13 Apr 2006 14:35
{AUDIT REPORT}SK TELECOM CO., LTD.NON-CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004AND INDEPENDENT AUDITORS' REPORTIndependent Auditors' ReportEnglish Translation of a Report Originally Issued in KoreanTo the Stockholders and Board of Directors ofSK Telecom Co., Ltd.We have audited the accompanying non-consolidated balance sheets of SK TelecomCo., Ltd. (the "Company") as of December 31, 2005 and 2004, and the relatednon-consolidated statements of income, appropriations of retained earnings, andcash flows for the years then ended (all expressed in Korean Won). Thesefinancial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour audits.We conducted our audits in accordance with auditing standards generallyaccepted in the Republic of Korea. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, ona test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.In our opinion, such financial statements referred to above presents fairly, inall material respects, the financial position of the Company as of December 31,2005 and 2004, and the results of its operations, the appropriations of itsretained earnings and its cash flows for the years then ended, in conformitywith accounting principles generally accepted in the Republic of Korea.Our audits also comprehended the translation of the Korean Won amounts intoU.S. dollar amounts and, in our opinion, such translation has been made inconformity with the basis stated in Note 2(a). Such U.S. dollar amounts arepresented solely for the convenience of readers outside of the Republic ofKorea. Accounting principles and auditing standards and their application in practicevary among countries. The accompanying financial statements are not intendedto present the financial position, results of operations and cash flows inaccordance with accounting principles and practices generally accepted incountries other than the Republic of Korea. In addition, the procedures andpractices utilized in the Republic of Korea to audit such financial statementsmay differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for useby those knowledgeable about Korean accounting procedures and auditingstandards and their application in practice.February 3, 2006Notice to ReadersThis report is effective as of February 3, 2006, the auditors' report date. Certain subsequent events or circumstances may have occurred between theauditors' report date and the time the auditors' report is read. Such eventsor circumstances could significantly affect the accompanying financialstatements and may result in modification to the auditors' report. SK TELECOM CO., LTD. NON-CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2005 AND 2004 Translation into U.S. dollars (Note Korean Won 2) December December 31, 31, December 31, December 31, ASSETS 2005 2004 2005 2004 (In millions) (In thousands) CURRENT ASSETS : Cash and cash equivalents (Note 11) W 151,766 W 112,966 $150,263 $111,848 Short-term financial instruments (Note 18) 73,062 7,700 72,339 7,624 Trading securities (Notes 2 and 3) 745,360 640,389 737,980 634,049 Current portion of long-term investment securities (Notes 2 and 3) - 3,600 - 3,564 Accounts receivable - trade (net of allowance for doubtful accounts of W121,319 million at December 31, 2005 and W58,248 million at December 31, 2004) (Notes 2, 11 and 21) 1,607,596 1,562,774 1,591,679 1,547,301 Short-term loans (net of allowance for doubtful accounts of W648 million at December 31,2005 and W 562 million at December 31, 2004) (Notes 2, 5 and 21) 64,150 55,613 63,515 55,062 Accounts receivable - other (net of allowance for doubtful accounts of W14,246 million at December 31, 2005 and W13,665 million at December 31, 2004) (Notes 2, 11 and 21) 1,333,238 1,365,226 1,320,038 1,351,709 Inventories (Note 2) 5,986 10,961 5,927 10,852 Prepaid expenses 101,274 80,768 100,271 79,968 Deferred income tax assets, net (Notes 2 and 16) 61,152 - 60,547 - Accrued income and other 28,901 14,348 28,614 14,206 Total - Current Assets 4,172,485 3,854,345 4,131,173 3,816,183 NON-CURRENT ASSETS : Property and equipment, net (Notes 2, 6, 20 and 21) 4,595,883 4,605,253 4,550,379 4,559,656 Intangible assets, net (Notes 2, 7 and 24) 3,386,547 3,448,619 3,353,017 3,414,474 Long-term investment securities (Notes 2 and 3) 1,203,333 923,537 1,191,419 914,393 Equity securities accounted for using the equity method (Notes 2 and 4) 925,904 826,246 916,737 818,065 Long-term loans (net of allowance for doubtful accounts of W 23,737 million at December 31,2005 and W 19,173 million at December 31, 2004) (Notes 2, 5 and 21) 14,204 28,284 14,063 28,004 Guarantee deposits (net of allowance for doubtful accounts of W 311 million at December 31, 2005 and nil at December 31, 2004) (Notes 2, 11 and 21) 122,846 242,387 121,630 239,987 Long-term deposits and other (Note 18) 100,474 92,034 99,479 91,124 Total - Non-Current Assets 10,349,191 10,166,360 10,246,724 10,065,703 TOTAL ASSETS # W14,521,676 W14,020,705 $14,377,897 $13,881,886 (Continued) SK TELECOM CO., LTD. NON-CONSOLIDATED BALANCE SHEETS (CONTINUED) December 31, 2005 AND 2004 Korean Won Translation into U.S. dollars (Note 2) December December 31, 31, December 31, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004 2005 2004 (In millions) (In thousands) CURRENT LIABILITIES : Accounts payable (Notes 11 and 21) W971,558 W1,070,588 $961,939 $1,059,988 Short-term borrowings - 400,000 - 396,040 Income taxes payable (Note 16) 366,579 267,797 362,950 265,146 Accrued expenses (Notes 2 and 22) 362,178 378,303 358,592 374,557 Dividend payable 298 263 295 260 Withholdings 205,060 188,197 203,030 186,334 Current portion of long-term debt, net (Notes 8 and 10) 809,490 498,278 801,475 493,345 Current portion of subscription deposits (Note 9) 14,875 13,405 14,728 13,272 Other 17,230 42,880 17,058 42,454 Total Current Liabilities - 2,747,268 2,859,711 2,720,067 2,831,396 LONG-TERM LIABILITIES : Bonds payable, net (Notes 2 and 8) 2,314,208 2,891,843 2,291,295 2,863,211 Subscription deposits (Note 9) 23,770 31,440 23,535 31,129 Long-term payables - other (net of present value discount of W 58,413million at December 31,2005 and W 72,663 million at December 31, 2004) (Note 2) 591,587 577,337 585,730 571,621 Obligations under capital lease (Notes 2 and 10) 10,204 - 10,103 - Accrued severance indemnities, net (Note 2) 64,029 75,409 63,395 74,662 Deferred income tax liabilities, net (Notes 2 and 16) 409,715 323,096 405,658 319,897 Long-term currency swap (Notes 2 and 23) 73,450 96,743 72,723 95,785 Guarantee deposits received and other (Note 21) 29,565 38,034 29,272 37,656 Total Long-Term Liabilities - 3,516,528 4,033,902 3,481,711 3,993,961 Total Liabilities - 6,263,796 6,893,613 6,201,778 6,825,357 STOCKHOLDERS' EQUITY : Capital stock (Notes 1 and 12) 44,639 44,639 44,197 44,197 Capital surplus (Notes 2 and 12) 2,966,198 2,983,166 2,936,830 2,953,630 Retained earnings (Note 13) : Appropriated 5,470,701 4,733,936 5,416,536 4,687,066 Unappropriated 1,799,160 1,422,772 1,781,347 1,408,685 Capital adjustments : Treasury stock (Note 14) (2,047,105) (2,047,105) (2,026,837) (2,026,837) Unrealized profit (loss) on valuation of long-term investment securities, net (Notes 2, 3 and 16) (42,134) (89,842) (41,717) (88,952) Equity in capital adjustments of affiliates, net (Notes 2, 4 and 16) 77,119 124,145 76,355 122,916 Loss on valuation of currency swap, net (Notes 2, 16 and 23) (14,178) (49,452) (14,038) (48,962) Stock options (Notes 2 and 15) 3,480 4,833 3,446 4,786 Total Stockholders' Equity - 8,257,880 7,127,092 8,176,119 7,056,529 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY # W14,521,676 W14,020,705 $14,377,897 $13,881,886 See accompanying notes to non-consolidated financial statements. SK TELECOM CO., LTD. NON-CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2005 AND 2004 Translation into U.S. Korean Won dollars (Note 2) 2005 2004 2005 2004 (In millions (In