th non-guaranteed debenture 5.66 360,000 360,000 45th non-guaranteed debenture - - 320,000 47-1st non-guaranteed debenture 4.95 230,000 230,000 47-2nd non-guaranteed debenture 5.32 70,000 70,000 48th non-guaranteed debenture 5.31 200,000 200,000 51-2nd non-guaranteed debenture 6.41 70,000 - 52-2nd non-guaranteed debenture 6.64 100,000 - 53-1st non-guaranteed debenture 8.23 20,000 - 53-2nd non-guaranteed debenture 8.36 180,000 - 1,230,000 1,180,000 Foreign currency debentures 49th non-guaranteed debenture of US$ 175 million 3M LIBOR+1.50 220,063 - 50th non-guaranteed debenture of JP¥ 7,000 million 3M TIBOR+1.60 97,572 - 51-1st non-guaranteed debenture of US$ 95 million 3M LIBOR+1.60 119,462 - 52-1st non-guaranteed debenture of US$ 99 million 6.20 100,000 - 537,098 - 1,767,098 1,180,000 Less: Current portion (590,000) (320,000) Discount on debentures (4,026) (963) 1,173,071 859,037 Foreign currency loans Korea Development Bank of US$ 70 million 3M LIBOR+2.00 88,025 - Bank of Communications of US$ 30 million 3M LIBOR+2.00 37,725 - 125,750 - Less: Current portion (37,725) - 88,025 -

38 / 39

The payment schedule of debentures and long-term borrowings is as follows:

(in millions of Korean won) What makes us a winner Long-term Debentures borrowing Total

2009 590,000 37,725 627,725 2010 220,000 50,300 270,300 2011 787,097 37,725 824,822 Thereafter 170,000 - 170,000 1,767,097 125,750 1,892,847 KTF 2008 Annual Report

12. Other long-term accounts payable

Other long-term accounts payable was related to frequency usage rights granted in 2000 for CDMA IMT-2000 carrier license, for which the Company was required to pay ￦1,300,000 million by the Ministry of Knowledge Economy (former Ministry of Information and Communication) for these frequency usage rights. In 2001, the Company paid ￦650,000 million and should pay the remaining balance of ￦650,000 million payable over five years from 2007 to 2011, including applicable interest. Pursuant to the installment payment schedule, the amounts paid for the years ended December 31, 2008 and 2007, were ￦110,000 million and ￦90,000 million, respectively. Other long- term accounts payable as of December 31, 2008 and 2007, are stated at the net present value of future cash flows, calculated using the effective interest rate of 9.93% at the time of receipt of frequency usage license.

The annual maturities of other long-term accounts payable outstanding as of December 31, 2008, exclusive of discounts on other long-term accounts payales, are as follows:

(in millions of Korean won)

Amounts

2009 130,000 2010 150,000 2011 170,000 450,000

13. Reserves

The Company accrues a reserve for the call bonus mileage amounts, which the Company is obliged to pay to its customers, as a liability. Changes in reserve for call bonus mileage for the years ended December 31, 2008 and 2007, consist of the following:

(in millions of Korean won)

2008 2007

Beginning balance 8,380 16,264 Provisions 5,555 - Payments (4,237) (7,884) Ending balance 9,698 8,380 Less: Current portion (5,084) (4,332) 4,614 4,048

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

The reserve for call bonus mileage provided by the Company is effective for five years, while the call bonus mileage unused for five years will expire. The reserve for call bonus mileage the Company expects to be claimed in the next five years is as follows:

(in millions of Korean won)

Nominal amount Present value

2009 5,222 5,084 2010 2,707 2,495 2011 1,403 1,224 2012 728 600 2013 377 295 10,437 9,698

The Company accrued the reserve for call bonus mileage based on the discounted future estimated use amount computed using the weighted average borrowing interest rate. The reserve amount expected to be claimed within one year is recorded as current liabilities.

The changes in reserve for asset restoration in long-term reserves for the year ended December 31, 2008, is as follows:

2008 (in millions of Korean won)

Beginning balance - Increase 53,840 Decrease - Ending balance 53,840

14. Accrued Severance Benefits

Changes in accrued severance benefits for the years ended December 31, 2008 and 2007, consist of the following:

(in millions of Korean won)

2008 2007

Beginning balance 51,884 42,238 Severance payment (28,942) (9,854) Provision for severance benefits 18,267 18,438 Transferred from affiliated companies 4 62 41,213 51,884 Less: Deposits to National Pension Service (147) (268) 41,066 51,616