thousands except for per share except for per share data) data) OPERATING REVENUE (Notes 2 and 21) W10,161,129 W9,703,681 $10,060,524 $9,607,605 OPERATING EXPENSES (Notes 2 and 21) Labor cost (380,383) (402,734) (376,617) (398,747) Commissions paid (2,895,214) (2,827,159) (2,866,549) (2,799,167) Depreciation and amortization (Notes 2, 6, 7 and 10) (1,512,919) (1,577,434) (1,497,940) (1,561,816) Network interconnection (935,217) (858,754) (925,957) (850,251) Leased line (392,834) (365,444) (388,945) (361,826) Advertising (260,699) (328,552) (258,118) (325,299) Research and development (Note 2) (204,698) (203,741) (202,671) (201,724) Rent (179,726) (167,671) (177,947) (166,011) Frequency usage (156,098) (143,047) (154,552) (141,631) Repair (128,311) (108,533) (127,041) (107,458) Cost of goods sold (12,372) (5,915) (12,250) (5,856) Other (449,088) (355,116) (444,640) (351,601) Sub-total (7,507,559) (7,344,100) (7,433,227) (7,271,387) OPERATING INCOME 2,653,570 2,359,581 2,627,297 2,336,218 OTHER INCOME : Interest income (Note 3) 54,988 68,319 54,444 67,643 Dividends 26,515 23,843 26,252 23,607 Commissions (Note 21) 33,331 32,843 33,001 32,518 Equity in earnings of affiliates (Notes 2 and 4) 55,943 53,825 55,389 53,292 Foreign exchange and translation gains (Note 2) 1,862 10,897 1,844 10,789 Reversal of allowance for doubtful accounts 437 283 433 280 Gain on disposal of investment assets (Notes 3 and 4) 196,522 1,312 194,576 1,299 Gain on disposal of property and equipment 4,645 2,054 4,599 2,034 Gain on foreign exchange transactions and valuation of - currency swap (Notes 2 and 23) 2,545 2,850 2,520 2,822 Other 33,005 40,903 32,678 40,497 Sub-total 409,793 237,129 405,736 234,781 (Continued) SK TELECOM CO., LTD. NON-CONSOLIDATED STATEMENTS OF INCOME (CONTINUED) YEARS ENDED DECEMBER 31, 2005 AND 2004 Translation into U.S. Korean Won dollars (Note 2) 2005 2004 2005 2004 (In millions (In thousands except for per share except for per share data) data) OTHER EXPENSES : Interest and discounts (W252,464) (W302,491) ($249,964) ($299,496) Donations (75,983) (19,796) (75,231) (19,600) Foreign exchange and translation losses (Note 2) (2,223) (6,248) (2,201) (6,186) Loss on foreign exchange transactions and valuation of currency swap (Notes 2 and 23) - (15,819) - (15,662) Equity in losses of affiliates (Notes 2 and 4) (90,801) - (89,902) - Loss on impairment of long-term investment securities (Notes 2 and 3) (1,793) (32,074) (1,775) (31,756) Loss on disposal of investment assets (Note 4) (2,265) (810) (2,243) (802) Loss on disposal of property, equipment and intangible assets (6,079) (18,344) (6,019) (18,162) Other (77,142) (85,350) (76,379) (84,506) Sub-total (508,750) (480,932) (503,714) (476,170) ORDINARY INCOME 2,554,613 2,115,778 2,529,319 2,094,829 INCOME BEFORE INCOME TAXES 2,554,613 2,115,778 2,529,319 2,094,829 PROVISION FOR INCOME TAXES (Notes 2 and 16) (683,233) (620,926) (676,468) (614,778) NET INCOME W1,871,380 W1,494,852 $1,852,851 $1,480,051 NET INCOME PER SHARE (In Korean Won and U.S. dollars) (Note 17) W25,421 W20,307 $25.169 $20.106 DILUTED NET INCOME PER SHARE (In Korean Won and U.S. dollars) (Note 17) W25,015 W20,137 $24.767 $19.938 See accompanying notes to non-consolidated financial statements. SK TELECOM CO., LTD. NON-CONSOLIDATED STATEMENTS OF APPROPRIATIONS OF RETAINED EARNINGS YEARS ENDED DECEMBER 31, 2005 AND 2004 Korean Won Translation into U.S. dollars (Note 2) 2005 2004 2005 2004 (In millions) (In thousands) RETAINED EARNINGS BEFORE APPROPRIATIONS Beginning of year W1,394 W1,534 $1,381 $1,519 Interim dividends (Note 19) (73,614) (73,614) (72,885) (72,885) Net income for the year 1,871,380 1,494,852 1,852,851 1,480,051 End of year 1,799,160 1,422,772 1,781,347 1,408,685 TRANSFER FROM VOLUNTARY RESERVES Reserve for research and manpower development (Note 13) 131,466 84,235 130,164 83,401 APPROPRIATIONS Reserve for research and manpower development (Note 13) (190,000) (130,000) (188,119) (128,713) Reserve for business expansion (Note 13) (1,150,000) (691,000) (1,138,614) (684,158) Cash dividends (Note 19) (588,914) (684,613) (583,083) (677,835) (1,928,914) (1,505,613) (1,909,816) (1,490,706) UNAPPROPRIATED RETAINED EARNINGS TO BE CARRIED FORWARD TO THE FOLLOWING YEAR W1,712 W1,394 $1,695 $1,380 See accompanying notes to non-consolidated financial statements. SK TELECOM CO., LTD. NON-CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005 AND 2004 Korean Won Translation into U.S. dollars (Note 2) 2005 2004 2005 2004 (In millions) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES : Net income W1,871,380 W1,494,852 $1,852,851 $1,480,051 Expenses not involving cash payments : Provision for severance indemnities 40,465 52,487 40,064 51,967 Depreciation and amortization 1,634,254 1,699,531 1,618,073 1,682,704 Allowance for doubtful accounts 106,130 34,797 105,079 34,452 Foreign translation loss 876 736 867 729 Loss on foreign exchange transactions and valuation of currency swap - 15,819 - 15,662 Equity in losses of affiliates 90,801 - 89,902 - Loss on impairment of long-term investment securities 1,793 32,074 1,775 31,756 Loss on disposal of investment assets 2,265 810 2,243 802 Loss on disposal of property, equipment and intangible assets 6,079 18,344 6,019 18,162 Amortization of discounts on bonds and other 49,283 45,254 48,796 44,807 Sub-total 1,931,946 1,899,852 1,912,818 1,881,041 Income not involving cash receipts : Foreign translation gain (143) (365) (142) (361) Reversal of allowance for doubtful accounts (437) (283) (433) (280) Equity in earnings of affiliates (55,943) (53,825) (55,389) (53,292) Gain on disposal of investment assets (196,523) (1,312) (194,576) (1,299) Gain on disposal of property and equipment (4,645) (2,054) (4,599) (2,034) Gain on foreign exchange transactions and valuation of currency swap (2,545) (2,850) (2,520) (2,822) Other (73) (2,535) (72) (2,509) Sub-total (260,309) (63,224) (257,732) (62,597) Changes in assets and liabilities related to operating activities : Accounts receivable - trade (149,119) (146,726) (147,643) (145,273) Accounts receivable - other 30,011 (566,411) 29,714 (560,803) Inventories 4,975 (3,114) 4,926 (3,083) Prepaid expenses 10,504 2,545 10,400 2,520 Accrued income and other (14,420) 633 (14,277) 627 Accounts payable (98,890) (46,886) (97,911) (46,422) Income taxes payable 90,245 (131,813) 89,351 (130,508) Accrued expenses (16,125) (22,941) (15,965) (22,714) Withholdings 16,863 10,737 16,696 10,631 Current portion of facility deposits 1,471 2,580 1,456 2,554 Advance receipts and other (25,649) 11,142 (25,395) 11,032 Deferred income taxes 4,511 80,797 4,466 79,997 Severance indemnity payments (21,985) (26,728) (21,767) (26,463) Deposits for group severance indemnities and other deposits (31,875) (16,389) (31,558) (16,226) Sub-total (199,483) (852,574) (197,507) (844,131) Net Cash Provided by Operating Activities 3,343,534 2,478,906 3,310,430 2,454,364 (Continued) SK TELECOM CO., LTD. NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2005 AND 2004 Translation into U.S. dollars Korean Won (Note 2) 2005 2004 2005 2004 (In millions) (In thousands) CASH FLOWS FROM INVESTING ACTIVITIES : Cash inflows from investing activities : Decrease in trading securities W W220,849 $- $218,662 Decrease in current portion of long-term investment securities 53,600 85,861 53,069 85,011 Decrease in short-term loans 60,258 86,359 59,661 85,504 Decrease in short-term financial instruments - 92,813 - 91,894 Decrease in long-term financial instruments - 50,000 - 49,505 Proceeds from sales of long-term investment securities 16,986 17,390 16,818 17,218 Proceeds from sales of equity securities accounted - - for using the equity method 296,911 2,710 293,971 2,683 Decrease in guarantee deposits 132,298 19,513 130,988 19,320 Decrease in other non-current assets 34,827 36,287 34,482 35,928 Proceeds from disposal of property and equipment 33,928 9,853 33,592 