40 / 41

15. Monetary Assets and Liabilities Denominated in Foreign Currencies

What makes us a winner As of December 31, 2008 and 2007, monetary assets and liabilities denominated in foreign currencies, excluding those disclosed elsewhere in the notes to financial statements, are as follows:

(in millions of Korean won, and in thousands of foreign currency)

2008 2007

Foreign Currency Korean won Foreign Currency Korean won

Accounts receivable US$ 48 60 US$ 58 54 Accounts payable US$ 510 641 US$ 3,231 3,031 KTF 2008 Annual Report Other accounts payable US$ 1,183 1,488 US$ 11,709 10,986 EUR 15 26 EUR 24 33 GBP 1 2 - - CNY 6 1 - - HKD 17 3 - - JP¥ - - JP¥ 22,600 188 Long-term debentures US$ 68,539 337,688 - - JP¥ 6,976,214 97,241 - - Long-term borrowings US$ 100,000 125,750 - -

16. Capital Stock

The Company is authorized to issue 400 million shares of common stock at ￦5,000 par value per share. As of December 31, 2008, the total number of common shares issued and outstanding is 188,274,091 (2007: 192,722,091).

The retirement of 4,448,000 shares of treasury stock was approved at the Board of Directors’ meeting on April 11, 2008, and those shares of treasury stock were retired on July 21, 2008.

17. Capital Adjustments

The Company has retained 50,882 treasury shares (2007: 61,334 shares) of its common stock as of December 31, 2008. The Company intends either to provide these treasury shares to employees and directors as compensation, or to sell them in the near future.

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

18. Retained Earnings

Retained earnings as of December 31, 2008 and 2007, consist of the following:

(in millions of Korean won)

2008 2007

Statutory reserve Legal reserve 43,194 43,194 Voluntary reserve Reserve for business expansion 1,373,051 1,350,000 1,416,245 1,393,194

The Commercial Code of the Republic of Korea requires the Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid until such reserve equals 50% of its issued capital stock. The reserve is not available for the payment of cash dividends, but may be transferred to capital stock through an appropriate resolution of the Company’s Board of Directors or used to reduce accumulated deficit, if any, with the ratification of the Company’s majority shareholders.

19. Stock Options

The Company granted stock options to certain executives including the Chief Executive Officer, directors and outside directors. The details of the stock options granted as of December 31, 2008, are as follows:

1st grant 2nd grant 3rd grant 4th grant

Grant date March 29, 2001 March 25, 2002 Sept. 8, 2003 Marc 4, 2005 Grantee Former CEO Directors CEO, Directors , Directors , Outside directors Outside directors Number of shares granted 18,000 44,800 629,500 128,800 Exercise price per share ￦ 41,273 ￦ 45,178 ￦ 30,000 ￦ 30,700 Settlement Equity settled type Equity settled type Equity settled type Equity settled type Exercise period March 30, 2004 March 26, 2005 Sept.9, 2005 March 5, 2007 ~ March 29, 2009 ~ March 25, 2010 ~ Sept.8, 2010 ~ March 4, 2012

1st grant 2nd grant 3rd grant 4th grant

Number of shares granted 18,000 44,800 629,500 128,800 Number of shares cancelled - (308,587) - Number of shares settled or forfeited (18,000) (16,200) (15,159) (18,683) Number of shares as of December 31, 2008 - 28,600 305,754 110,117

The Company values stock options granted based on the fair value method. Total compensation expense of ￦4,088 million was allocated over the vesting period and there was no compensation expense charged to operations for the year ended December 31, 2008. The cumulative amount for stock compensation costs accounted for as capital adjustment as of December 31, 2008, is ￦4,088 million.

42 / 43

Details of stock grants to chief executive officer and outside director from 2007, are as follows:

1st grant 2nd grant What makes us a winner Grant date June 20, 2007 June 20, 2007 Grantee CEO, Outside director CEO, Outside director Estimated number of shares granted 10,505 17,120 Vesting conditions Service requirement: six months Service requirement: six months Non-market performance condition: Non-market performance condition: achievement of performance achievement of performance Fair value at grant date ￦29,300 per share ￦29,300 per share KTF 2008 Annual Report The Company values stock grants using the fair value method. The Company settled the 1st stock grant with treasury stock, and recognized compensation cost of ￦502 million for the year ended December 31, 2008.