9,755 Proceeds from disposal of intangible assets 57 2,292 56 2,269 Sub-total 628,865 623,927 622,637 617,749 Cash outflows for investing activities : Increase in short-term financial instruments (55,361) - (54,813) - Increase of trading securities (104,973) - (103,934) - Increase in short-term loans (55,808) (49,892) (55,255) (49,398) Increase in long-term financial instruments (1,137) (60,003) (1,126) (59,409) Acquisition of long-term investment securities (309,215) (52,266) (306,153) (51,749) Acquisition of equity securities accounted for using the equity method (254,699) (130,240) (252,177) (128,950) Increase in long-term loans (3,571) (27,416) (3,536) (27,145) Increase in guarantee deposits and other non-current assets (96,365) (97,704) (95,411) (96,737) Acquisition of property and equipment (1,383,145) (1,570,002) (1,369,450) (1,554,457) Increase in intangible assets (188,676) (57,627) (186,808) (57,056) Sub-total (2,452,950) (2,045,150) (2,428,663) (2,024,901) Net Cash Used in Investing Activities (1,824,085) (1,421,223) (1,806,026) (1,407,152) (Continued) SK TELECOM CO., LTD. NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2005 AND 2004 Korean Won Translation into U.S. dollars (Note 2) 2005 2004 2005 2004 (In millions) (In thousands) Cash inflows from financing activities : Issuance of bonds W193,683 W1,205,727 W191,765 W1,193,789 Increase in short-term borrowings - 2,850 - 2,822 Other 24,392 13,496 24,151 13,362 Sub-total 218,075 1,222,073 215,916 1,209,973 Cash outflows for financing activities : Repayment of short-term borrowings (400,000) (328,669) (396,040) (325,415) Repayment of current portion of long-term debt (500,000) (1,370,036) (495,050) (1,356,471) Payment of dividends (758,192) (478,318) (750,685) (473,582) Decrease in facility deposits (7,670) (12,757) (7,594) (12,631) Acquisition of treasury stock - (2) - (2) Transaction of currency forward - (29) - (29) Other (32,862) (5,372) (32,536) (5,319) Sub-total (1,698,724) (2,195,183) (1,681,905) (2,173,449) Net Cash Used in Financing Activities (1,480,649) (973,110) (1,465,989) (963,476) NET INCREASE IN CASH AND CASH EQUIVALENTS 38,800 84,573 38,415 83,736 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 112,966 28,393 111,848 28,112 CASH AND CASH EQUIVALENTS AT END OF THE PERIOD W151,766 W112,966 $150,263 $111,848 See accompanying notes to non-consolidated financial statements. SK TELECOM CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2005 AND 2004 1. GENERALSK Telecom Co., Ltd. (the "Company") was incorporated in March 1984 under thelaws of Korea to engage in providing nationwide cellular telephonecommunication services in the Republic of Korea. The Company's common sharesand depositary receipts (DRs) are listed on the Stock Market of Korea Exchange(formerly "Korea Stock Exchange") and the New York and London Stock Exchanges,respectively. As of September 30, 2005, the Company's total issued shares areheld by the following : Percentage of Number of total shares shares issued (%) SK Group 18,748,452 22.79 POSCO Corp. 2,991,496 3.64 Institutional investors and other minority shareholders 51,874,348 63.04 Treasury stock 8,662,415 10.53 82,276,711 100.00 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe accompanying non-consolidated financial statements of the Company have beenprepared in accordance With Korean Financial Accounting Standards andStatements of Korean Accounting Standards ("SKAS") No, 1 through No. 17 (exceptfor No. 11 and No. 14). The accompanying non-consolidated financial statementswill be approved by the Company's board of directors on February 14, 2006. Significant accounting policies followed in preparing the accompanyingnon-consolidated financial statements are summarized as follows. a. Basis of PresentationThe accompanying non-consolidated statutory financial statements have beenprepared in the Korean language (Hangul) in conformity with the accountingprinciples generally accepted in the Republic of Korea ("Korean GAAP"). Certain accounting principles applied by the Company that conform withfinancial accounting standards and accounting principles in the Republic ofKorea may not conform with accounting principles generally accepted in othercountries. Accordingly, these financial statements are intended for use bythose who are informed about Korean accounting principles and practices. Theaccompanying non-consolidated financial statements have been condensed,restructured and translated into English with certain expanded descriptionsfrom the Korean language financial statements. Certain information included inthe Korean language financial statements, but not required for a fairpresentation of the Company's financial position, results of operations or cashflows, is not presented in the accompanying non-consolidated financialstatements.The official accounting records of the Company are maintained and expressed inKorean Won, the currency of the country in which the Company is incorporatedand operates. The translation of Korean Won amounts into U.S. dollar amountsare included solely for the convenience of readers outside of the Republic ofKorea and have been made at the rate of W1,010.0 to US$1, the Noon Buying Ratein the City of New York for cable transfers in Korean Won as certified forcustoms purposes by the Federal Reserve Bank of New York on the last businessday of the year ended December 31, 2005. Such translations into U.S. dollarsshould not be construed as representations that the Korean Won amounts could beconverted into U.S. dollars at the above or any other rate.b. Adoptions of New Statements of Korea Accounting Standards ("SKAS")On January 1, 2005, the Company adopted SKAS No.15 through No.17, which areeffective from the fiscal year beginning after December 31, 2004. The adoptionof such accounting standards did not materially affect the Company's financialstatements except as follows :Through 2004, the Company discontinued applying the equity method of accountingfor an investment when the investment is reduced to zero and did not providefor additional losses. Effective January 1, 2005, additional losses areprovided for to the extent that the Company has other investment assets relatedto the equity method investee, including preferred stock and long-termreceivables, pursuant to adoption of SKAS No.15, "Investments : EquityMethod". As a result of this accounting change, total assets as of December31, 2005 decreased by W4,706 million and ordinary income and net income for theyear ended December 31, 2005 decreased by W4,706 million (See Note 4).Through 2004, tax effects of temporary differences related to capitaladjustments were excluded in determining the deferred tax assets orliabilities. Effective January 1, 2005, such tax effects of temporarydifferences are included in determining the deferred tax assets or liabilities,pursuant to adoption of SKAS No. 16 "Income Taxes". Accordingly, adjustmentsmade directly to capital surplus or capital adjustments, which result intemporary differences, are recorded net of related tax effects. In addition,effective January 1, 2005, deferred income tax assets and liabilities whichwere presented on the balance sheet as a single non-current net number through2004, are separated into current and non-current portions. As a result ofadopting SKAS No. 16, total assets and total liabilities as of December 31,2005 increased by W61,152 million and W90,645 million, respectively, and totalstockholders' equity as of December 31, 2005 decreased by W29,493 million,which was directly reflected in capital surplus or capital adjustments (SeeNote 16).Through 2004, provisions were recorded at nominal value. Effective January 1,2005, provisions are recorded at the present value when the effect of the timevalue of money is material, pursuant to adoption of SKAS No. 17 "Provisions,Contingent Liabilities and Contingent Assets". SKAS No. 16 is prospectivelyapplied and as