20. Operating Expenses

Operating expenses for the years ended December 31, 2008 and 2007, consist of the following:

(in millions of Korean won)

2008 2007

Salaries and wages 184,702 179,073 Severance benefits 18,267 18,439 Employee fringe benefits 33,833 32,066 Rental expenses 162,352 157,796 Commissions expenses 569,671 526,445 Depreciation 1,011,753 1,037,852 Amortization 106,126 104,483 Taxes and dues 29,700 37,755 Interconnection charges 824,545 724,237 Leased line charges 375,298 386,542 Research and development costs 5,338 5,836 Sales commissions 1,557,946 1,239,354 Sales promotional expenses 720,504 450,867 Advertising expenses 108,560 127,729 Bad debt expense 45,214 45,467 Water and electricity 76,617 75,461 Communications 30,802 29,107 Repairs and maintenance 67,749 72,853 Cost of PCS handset sales 1,861,822 1,500,862 Others 77,785 69,054 7,891,839 6,852,421

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

Cost of PCS handset sales for the years ended December 31, 2008 and 2007, consists of the following:

(in millions of Korean won)

2008 2007

Beginning balance of inventories 123,236 130,252 Cost of PCS handset purchased 1,953,043 1,498,679 Transfer to other accounts (4,091) (4,833) Ending balance of inventories (210,366) (123,236) Cost of PCS handset sales

21. Income Taxes

Details of income tax expense for the years ended December 31, 2008 and 2007, are as follows:

(in millions of Korean won)

2008 2007

Current income taxes (including additional income tax and tax refunds) 77,892 72,514 Deferred income tax from temporary differences 1 (56,116) (29,737) Income tax expense 21,776 42,777

1 Details of deferred income taxes from temporary differences for the years ended December 31, 2008 and 2007, are as follows:

(in millions of Korean won)

2008 2007

Beginning balance of deferred income tax assets 97,455 70,544 Increase in beginning balance of deferred income tax 4,555 - assets based on Korea Accounting Institute Opinion 06-2 Ending deferred income tax assets (124,041) (97,455) Deferred income taxes from tax credit (40,660) (3,357) Changes in deferred income taxes charged directly to the shareholders’ equity 6,576 522 Deferred income taxes (56,115) 29,736

The reconciliation between net income before income tax and income tax expense for the years ended December 31, 2008 and 2007, are as follows:

(in millions of Korean won)

2008 2007

Net income before income tax 186,355 286,922 Income tax based on statutory rate 52,217 78,890 Adjustments 2 (29,441) (36,113) Income tax expense 21,776 42,777 Effective tax rates (Income tax over net income before tax) 11.69% 14.91%

2 Details of adjustments for the years ended December 31, 2008 and 2007, are as follows:

44 / 45

(in millions of Korean won)

2008 2007 What makes us a winner

Non-temporary difference 10,429 1,334 Changes in unrecognized deferred income tax assets (liabilities) (liabilities) relating to equity method investments 24,378 6,062 Tax credit for investment (83,113) (37,192) Effect of change in the statutory tax rate 19,614 - Additional income tax and tax refund for prior years (909) (75) Other 159 (6,242) KTF 2008 Annual Report (29,441) (36,113)

Changes in the temporary differences and related deferred tax assets and liabilities for the years ended December 31, 2008 and 2007, are as follows:

2008 (in millions of Korean won)

Jan. 1, Final tax Dec. 31, Non- 2008 return Increase Decrease 2008 current current

Deductible temporary differences Allowance for doubtful accounts 173,010 172,455 126,392 172,455 126,392 126,392 - Inventories 11,100 11,100 7,955 11,100 7,955 7,955 - Impairment on long-term securities 12,543 12,234 - - 12,234 - 12,234 Available-for-sale securities 294 207 8,417 207 8,417 - 8,417 Equity method investments 22,650 22,738 109,765 4,147 128,355 - 128,355 Foreign currency translation - - 133,131 - 133,131 - 133,131 Accrued expenses 122,685 130,189 141,136 130,189 141,136 141,136 - Reserve for liabilities 8,380 8,380 131,462 8,380 131,462 106,838 24,624 Provision for severance benefits 36,249 36,249 11,210 13,304 34,156 - 34,156 Frequency usage rights 4,470 4,470 1,095 - 5,564 - 5,564 Property and equipment - - 72,668 - 72,668 - 72,668 Derivatives - - 13,031 - 13,031 - 13,031 Others 684 792 3,050 2,862 981 910 70 392,065 398,814 759,312 342,644 815,482 383,231 432,251 Less: Unrecognized as deferred income tax assets 3 22,651 22,738 109,765 4,147 128,355 - 128,355 Recognized as deferred income tax assets 369,414 376,076 649,547 338,497 687,127 383,231 303,896 Deferred income tax assets 101,589 103,421 159,599 92,742 66,857 Unrealized gains or losses from intercompany transactions Recognized as deferred income tax assets 16,562 16,562 29,760 16,562 29,760 29,760 - Deferred income tax assets (note 2) 4,555 4,555 7,765 7,765 -

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

2008 (in millions of Korean won)

Jan. 1, Final tax Dec. 31, Non- 2008 return Increase Decrease 2008 current current

Tax credit carried forward Tax credit carried forward 110,227 110,804 59,682 47,169 123,317 53,390 69,927 Less: Unrecognized as deferred income tax assets 22,991 23,568 - 23,568 - - - Recognized as deferred income tax assets 87,236 87,236 59,682 23,601 123,317 53,390 69,927 Deferred income tax assets 70,325 70,325 110,985 48,051 62,935 Total deferred income tax assets 176,469 178,301 278,349 148,558 129,792 Taxable temporary differences Accrued interest income (706) (706) 706 1,650 (1,650) (1,650) - Equity method investments (608) (608) 608 5,991 (5,991) - (5,991) Depreciation (4,456) (4,456) 1,771 - (2,684) - (2,684) Available-for-sale securities (7,902) (5,723) 5,723 181 (181) - (181) Derivatives (1,971) (1,971) - 146,572 (148,542) - (148,542) Others - (12,616) 33,468 62,296 (41,444) (22,537) (18,907) (15,643) (26,080) 42,276 216,690 (200,492) (24,187) (176,305) Less: Unrecognized as deferred income tax liabilities 3 (608) (608) 608 5,991 (5,991) - (5,991) Recognized as deferred income tax liabilities (15,035) (25,471) 41,668 210,699 (194,501) (24,187) (170,314) Total deferred income tax liabilities (4,134) (7,005) (43,322) (5,853) (37,469) Deferred income tax assets, net 172,335 171,297 235,027 142,705 92,323

2007 (in millions of Korean won)

Jan. 1, Final tax Dec. 31, Non- 2007 return Increase Decrease 2007 Current current

Deductible temporary differences Allowance for doubtful accounts 131,354 131,354 173,010 131,354 173,010 173,010 - Inventories 15,609 15,609 11,100 15,609 11,100 11,100 - Available-for-sale securities 11,040 11,040 1,799 - 12,839 - 12,839 Equity method investments 4,149 4,149 18,666 165 22,650 - 22,650 Accrued expenses 69,152 69,152 122,685 69,152 122,685 122,685 - Reserve for liabilities 16,265 16,265 8,380 16,265 8,380 4,332 4,048 Provision for severance benefits 25,727 25,727 10,523 - 36,250 - 36,250 Frequency usage rights 3,375 3,375 1,095 - 4,470 - 4,470 Others 4,479 4,132 426 3,875 683 306 377 281,150 280,803 347,684 236,420 392,067 311,433 80,634

46 / 47

2007 (in millions of Korean won)

What makes us a winner Jan. 1, Final tax Dec. 31, Non- 2007 return Increase Decrease 2007 current current

Less: Unrecognized as deferred income tax assets 3 4,149 4,149 18,667 165 22,651 - 22,651 Recognized as deferred income tax assets 277,000 276,653 329,016 236,254 369,415 311,432 57,983 Deferred income tax assets 76,175 76,079 101,589 85,644 15,945 Tax credit carried forward Tax credit carried forward 100,378 101,395 51,525 42,693 110,227 43,750 66,477 KTF 2008 Annual Report Less: Unrecognized as deferred income tax assets 16,905 17,922 5,069 - 22,991 - 22,991 Recognized as deferred income tax assets 83,473 83,473 46,456 42,693 87,236 43,750 43,486 Deferred income tax assets 66,968 66,968 70,325 35,000 35,325 Total deferred income tax assets 143,143 143,048 171,915 120,644 51,271 Taxable temporary differences Accrued interest income (2,922) (3,256) (706) (3,256) (706) (706) - Equity method investments (768) (768) 160 - (608) - (608) Depreciation (6,234) (6,234) - (1,778) (4,456) - (4,456) Available-for-sale securities (9,791) (7,177) (724) - (7,901) - (7,901) Derivatives (1,494) (1,494) - 476 (1,970) - (1,970) Others (2,922) (3,256) (706) (3,256) (706) (706) - (21,209) (18,929) (1,270) (4,558) (15,641) (706) (14,935) Less: Unrecognized as deferred income tax liabilities 3 (768) (768) 160 - (608) - (608) Recognized as deferred income tax liabilities (20,441) (18,161) (1,430) (4,558) (15,033) (706) (14,327) Total deferred income tax liabilities (5,621) (4,994) (4,134) (194) (3,940) Deferred income tax assets, net 137,522 138,053 167,781 120,450 47,331

3 As of December 31, 2008, deferred income tax assets resulting from equity method investments are not recorded because the Company’s ability to realize those deferred income tax assets is uncertain.