a result of adopting such accounting standard, total liabilitiesas of December 31, 2005 decreased by W7,415 million and ordinary income and netincome for the year ended December 31, 2005 increased by W5,376 million (SeeNote 22).Such newly adopted accounting standards are prospectively applied as allowed bySKAS No. 15 through No. 17. As a result, the non-consolidated balance sheet asof December 31, 2004 and the non-consolidated statement of income and cashflows for the year ended December 31, 2004, which are comparatively presentedherein, were not adjusted to reflect the effect of adoption of SKAS No. 15through No. 17.c. Allowance for Doubtful AccountsAllowance for doubtful accounts is provided based on the estimatedcollectibility of individual accounts and historical bad debt experience.d. InventoriesInventories, which consist mainly of replacement units for wirelesstelecommunication facilities and supplies for sales promotion, are stated atthe lower of cost or market value, with cost determined using the movingaverage method. During the year, perpetual inventory systems are used to valueinventories, which are adjusted to physical inventory counts performed atfiscal year end. When the market value of inventories is less than theacquisition cost, the carrying amount is reduced to the market value and anydifference is charged to current operations as operating expenses There was nosuch loss for the years ended December 31, 2005 and 2004.e. Securities (excluding securities accounted for using the equity method ofaccounting)Debt and equity securities are initially recorded at their acquisition costs(fair value of considerations paid) including incidental cost incurred inconnection with acquisition of the related securities and classified intotrading, available-for-sale and held-to-maturity securities depending on theacquisition purpose and nature.Trading securities are stated at fair value with gains or losses on valuationreflected in current operations. Securities classified as available-for-sale are reported at fair value. Unrealized gains or losses on valuation of available-for-sale securities areincluded in capital adjustments and the unrealized gains or losses arereflected in net income when the securities are sold or if an impairment isother than temporary. Equity securities are stated at acquisition cost if fairvalue cannot be reliably measured. If the declines in the fair value ofindividual available-for-sale securities below their acquisition or amortizedcost are other than temporary and there is objective evidence of impairment,write-downs of the individual securities are recorded to reduce the carryingvalue to their fair value. The related write-downs are recorded in currentoperations as a loss on impairment of investment securities.Held-to-maturity securities are presented at acquisition cost after premiums ordiscounts are amortized or accreted, respectively. The Company recognizeswrite-downs resulting from other-than-temporary declines in the fair valuebelow its book value on the balance sheet date if there is objective evidenceof impairment. The related write-downs are recorded in current operations as aloss on impairment of investment securities.Trading securities are presented in the current asset section of the balancesheet, and available-for-sales and held-to-maturity securities are presented inthe current asset section of the balance sheet if their maturities are withinone year; otherwise such securities are recorded in the non-current section ofthe balance sheet.f. Investment Securities Accounted for Using the Equity Method of AccountingInvestment securities of affiliated companies, in which the Company has theability to exercise significant influence, are carried using the equity methodof accounting, whereby the Company's initial investment is recorded at cost andthe carrying value is subsequently increased or decreased to reflect theCompany's portion of shareholders' equity of the investee. Differences betweenthe purchase cost and net asset value of the investee are amortized over 5 to20 years using the straight-line method. When applying the equity method ofaccounting, unrealized intercompany gains and losses are eliminated and theeffect of eliminations is reflected in the investment securities account (SeeNote 4). In addition, effective January 1, 2005, the Company provides foradditional losses for those investments accounted for using the equity methodthat are reduced to zero to the extent that the Company has other investmentassets related to the equity method investees.g. Property and EquipmentProperty and equipment are stated at cost. Major renewals and betterments,Which prolong the useful life or enhance the value of assets, are capitalized;expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the declining balance method (except forbuildings and structures acquired on or after January 1, 1995 which aredepreciated using the straight-line method) over the estimated useful lives (4~30 years) of the related assets (See Note 6).Interest expense and other financing charges for borrowings related to themanufacture or construction of property and equipment are charged to currentoperations as incurred.h. Intangible AssetsIntangible assets are recorded at cost, less amortization computed using thestraight-line method over 5 to 20 years. The amortization for the years endedDecember 31, 2005 and 2004 Were W329,360 million and W317,394 million,respectively.With its application for a license to provide IMT 2000 service, the Company hasa commitment to pay W1,300,000 million to the Ministry of InformationCommunication ("MIC"). W650,000 million was paid in March 2001 by SK IMT Co.,Ltd. (a former subsidiary of the Company), which was merged into the Company onMay 1, 2003, and the remainder is required to be paid over 10 years with anannual interest rate equal to the 3-year-maturity government bond rate minus0.75% (3.58% as of December 31, 2005). The future payment obligations areW90,000million in 2007, W110,000 million in 2008, W130,000 million in 2009,W150,000 million in 2010, and W170,000 million in 2011. On December 4, 2001,SK IMT Co., Ltd. received the IMT 2000 license from MIC, and recorded the totallicense cost as an intangible asset. As a result of the merger with SK IMTCo., Ltd., the Company acquired such IMT license of W1,259,253 million andassumed the related long-term payable with a principal amount of W650,000million on May 1, 2003 (the date of merger). Amortization of the IMT licensecommenced when the Company started its commercial IMT 2000 service in December2003, using the straight-line method over the estimated useful life of the IMTlicense which expires in December 2016.i. Convertible BondsThe proceeds from issuance of convertible bonds are allocated between theconversion rights and the debt issued; the portion allocable to the conversionrights is accounted for as capital surplus with a corresponding conversionright adjustment which is deducted from the related bonds. Such conversionright adjustment is amortized to interest expense using the effective interestrate method over the redemption period of the convertible bonds. The portionallocable to the conversion rights is measured by deducting the present valueof the debt at time of issuance from the gross proceeds from issuance ofconvertible bonds, with the present value of the debt being computed bydiscounting the expected future cash flows (including call premium, if any)using the effective interest rate applied to ordinary or straight debt of theCompany at the issue date.j. Discounts on BondsDiscounts on bonds are amortized to interest expense using the effectiveinterest rate method over the redemption period of the bonds.k. Valuation of Long-term PayablesLong-term payables resulting from long-term installment transactions are statedat the present value of the expected future cash flows. Imputed interestamounts are recorded in present value discount accounts which are deducteddirectly from the related nominal payable balances. Such imputed interest isincluded in operations using the effective interest rate method over theredemption period.l. Provisions, Contingent Liabilities and Contingent AssetsThe Company recognizes a provision when i) it has a present obligation as aresult of a past event, ii) it is probable that a disbursement of economicresources will be required to settle the obligation, and iii) a reliableestimate can be made of the amount of the obligation (See Note 22).The Company does not recognize the following contingent obligations asliabilities ;- Possible obligations related to past events, for which the existence of aliability can only be confirmed upon occurrence of uncertain future event orevents outside the control of the Company.