Changes in the temporary differences and related deferred tax assets and liabilities for the years ended December 31, 2008 and 2007, are as follows: (in millions of Korean won)

2008 2007

Gain on valuation of available-for-sale securities 1,812 (2,092) Gain on valuation of derivatives 2,672 - 4,484 (2,092)

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

Balances of income tax payable and prepaid income tax before offsetting as of December 31, 2008 and 2007, are as follows:

(in millions of Korean won)

2008 2007

Income tax payable 78,801 72,589 Prepaid income tax (15,537) (30,956) 63,264 41,633

During the year, as a result of the change in the statutory tax rate form 27.5% to 24.2% in 2009 and to 22 % thereafter, the balances of the deferred tax assets and liabilities have been recalculated.

The tax effect of cumulative temporary difference was calculated based on future tax rate of the fiscal year when temporary differences are expected to reverse. The 27.5% and 25% tax rates were used for temporary difference expected to reverse in year 2008 and thereafter, respectively. As a result, deferred tax assets were lower by ￦19,614 million as compared to the amount using the current tax rate of 27.5%.

22. Comprehensive Income

Comprehensive income for the years ended December 31, 2008 and 2007, consists of the following:

(in millions of Korean won)

2008 2007

Net income 164,579 244,144 Other comprehensive income and expense Loss on valuation of available-for-sale securities Tax effects: ￦3,904 (2007: ￦(-) 522 ) (11,939) (1,375) Loss on equity method investments No tax effects in 2008 and 2007 3,680 (161) Gain on equity method investments No tax effects in 2008 and 2007 1,443 (567) Gain on valuation of derivatives Tax effects: ￦2,672 (2007: Nil) (9,473) - Comprehensive income 148,290 242,041

23. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the year.

Basic earnings per share for the years ended December 31, 2008 and 2007, is calculated as follows:

(in millions of Korean won, except for per share amounts)

2008 2007

Net income attributable to common stocks 164,579 244,144 Weighted-average number of common stocks outstanding 189,991,699 194,948,875 Basic earnings per share 866 1,252

48 / 49

There has been no dilutive effect for the years ended December 31, 2008 and 2007.

What makes us a winner Non-dilutive potential common stocks as of December 31, 2008, are as follows:

Number of common Exercise period shares to be issued Stock options March 26, 2005 ~ March 25, 2010 28,600 Stock options Sept. 9. 2005 ~ Sept. 8. 2010 305,754 Stock options March 5, 2007 ~ March 4, 2012 110,117 Other share-based payments April 14, 2008 10,505

KTF 2008 Annual Report Other share-based payments April 14, 2009 17,120

24. Related Party Transactions

The parent company is KT Corporation which is the ultimate parent company and responsible for the consolidated financial statements.

2008

Parent company KT Corporation

Subsidiaries KTF Technologies Co., Ltd., PT.KTF Indonesia, KTFMhouse Co., Ltd., KTF M&S Co., Ltd., KTF MUSIC Co., Ltd. , Doremi Media Co., Ltd. Equity method investees Korea Digital Satellite Broadcasting Co., Ltd., Hares Info Tech Ltd., Korea IT Fund, ENtoB Corp, Boston Enterprise Partners, Sidus FNH Corp, KTF-CJ Music Contents Investment fund(Centurion music 1), SidusFNH-BENEX Cinema Fund, KTF-DoCoMo Mobile Investment Fund, U MOBILE SDN. BHD., Shinhan-KTF mobilecard Co., Ltd., KT Data systems Co., Ltd. Subsidiaries of the parent company KT Networks Co., Ltd., KT Hitel Co., Ltd., KT Powertel Co., Ltd., Korea Telecom Japan, KT Submarine Co., Ltd., KT Linkus Co., Ltd., KT Commerce, Inc., KT Rental Co., Ltd., KTCC Co., Ltd., NTC Co., Ltd., Internal Corporate Venture Fund, KTAI Co., Ltd., KTPI Co., Ltd., Olive Nine Co., Ltd., Telecop Service Co., Ltd., KT Capital Co., Ltd., KT FDS Corporation, NTT DoCoMo InC, and others

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

Significant transactions which occurred in the normal course of business with related companies during the years ended December 31, 2008 and 2007, and the related account balances outstanding as of December 31, 2008 and 2007, are summarized as follows:

2008 (in millions of Korean won)

Sales Purchases Receivables Payables

Parent company 756,002 443,880 194,092 52,750 Subsidiaries 406,026 593,915 2,252 73,478 Equity method investees 44 9,064 - 3,475 Subsidiaries of the parent company 28,033 64,510 1,353 7,782 Total 1,190,105 1,111,369 197,697 137,485

2007 (in millions of Korean won)

Sales Purchases Receivables Payables

Parent company 761,299 451,668 212,689 47,850 Subsidiaries 140,576 430,291 1,289 109,420 Equity method investees 5 1,837 - 121 Subsidiaries of the parent company 14,315 32,760 2,038 4,357 Total 916,195 916,556 216,016 161,748

Revenues (in millions of Korean won)

Transactions 2008 2007 Parent company KT Corporation Interconnection charges & others 756,002 761,299 Subsidiaries KTF Technologies Co., Ltd. PCS revenues 1,121 138 KTFMhows Co., Ltd. PCS revenues 6,340 2,836 KTF M&S Co., Ltd. Sales of cell phone & others 398,556 137,601 Doremi Media Co., Ltd. PCS revenues 1 - KTF MUSIC Co., Ltd. PCS revenues 9 - Equity method investees Hares Info Tech Ltd. PCS revenues - 1 PT. KTF Indonesia Interest income & others - - ENtoB Corp. PCS revenues 1 1 Sidus FNH Corp. PCS revenues 4 4 Korea Digital Satellite Broadcasting Co., Ltd. PCS revenues 2 - KT Data Systems Co., Ltd. PCS revenues 37 -

50 / 51

Revenues (in millions of Korean won)

What makes us a winner Transactions 2008 2007

Subsidiaries of the parent company KT Networks Co., Ltd. Interconnection charges & others 18,243 12,267 KT Hitel Co., Ltd. PCS revenues & others 1,274 687 KT Powertel Co., Ltd. Interconnection charges & others 1,262 1,239 Korea Telecom Japan PCS revenues - 1 KT Linkus Co., Ltd. PCS revenues - 1

KTF 2008 Annual Report KT Commerce, Inc. PCS revenues 133 17 KT Rental Co., Ltd. and others PCS revenues & others 7,120 102 Total 1,190,105 916,194

Purchase (in millions of Korean won)

Transactions 2008 2007 Parent company KT Corporation Leased line charges & others 443,880 451,668 Subsidiaries PT. KTF Indonesia Commissions & others - 10 KTF Technologies Co., Ltd. Purchase of cell phone & others 304,361 358,150 KTFMhows Co., Ltd. Advertisements & others 11,592 10,805 KTF M&S Co., Ltd. Sales commissions & others 267,291 61,326 KTF MUSIC Co., Ltd. Commissions & others 10,671 - Equity method investees Korea Digital Satellite Broadcasting Co., Ltd. Commissions & others 288 435 Hares Info Tech Ltd. Commissions & others 711 1,402 ENtoB Corp. Commissions & others 6,142 - KT Data systems Co., Ltd. Commissions & others 1,924 - Subsidiaries of the parent company KT Networks Co., Ltd. Sales commissions & others 22,197 11,012 KT Hitel Co., Ltd. Commissions & others 8,441 16,940 KT Powertel Co., Ltd. Interconnection charges & others 1,576 907 KT Linkus Co., Ltd. Commissions & others 8 11 KT Commerce, Inc. Sales promotions & others 2,435 2,298 KT Telecop Service Co., Ltd. Commissions & others 105 67 Olive Nine Co., Ltd. Advertisements & others - 30 KT Rental Co., Ltd. and others Rent & others 29,747 1,494 Total 1,111,369 916,555

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

Details of receivables and payables with related parties as of December 31, 2008 and 2007, are as follows:

Receivables (in millions of Korean won)

Transactions 2008 2007 Parent company KT Corporation Trade accounts and notes receivable 194,092 212,689 Subsidiaries KTF Technologies Co., Ltd. Trade accounts and notes receivable 284 10 KTFMhows Co., Ltd. Trade accounts and notes receivable 1,836 518 KTF M&S Co., Ltd. Trade accounts and notes receivable 16 761 KTF MUSIC Co., Ltd. Other accounts receivable 115 - Subsidiaries of the parent company KT Networks Co., Ltd. Trade accounts and notes receivable 248 1,712 KT Hitel Co., Ltd. Trade accounts and notes receivable 3 95 KT Powertel Co., Ltd. Other accounts receivable 294 232 KOIS Inc. and others Trade accounts and notes receivable 808 - Total 197,696 216,017

Payables (in millions of Korean won)