- Present obligations arising out of past events or transactions, for which i)a disbursement of economic resources to fulfill such obligations is notprobable or ii) a disbursement of economic resources is probable, but therelated amount cannot be reasonably estimated.In addition, the Company does not recognize potential assets related to pastevents or transactions, for which the existence of an asset or future benefitcan only be confirmed upon occurrence of uncertain future event or eventsoutside the control of the Company.m. Accrued Severance IndemnitiesIn accordance with the Company's policy, all employees with more than one yearof service are entitled to receive severance indemnities, based on length ofservice and rate of pay, upon termination of their employment. Accruals forseverance indemnities are recorded to approximate the amount required to bepaid if all employees Were to terminate at the balance sheet date. The Company has deposits with insurance companies to fund the portion of theemployees' severance indemnities which is in excess of the tax deductibleamount allowed under the Corporate Income Tax Law, in order to take advantageof the additional tax deductibility for such funding. Such deposits withoutside insurance companies, where the beneficiaries are the Company'semployees, totaling W187,103 million and W155,228 million as of December 31,2005 and 2004, respectively, are deducted from accrued severance indemnities.In accordance with the Korean National Pension Fund Law, the Companytransferred a portion of its accrued severance indemnities to the NationalPension Fund through March 1999. Such transfers, amounting to W5,172 millionand W5,612 million as of December 31, 2005 and 2004, respectively, are deductedfrom accrued severance indemnities.Actual payment of severance indemnities amounted to W21,985 million and W26,728million for the years ended December 31, 2005 and 2004, respectively.n. Accounting for Employee Stock Option Compensation PlanThe Company adopted the fair value based method of accounting for its employeestock option compensation plan (See Note 15). Under the fair value basedmethod, compensation cost is measured at the grant date based on the value ofthe award and is recognized over the service period. For stock options, fairvalue is determined using an option-pricing model that takes into account thestock price at the grant date, the exercise price, the expected life of theoption, the volatility of the underlying stock, expected dividends and thecurrent risk-free interest rate for the expected life of the option. However,as permitted under Korean GAAP, the Company excludes the volatility factor inestimating the value of its stock options granted before December 31, 2003,which results in measurement at minimum value. The total compensation cost ofan option estimated at the grant date is not subsequently adjusted for changesin the price of the underlying stock or its volatility, the actual life of theoption, dividends on the stock, or the risk-free interest rate. In addition,recognized compensation costs related to stock options that were expired, dueto such stock options not being exercised within the exercisable period, aretransferred to other capital surplus from capital adjustments.o. Accounting for LeasesLease agreements that include a bargain purchase option, result in the transferof ownership at the end of the lease term, have a lease term equal to 75% ormore of the estimated economic life of the leased property or where the presentvalue of minimum lease payments equals or exceeds 90% of the fair value of theleased property, are accounted for as capital leases. All other leases areaccounted for as operating leases.Assets and liabilities related to capital leases are recorded as property andequipment and obligations under capital leases, respectively, and the relatedinterest is calculated using the effective interest rate method and charged toother expenses. For operating leases, the future minimum lease payments areexpensed ratably over the lease term while contingent rentals are expensed asincurred (See Note 10).p. Research and Development CostsThe Company charges substantially all research and development costs to expenseas incurred. The Company incurred internal research and development costs ofW204,698 million and W203,741 million for the years ended December 31, 2005 and2004, respectively, and external research and development costs of W68,526million and W68,549 million for the years ended December 31, 2005 and 2004,respectively.q. Accounting for Foreign Currency Transactions and TranslationTransactions denominated in foreign currencies are recorded in Korean Won basedon the prevailing rate of exchange at the dates of transactions. Monetaryassets and liabilities denominated in foreign currency are translated intoKorean Won at the Base Rates announced by Seoul Money Brokerage Services, Ltd.on the balance sheet date, which were, for US dollars, W1,013.00=US$1 andW1,043.80=US$1 at December 31, 2005 and 2004, respectively. The resultinggains or losses arising from the translation or settlement of such assets andliabilities are included in current operations.r. Derivative InstrumentsThe Company records rights and obligations arising from derivative instrumentsas assets and liabilities, which are stated at fair value. The gains andlosses that result from the change in the fair value of derivative instrumentsare reported in current earnings. However, for derivative instrumentsdesignated as hedging the exposure of variable cash flows, the effectiveportions of the gains or losses on the hedging instruments are recorded as aseparate component of shareholders' equity and credited/charged to operationsat the time the hedged transactions affect earnings, and the ineffectiveportions of the gains or losses are credited/charged immediately to operations.s. Revenue RecognitionsOperating revenue is recognized when cellular telephone communication servicesare provided.t. Income TaxesIncome tax expense is determined by adding or deducting the total income taxand surtaxes to be paid for the current period and the changes in deferredincome tax assets and liabilities.Deferred tax is recognized on differences between the carrying amounts ofassets and liabilities in the financial statements and the corresponding taxbases used in the computation of taxable profits. Deferred tax liabilities aregenerally recognized for all taxable temporary differences with some exceptionsand deferred tax assets are recognized to the extent that it is probable thattaxable profits will be available against which the deductible temporarydifferences can be utilized. The carrying amount of deferred tax assets isreduced to the extent that it is no longer probable that sufficient taxableprofits will be available to allow all or part of the assets to be recovered.Effective January 1, 2005 deferred income tax assets and liabilities, whichwere presented on the balance sheet as a single non-current net amount through2004, are classified into current and non-current