Transactions 2008 2007 Parent company KT Corporation Trade accounts and notes payable 52,750 47,850 Subsidiaries KTF Technologies Co., Ltd. Trade accounts and notes payable 60,202 100,569 KTFMhows Co., Ltd. Other accounts payables & others 4,050 3,257 KTF M&S Co., Ltd. Other accounts payables & others 5,952 5,594 KTF MUSIC Co., Ltd. Other accounts payables & others 3,274 - Equity method investees Korea Digital Satellite Broadcasting Co., Ltd. Other accounts payable 25 62 Hares Info Tech Ltd. Other accounts payable 77 59 ENtoB Corp. Other accounts payable 1,299 - KT Data systems Co., Ltd. Other accounts payable 2,074 - Subsidiaries of the parent company KT Networks Co., Ltd. Other accounts payable 4,266 522 KT Hitel Co., Ltd. Other accounts payable 1,192 3,483 KT Powertel Co., Ltd. Other accounts payable & others 12 5 KT Commerce, Inc. Other accounts payable 1,866 307 KT Telecop Service Co., Ltd. Other accounts payable 2 2 KT Rental Co., Ltd. and others Other accounts payable & others 443 38 Total 137,484 161,748

52 / 53

Compensation for key management consists of:

(in millions of Korean won) What makes us a winner 2008 2007

Short-term salaries 556 606 Post retirement benefits 285 239 Share-based compensation 502 43 1,343 888

Key management refers to the directors who have significant control and responsibilities on the Company’s operations and business. KTF 2008 Annual Report

25. Derivatives

As of December 31, 2008, the Company has cross currency interest swap contracts with various banks to manage the exposure to changes in foreign currency exchange rates and interest rates with regard to the foreign currency debentures and loans in accordance with its foreign currency risk management policy.

Swap contracts outstanding as of December 31, 2008, are as follows:

(in millions)

Transaction amount Exchange Interest nominal rates(%) Disbursement Receipts contracts on contracts Maturities

Calyon corporation and investment Bank ￦ 66,150 US$ 70 945.00 4.88 2011.02.25 ANZ Corporation 33,075 US$ 35 945.00 4.76 2011.02.25 ABN AMRO BANK 28,335 US$ 30 944.50 4.97 2011.02.25 Hana Bank 18,912 US$ 20 945.60 4.52 2011.02.25 National Agricultural Cooperative Federation 18,900 US$ 20 945.00 4.52 2011.02.25 Korea Development Bank 66,220 US$ 70 946.00 4.87 2010.12.13 Bank of Tokyo-Mitsubishi UFJ 39,124 JPY 4,000 9.78 5.03 2011.04.28 Mizuho Corporate Bank., Ltd. 28,643 JPY 3,000 9.55 5.10 2011.04.28 DBS BANK Ltd. 51,400 US$ 50 1028.00 5.84 2011.06.20 Woori Investment & Securities 15,420 US$ 15 1028.00 5.82 2011.06.20 BNP Paribas 31,050 US$ 30 1035.00 5.88 2011.06.20 Woori Investment & Securities 31,380 US$ 30 1046.00 5.77 2011.04.02

The Company applies the cash flow hedge accounting and is exposed to fluctuations in cash flows up to June 20, 2011. Total accumulated other comprehensive expense recognized under the cash flow hedge amounts to ￦12,145 million, of which ￦213 million is expected to be recognized as income within 12 months from December 31, 2008.

As of December 31, 2008, the Company has the right to exercise the put option relating to PT. Mobile-8 securities listed on the Indonesia Stock Exchange after January 1, 2009. The unrealized gain of ￦12,569 million is charged to current operations as this contract does not meet the requirements for hedge accounting for financial statement purpose.

Notes to Non-Consolidated Financial Statements December 31, 2008 and 2007

26. Commitments and Contingencies

The Company has entered into an agreement relating to the resale of PCS with KT Corporation. As compensation for providing telecommunications network, the Company receives certain amount by multiplying outgoing call generated from KT Corporation’s subscribers by the agreed rate per minute.

With regard to its 2G business, the Company is required to pay a certain portion of its related revenues to the Ministry of Knowledge Economy (former the Ministry of Information and Communication). As of December 31, 2008, accrued expenses are ￦12,019 million(2007: ￦21,022 million).

As of December 31, 2008, the Company has bank overdraft agreement with two banks amounting to ￦100,000 million.

The Company has local credit agreements of up to ￦910,000 million with several banks.

As of December 31, 2008, the Company is either a defendant or a plaintiff in various legal proceedings arising from the normal course of business. The aggregate amounts of cases with the Company as the defendant and the plaintiff amounted to approximately ￦5,917 million in 18 cases, and ￦2,110 million in 6 cases, respectively, as of December 31, 2008. The Company believes that although the outcome of these cases is uncertain, they would not result in a material ultimate loss for the Company. Accordingly, no provision for potential losses arising from these cases is reflected in the accompanying financial statements.