based on the classificationof related assets or liabilities for financial reporting purposes3. INVESTMENT SECURITIESa. Trading SecuritiesTrading securities as of December 31, 2005 and December 31, 2004 are as follows(in millions of Korean Won) : December December 31, 2005 31, 2004 Fair value and carrying Acquisition cost Fair value Carrying amount amount Beneficiary certificates W745,360 W745,360 W745,360 W640,389 b. Long-term Investment SecuritiesLong-term investment securities as of December 31, 2005 and 2004 are as follows(in millions of Korean Won) : December 31, 2005 December 31, 2004 Available-for-sale equity securities W907,069 W872,209 Available-for-sale debt securities 296,264 4,928 Held-to-maturity securities - 50,000 Total 1,203,333 927,137 Less current portion - (3,600) Long-term portion W1,203,333 W923,537 b-(1). Available-for-sale Equity SecuritiesAvailable-for-sale equity securities as of December 31, 2005 and 2004 are asfollows (in millions of Korean Won) : Carrying amount Number of percentage Acquisition Shares (%) at cost at Fair at Dec. Dec. 31, Dec. 31, value at 31, 2005 2005 2005 Dec 31, 2005 2005 2004 (Investments in listed companies) Digital Chosunilbo Co., Ltd. 2,890,630 7.8 W5,781 W5,796 W5,796 W2,023 Hanaro Telecom Inc. 22,090,000 4.8 121,677 56,440 56,440 71,019 Korea Radio Wave Basestation Management 234,150 4.4 1,171 2,646 2,646 2,178 POSCO Corporation 2,481,310 2.8 332,662 501,225 501,225 464,005 INNOTG Co., Ltd. 59,473 0.4 1,695 83 83 152 - (note SINJISOFT Corporation - - - a) - 590 - (note 1,600Cowon Systems, Inc. - - - a) - Sub-total 462,986 566,190 566,190 541,567 (Investments in non-listed companies) Powercomm Co., 7,500,000 (note Ltd. 5.0 240,243 77,130 b) 77,130 71,565 Japan MBCO 54,000 7.3 27,332 (note e) 27,332 27,332 Real Telecom Co., 398,722 (note - -Ltd. 8.3 5,981 - c) Enterprise Networks 2,821 (note - -Co., Ltd. 0.03 14,438 - d) Eonex Technologies 144,000 (note e) 4,593 4,593Inc. 12.6 3,600 - - (note - 3,188WiderThan Co., Ltd. - - f) Korea Economic 2,585,069 (note e) 13,964 Daily 13.8 13,964 2,077 (note e) (note 22,825 Others 99,646 g) 25,481 Sub-total 405,204 145,844 134,236 (Investments in funds) Korea IT Fund 190,000 (note e) 190,000 190,000 Others 5,035 (note e) 5,035 6,406 Sub-total 195,035 195,035 196,406 Total W1,063,225 W907,069 W872,209 (note a) The investments in common stock of SINJISOFT Corporation and Cowon System, Inc. were all sold and the Company recorded a gain on disposal of investment assets of W931 million and W1,097 million, respectively, for the year ended December 31, 2005. (note b) The Company recorded its investments in common stock of Powercomm Co., Ltd. at its fair value, Which was estimated by an outside professional valuation company using the present value of expected future cash flows and the unrealized loss on valuation of investments amounting to W163,113 and W168,678 as of December 31, 2005 and 2004, respectively, were recorded as a capital adjustment. (note c) Due to the impairment of the Company's investments in common stock of Real Telecom Co., Ltd., the Company recorded impairment loss of W5,981 million for the year ended December 31, 2004. (note d) The Company recorded impairment loss of W14,438 million for the year ended December 31, 2004 for its investments in common stock of Enterprise Networks Co., Ltd. as the investee filed for reorganization prodeedings. (note e) As a reasonable estimate of fair value could not be made, the investment is stated at acquisition cost. The investment in common stock of Eonex Technologies Inc. was reclassified to available-for-sale securities from equity securities accounted for using the equity method during 2003, as the Company's ownership in such investees decreased to less than 20% and the Company lost significant influence. Such securities were transferred to available-for-sale securities at the carrying amount valued using the equity method of accounting prior to the reclassification. (note f) The investment in common stock of WiderThan Co., Ltd. was reclassified to equity securities accounted for using the equity method during 2005. Although the Company's ownership in WiderThan Co., Ltd. is less than 20%, the Company exercises significant influence on the selection of directors and the investee has significant transactions with the Company. (note g) Due to the impairment of the Company's investments in common stock of TeleMerc.com and MobileWelcom Co., Ltd., the Company recorded impairment losses on such investments of W1,793 million and W1,000 million for the years ended December 31, 2005 and 2004, respectively.b-(2). Available-for-sale Debt SecuritiesAvailable-for-sale debt securities as of December 31, 2005 and 2004 are asfollows (in millions of Korean Won) : Carrying amount December December Maturity Acquisition cost 31, 2005 31, 2004 Public bonds (note a) W1,590 W1,590 W1,328 Currency stabilization bonds (note b) 294,891 294,674 - Convertible bonds of Real Telecom Co., Ltd. (note c) March, 2007 10,656 - - Convertible bonds of Eonex Technologies, Inc. (3rd) (note d) January, 2005 - - 3,600 Total 307,137 296,264 4,928 Less current portion of available-for-sale debt securities - - (3,600) Long-term available-for- sale debt securities W307,137 W296,264 W1,328 The interest income incurred from available-for-sale debt securities for theyears ended December 31, 2005 and 2004 were W914 million and W391 million,respectively.(note a) The maturities of public bonds as of December 31, 2005 and 2004 are asfollows (in millions of Korean Won) :Maturity December 31, 2005 December 31, 2004 Within five years W1,229 W904 Within ten years 361 424 W1,590 W1,328 (note b) The maturities of monetary stabilization bonds as of December 31, 2005and 2004 are as follows (in millions of Korean Won) :Maturity December 31, 2005 December 31, 2004 Within five years W294,674 W- (note c) The convertible bonds of Real Telecom Corp. with a principal amount ofW10,656 million can be converted into 371,018 shares of common stock of RealTelecom Corp. at W28,721 per share during the period from September 29, 2004 toMarch 28, 2007. Due to the impairment of such bonds, the Company recorded animpairment loss of W10,656 million for the year ended December 31, 2004.(note d) The convertible bonds of Eonex Technologies, Inc. (3rd) were allsettled in cash during the year ended December 31, 2005.b-(3). Changes in Unrealized Gains (Losses) on Investments in Common StockThe changes in unrealized gains (losses) on investments in common stock duringthe years ended December 31, 2005 and 2004 are as follows (in millions ofKorean Won) : For the year ended December 31, 2005 Transferred to Tax Beginning Increase/ realized effect Ending balance (decrease) gain (loss) (note) balance Available-for-sales equity securities : Digital Chosunilbo (W4) Co., Ltd. (W3,758) W3,772 W- W10 Hanaro Telecom Inc. (50,657) (14,580) - 17,940 (47,297) Korea Radio Wave (405) Basestation Management 1,007 468 - 1,070 POSCO Corporation 131,343 37,220 - (46,355) 122,208 INNOTG Co., Ltd. (1,543) (68) - 443 (1,168) SINJISOFT - Corporation 460 - (460) - Cowon Systems, Inc. - 585 (585) - - Powercomm Co., Ltd. (168,678) 5,565 - 44,856 (118,257) Eonex Technologies (553) Inc. 2,011 - - 1,458 WiderThan Co., Ltd. (27) 27 - - - Sub-total (89,842) 32,989 (1,045) 15,922 (41,976) Currency 60 stabilization bonds - (218) - (158) Total (W89,842) W32,771 (W1,045) W15,982 (W42,134) (note) Represents adjustments to reflect the tax effect of temporarydifferences directly charged or credited to unrealized gains (losses) onvaluation of long-term investment securities in accordance With SKAS No. 16"Income Taxes", which is effective January 1, 2005. For the year ended December 31, 2004 Transferred to Beginning Increase/ realized Ending balance (decrease) gain (loss) balance Digital Chosunilbo Co., Ltd. (W2,934) (W824) W- (W3,758) Hanaro Telecom Inc. (55,469) 4,812 - (50,657) Korea Radio Wave Basestation Management 1,498 (491) - 1,007 POSCO Corporation 71,792 59,551 - 131,343 INNOTG Co., Ltd. - (1,543) - (1,543) Powercomm Co., Ltd. (171,835) 3,157 - (168,678) SINJISOFT Corporation - 460 - 460 Eonex Technologies Inc. - 2,011 - 2,011 WiderThan Co., Ltd. - (27) - (27) Total (W156,948) W67,106 W- (W89,842) b-(4). Held-to-maturity SecuritiesHeld-to-maturity securities as of December 31, 2005 and 2004 are as follows (inmillions of Korean Won) : Carrying amount December December Maturity Acquisition cost 31, 2005 31, 2004 Subordinated bonds of Mirae Asset Life Insurance Co., Ltd. (formerly SK Life Insurance Co., Ltd.) (note a) W- W- W50,000 Total - 50,000 Less current portion of held-to-maturity securities - - Long-term held-to-maturity securities W- W50,000 Interest income from held-to-maturity securities for the years ended December31, 2005 and 2004 are W3,748 million and W15,686 million, respectively.(note a) The Subordinated bonds of Mirae Asset Life Insurance Co., Ltd.(formerly SK Life Insurance Co., Ltd.) were all liquidated during 2005.4. EQUITY SECURITIES ACCOUNTED FOR USING THE EQUITY METHOD OF ACCOUNTINGEquity securities accounted for using the equity method of accounting as ofDecember 31, 2005 and 2004 are as follows (in millions of Korean Won) : December 31, 2005 Carrying Amount Ownership Net Number Percentage Acquisition Asset December December of shares (%) Cost Value 31, 2005 31, 2004 Pantech Co., (note Ltd. 25,570,306 22.7 W26,309 W54,841 a) W55,634 W190,896 SK Capital Co., Ltd. 10,000,000 100.0 50,000 37,501 37,501 34,891 SK Communications Co., Ltd. 7,844,454 91.1 175,441 138,372 158,170 143,096 SK Telink Co., Ltd. 943,997 90.8 5,296 70,863 70,863 56,182 SK C&C Co., Ltd. 300,000 30.0 19,071 193,381 198,251 201,353 SK Wyverns Baseball Club Co., Ltd. 199,997 100.0 1,000 - - - STIC Ventures Co., Ltd. 1,600,000 21.9 8,000 8,308 8,308 7,321 Paxnet Co., Ltd. 5,590,452 67.1 26,563 9,135 27,372 25,244 Global Credit & Information Corp. 300,000 50.0 2,410 2,648 3,276 3,054 TU Media Corp. 12,922,266 29.6 64,611 31,400 32,393 34,607 Aircross Co., Ltd. 600,000 38.1 300 970 970 944 Widerthan Co., (note Ltd. 2,000,000 10.1 1,000 12,827 b) 12,827 - (note IHQ, Inc. 8,000,000 21.6 14,440 7,668 d) 13,935 - Seoul Records, Inc. 9,582,321 60.0 27,874 23,572 27,242 - Harex Info Tech, Inc. 225,000 21.2 3,375 1,166 2,568 3,375 SLD Telecom PTE. Ltd. 80,476,700 55.1 93,987 54,952 55,358 59,804 Skytel Co., Ltd. 1,756,000 28.6 2,159 4,872 4,872 3,633 SK China Company Ltd. 28,160 20.7 3,195 1,569 483 803 SK Telecom China Co., Ltd. 6,150,000 100.0 7,340 6,927 6,927 9,212 ULand Co., Ltd. 14,100,100 70.1 17,511 8,936 12,564 8,257 SK Telecom USA (note Holdings, Inc. 1,000 100.0 123,214 103,751 c) 103,751 - SK Telecom International, Inc. 1,099 100.0 17,467 25,957 25,957 21,995 SK USA, Inc. 49 49.0 3,184 3,353 3,353 3,184 Centurion IT Investment Association 37.5 3,000 3,635 3,635 3,205 1st Music Investment Fund of SK-PVC 69.3 6,925 6,990 6,990 - 2nd Music Investment Fund of SK-PVC 79.3 7,925 7,966 7,966 - SK-KTB Music Investment Fund 74.3 14,850 14,999 14,999 - IMM Cinema Fund 48.4 12,000 11,884 11,884 - SK-QC Wireless Development Fund - - - - 5,145 SKT-HP Ventures, LLC. 50.0 6,415 5,272 5,272 5,284 Other investments in (note affiliates 13,083 e) 12,583 4,761 Total W925,904 W826,246 (note a) 4,542,000 shares of SKY Teletech Co., Ltd. (formerly SK Teletech Co., Ltd.) were sold to Curitel Communications, Inc. and the Company recorded a gain of W175,488 million during the 3rd quarter of 2005. SKY Teletech Co., Ltd was merged into Pantech Co., Ltd. during the 4th quarter of 2005 and the Company's ownership interest decreased from 29.1% to 22.7%. In addition, the difference between the Company's portion of the merged company's equity and the carrying amount at the date of merger of W269 million Was recorded as a loss on disposal of investment assets.(note b) The investment in common stock of WiderThan Co., Ltd. Was reclassified to equity securities accounted for using the equity method during 2005. Although the Company's ownership in WiderThan Co., Ltd. is less than 20%, the Company exercises significant influences on the selection of directors and the investee has significant transactions with the Company.(note c) In the first quarter of 2005, the Company incorporated SK Telecom USA Holdings, Inc. with an initial investment of US$83 million in order to invest in and manage Helio, Inc., a joint venture company in the Untied States of America, which was established in order to provide wireless telecommunication services in the United States of America. In addition, the Company invested an additional US$40 million in SK USA Holdings, Inc. during the 3rd quarter of 2005 (See Note 23 (b)).(note d) In February 2005, the Company acquired 8,000,000 shares of IHQ, Inc., an entertainment management company, for W1,805 per share with an option to purchase an additional 5,000,000 shares at the previously agreed upon price during the period from March 15, 2006 to April 30, 2006, in order to secure high-quality content for the Company's wireless internet services. (note e) As allowed under Korean GAAP, investments in equity securities of SK Telecom Europe Limited and certain others were not accounted for using the equity method of accounting, as changes in the Company's portion of shareholders' equity of such investees were not expected to be material. Details of the changes in investments in affiliates accounted for using theequity method for the years ended December 31, 2005 and 2004 are as follows (inmillions of Korean Won) : For the year ended December 31, 2005 Beginning balance or Equity in Equity in Other acquisition earnings capital increase Ending cost (losses) adjustments (decrease) balance Pantech Co., Ltd. (note a) W75,148 (W19,404) (W110) W- W55,634 SK Capital Co., Ltd. 34,891 (523) 3,133 - 37,501 SK Communications Co., Ltd (note a) 143,096 12,643 2,431 - 158,170 SK Telink Co., Ltd. (note a) 56,182 14,649 32 - 70,863 SK C&C Co., Ltd. (notes a and b) 201,353 17,501 (20,003) (600) 198,251 SK Wyverns Baseball Club Co., Ltd. (notes a and c) - (4,706) - - - STIC Ventures Co., Ltd. (note a) 8,684 (1,135) 759 - 8,308 Paxnet Co., Ltd. (note a) 25,244 2,128 - - 27,372 Global Credit & Information Corp. 3,054 222 - - 3,276 TU Media Corp. (note a) 60,219 (27,821) (5) - 32,393 Aircross Co., Ltd. (note a) 944 26 - - 970 WiderThan Co., Ltd. (note a) 11,398 1,368 61 - 12,827 IHQ, Inc. (note a) 14,440 (560) 55 - 13,935 Seoul Records, Inc. (note a) 27,874 (632) - - 27,242 Harex Info Tech, Inc. (notes a and d) 3,375 (807) - - 2,568 SLD Telecom PTE. Ltd. (note a) 64,588 (7,351) (1,879) - 55,358 Skytel Co., Ltd. (notes a and b) 3,633 1,355 69 (185) 4,872 SK China Company, Ltd. (note a) 803 (261) (59) - 483 SK Telecom China Co., Ltd. (note a) 9,212 (2,055) (230) - 6,927 ULand Co., Ltd. (note a) 17,511 (4,545) (402) - 12,564 SK Telecom USA Holdings, Inc. (note a) 123,214 (20,885) 1,422 - 103,751 SK Telecom International, Inc. (note a) 21,995 4,657 (695) - 25,957 SK USA, Inc. (notes a and d) 3,184 560 (391) - 3,353 Centurion IT investment Association 3,205 430 - - 3,635 1st Music Investment Fund of SK-PVC 6,925 65 - - 6,990 2nd Music Investment Fund of SK-PVC 7,925 41 - - 7,966 SK-KTB Music Investment Fund 14,850 149 - - 14,999 IMM Cinema Fund 12,000 (116) - - 11,884 SKT-QC Wireless Development Fund (note e) 5,145 1 - (5,146) - SKT-HP Ventures, LLC 5,284 148 (160) - 5,272 Total W965,376 (W34,858) (W15,972) (W5,931) W913,321 (note a) Investments were recorded using the equity method of accounting based on unaudited and unreviewed financial statements as of and for the year ended December 31, 2005. In order to verify the reliability of such unaudited and unreviewed financial statements, the Company has performed the following procedures and found no significant errors : obtained the signature from the chief executive