27. Value Added Information

Value added information for the years ended December 31, 2008 and 2007, consists of the following:

(in millions of Korean won)

2008 2007

Salaries and wages 184,259 178,544 Severance benefits 18,267 18,439 Employee fringe benefits 33,833 32,066 Rental expenses 162,352 157,796 Depreciation 1,011,753 1,037,852 Amortization 106,126 104,483 Taxes and dues 29,700 37,755 1,546,290 1,566,935

28. Employee Welfare

Employee welfare through various programs spent by the Company for the years ended December 31, 2008 and 2007, totaled ￦33,833 million and ￦32,066 million, respectively.

54 / 55

29. Supplemental Cash Flow Information

What makes us a winner Significant transactions not affecting cash flows for the years ended December 31, 2008 and 2007, are as follows:

(in millions of Korean won)

2008 2007

Increase in machinery due to transfer from construction-in-progress 819,995 961,809 Reclassification of current portion of debenture 590,000 320,000 Reclassification of current portion of other accounts payable 130,000 110,000 KTF 2008 Annual Report Retirement of treasury stock 126,948 94,070 Recognition of assets restoration costs 38,908 -

30. Interim Results

Operating results for the three-month periods ended December 31, 2008 and 2007, are as follows:

(in millions of Korean won, except per share amounts)

4th quarter of 2008 4th quarter of 2007

Sales 1,950,241 1,928,744 Net income 101,907 53,051 Earnings per share 541 275

31. Subsequent Events

On January 20, 2009, the Company entered into a merger contract with its parent company, KT Corporation. The merger is to be approved on March 27, 2009, by the shareholders. The Company plans to merge with KT Corporation on May 18, 2009.

Report of Independent Accountants’ Review of Internal Accounting Control System

To the President of KT Freetel Co., Ltd.

We have reviewed the accompanying management’s report on the operations of the Internal Accounting Control System (“IACS”) of KT Freetel Co., Ltd.(the “Company”) as of December 31, 2008. The Company’s management is responsible for designing and operating IACS and for its assessment of the effectiveness of IACS. Our responsibility is to review the management’s report on the operations of the IACS and issue a report based on our review. The management’s report on the operations of the IACS of the Company states that “based on its assessment of the operations of the IACS as of December 31, 2008, the Company’s IACS has been designed and is operating effectively as of December 31, 2008, in all material respects, in accordance with the IACS standards established by the Internal Accounting Control System Operations Committee (IACSOC) of the Korea Listed Companies Association.”

Our review was conducted in accordance with the IACS review standards established by the Korean Institute of Certified Public Accountants. Those standards require that we plan and perform, in all material respects, the review of management’s report on the operations of the IACS to obtain a lower level of assurance than an audit. A review is to obtain an understanding of a company’s IACS and consists principally of inquiries of management and, when deemed necessary, a limited inspection of underlying documents, which is substantially less in scope than an audit.

A company’s IACS is a system to monitor and operate those policies and procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the Republic of Korea. Because of its inherent limitations, IACS may not prevent or detect a material misstatement of the financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on our review, nothing has come to our attention that causes us to believe that management’s report on the operations of the IACS, referred to above, is not presented fairly, in all material respects, in accordance with the IACS standards established by IACSOC.

Our review is based on the Company’s IACS as of December 31, 2008, and we did not review management’s assessment of its IACS subsequent to December 31, 2008. This report has been prepared pursuant to the Acts on External Audit for Stock Companies in Korea and may not be appropriate for other purposes or for other users.

Samil PricewaterhouseCoopers February 24, 2009

56 / 57

Report on the Operations of the Internal Accounting Control System

To the Board of Directors and Audit Committee of KT Freetel Co., Ltd.

What makes us a winner I, as the Internal Accounting Control Officer (“IACO”) of KT Freetel Co., Ltd. (“the Company”), assessed the status of the design and operations of the Company’s internal accounting control system (“IACS”) for the year ended December 31, 2008.

The Company’s management including IACO is responsible for designing and operating IACS. I, as the IACO, assessed whether the IACS has been effectively designed and is operating to prevent and detect any error or fraud which may cause any misstatement of the financial statements, for the purpose of establishing the reliability of financial reporting and the preparation of financial statements for external purposes. I, as the IACO, applied the IACS standard for the assessment of design and operations of the IACS.

KTF 2008 Annual Report Based on the assessment on the operations of the IACS, the Company’s IACS has been effectively designed and is operating as of December 31, 2008, in all material respects, in accordance with the IACS standards.

January 22, 2009

Wha Joon Cho Internal Accounting Control System Officer

Haing Min Kwon Chief Executive Officer