officer of the equity method investee asserting that the unaudited and unreviewed financial statements are accurate checked whether the major transactions identified by the Company, including public disclosures, were appropriately reflected in the unaudited and unreviewed financial statements performed an analytical review on the unaudited and unreviewed financial statements (note b) The Company received dividends from SK C&C Co., Ltd. and Skytel Co., Ltd. The corresponding amount was deducted from the carrying amount of equity method securities. (note c) In accordance with SKAS No.15, which requires the Company to provide for additional losses beyond the value of the equity method investment to the extent that the Company has other investment assets related to the equity method investee, the Company recorded additional losses of W4,706 million for the year ended December 31, 2005 in connection with long-term loans to SK Wyverns Baseball Club Co., Ltd. However, as of December 31, 2005, equity in losses of affiliates, net of additional losses discussed above, related to the investee totaling W429 million was not recognized due to the discontinuance of applying the equity method of accounting for the Company's investment in SK Wyberns Baseball Club Co., Ltd. (note d) Effective January 1, 2005, the Company recorded its investments in SK USA Inc. and Harex Info Tech, Inc. using the equity method of accounting as changes in the Company's portion of such investees' equity amounts resulting from applying the equity method of accounting is material. (note e) Investment was fully liquidated due to dissolution of SKT-QC Wireless Development Fund during the year ended December 31, 2005. For the year ended December 31, 2004 Beginning Equity balance or in Equity in Other acquisition earnings capital increase Ending cost (losses) adjustments (decrease) balance SK Teletech Co., Ltd. (note a) W159,275 W32,788 W - (W1,167) W190,896 SK Capital Co., Ltd. 45,865 (11,515) 541 - 34,891 SK Communications Co., Ltd 127,486 11,961 3,649 - 143,096 SK Telink Co., Ltd. 43,452 12,724 6 - 56,182 SK C&C Co., Ltd. (note a) 93,433 14,563 93,957 (600) 201,353 STIC Ventures Co., Ltd. 7,098 151 72 - 7,321 Paxnet Co., Ltd. 25,712 (515) 47 - 25,244 VCASH Co., Ltd. (note b) 943 (600) - (343) - Global Credit & Information Corp. 2,773 281 - - 3,054 WiderThan Co., Ltd. 3,166 49 (27) (3,188) - TU Media Corp. 39,000 (4,732) 339 - 34,607 Aircross Co., Ltd. 300 663 (19) - 944 Harex Info Tech, Inc. 3,375 - - - 3,375 SLD Telecom PTE. Ltd. 78,131 (11,064) (7,263) - 59,804 Skytel Co., Ltd. (note a) 3,053 1,177 (421) (176) 3,633 SK China Company, Ltd. 2,187 (1,198) (186) - 803 SK Telecom China Co., Ltd. 7,340 2,886 (1,014) - 9,212 ULand Co., Ltd 8,257 - - - 8,257 SK Telecom International, Inc. 18,963 6,037 (3,005) - 21,995 SK USA, Inc. 3,184 - - - 3,184 Centurion IT investment Association 3,125 80 - - 3,205 SKT-QC Wireless Development Fund 5,906 (2) (759) - 5,145 SKT-HP Ventures, LLC 5,964 91 (771) - 5,284 W687,988 W53,825 W85,146 (W5,474) W821,485 (note a) The Company received dividends from SK Teletech Co., Ltd., SK C&C Co., Ltd. and Skytel Co., Ltd. and the corresponding amount was deducted from its equity method securities. (note b) The investments in common stock of VCASH Co., Ltd. were sold to Korea Railway Transportation Promotion Foundation in 2004. Details of changes in the differences between the acquisition cost and netasset value of equity method investees at the acquisition date for the yearsended December 31, 2005 and 2004 are as follows (in millions of Korean Won) : For the year ended December 31, 2005 Beginning Increase/ Ending balance (Decrease) Amortization balance Pantech Co., Ltd. W3,286 (W2,381) (W112) W793 SK Communications Co., Ltd. 24,623 - (809) 23,814 SK C&C Co., Ltd. 5,276 - (406) 4,870 Paxnet Co., Ltd. 19,310 - (1,073) 18,237 Global Credit & Information Corp. 670 - (42) 628 TU Media Corp. - 1,045 (52) 993 IHQ, Inc. - 7,377 (1,110) 6,267 Seoul Records, Inc. - 4,078 (408) 3,670 Harex Info Tech, Inc. - 1,752 (350) 1,402 SLD Telecom PTE. Ltd. 428 - (22) 406 ULand Co., Ltd. - 3,922 (294) 3,628 Total W53,593 W15,793 (W4,678) W64,708 For the year ended December 31, 2004 Beginning Ending balance Increase Amortization balance SK Teletech Co., Ltd. W- W3,414 (W128) W3,286 SK Communications Co., Ltd. 21,799 3,176 (352) 24,623 SK C&C Co., Ltd. 5,682 - (406) 5,276 Paxnet Co., Ltd. 20,383 - (1,073) 19,310 Global Credit & Information Corp. 712 - (42) 670 SLD Telecom PTE. Ltd. - 433 (5) 428 Total W48,576 W7,023 (W2,006) W53,593 Details of changes in unrealized intercompany gains incurred from sales ofassets for the year ended December 31, 2005 are as follows (in millions ofKorean Won) : For the year ended December 31, 2005 Ending Beginning balance Increase Decrease balance SK Communications Co., Ltd. W- W4,459 (W443) W4,016 SK China Company Ltd. 1,206 - (120) 1,086 Total W1,206 W4,459 (W563) W5,102 Details of market price of the equity securities accounted for using the equitymethod as of December 31, 2005 are as follows (in millions of Korean Won,except for market price per share) : Market price per share Shares owned by the Company (in Korean Won) Market price Pantech Co., Ltd 5,900 25,570,306 150,865 WiderThan Co., Ltd. 15,408 2,000,000 30,816 IHQ, Inc. 9,220 8,000,000 73,760 Seoul Records, Inc. 5,480 9,582,321 52,511 The condensed financial information of the investees as of and for the yearended December 31, 2005 are as follows (in millions of Korean Won) : Total Total Net Assets Liabilities Revenue Income (loss) Pantech Co., Ltd W896,943 W652,831 W655,089 (W20,275) SK Capital Co., Ltd. 37,508 7 - (523) SK Communications Co., Ltd. 206,583 49,646 151,326 12,826 SK Telink Co., Ltd. 131,012 52,739 155,051 16,369 SK C&C Co., Ltd. 1,250,918 884,167 1,002,668 61,811 SK Wyverns Baseball Club Co., Ltd. 4,312 9,447 21,077 (1,231) STIC Ventures Co., Ltd. 56,970 19,008 11,503 (3,672) Paxnet Co., Ltd. 20,162 5,965 40,331 4,771 Global Credit & Information Corp. 9,851 4,555 37,597 529 TU Media Corp. 393,959 287,810 21,550 (96,316) Aircross Co., Ltd. 12,682 10,137 16,281 78 WiderThan Co., Ltd. 176,448 49,464 103,875 7,776 IHQ, Inc. 67,638 30,388 50,198 4,553 Seoul Records, Inc. 46,239 6,952 24,136 (3,441) Harex Info Tech, Inc. 5,971 461 1,071 (2,156) SLD Telecom PTE. Ltd. 100,882 1,087 - (13,617) Skytel Co., Ltd. 23,418 6,545 12,228 4,434 SK China Company Ltd. 8,090 514 1,849 (1,429) SK Telecom China Co., Ltd. 10,701 3,774 9,315 (2,232) ULand Co., Ltd. 14,740 2,001 4,668 (5,455) SK Telecom USA Holdings, Inc. 113,335 9,584 - (20,885) SK Telecom International, Inc. 27,384 1,427 13,404 4,707 SK USA, Inc. 8,320 1,477 8,312 799 Centurion IT Investment Association 9,693 - 1,962 1,886 1st Music Investment Fund of SK-PVC 10,113 20 124 93 2nd Music Investment Fund of SK-PVC 10,061 8 69 52 SK-KTB Music Investment Fund 20,270 51 280 201 IMM Cinema Fund 24,567 6 174 (239) SKT-HP Ventures, LLC. 10,548 5 305 297 5. LOANS TO EMPLOYEESShort-term and long-term loans to employees as of December 31, 2005 and 2004are as follows (in millions of Korean Won) : 2005 Short-term Long-term Total 2004 Loans to employees' stock ownership W3,249 W11,337 W14,586 W22,546association Loans to employees for housing and 93 340 433 612other Total W3,342 W11,677 W15,019 W23,158 6. PROPERTY AND EQUIPMENTProperty and equipment as of December 31, 2005 and 2004 are as follows (inmillions of Korean Won) : Useful lives (years) December 31, December 31, 2005 2004 Land - W461,513 W463,656 Buildings and structures 30,15 1,477,838 1,441,937 Machinery 6 10,376,529 9,452,751 Vehicles 4 20,442 20,268 Other 4 807,534 721,032 Construction in progress - 264,309 138,002 13,408,165 12,237,646 Less accumulated depreciation (8,812,282) (7,632,393) Property and equipment, net W4,595,883 W4,605,253 The standard value of land declared by the government as of December 31, 2005and 2004 are W412,829 million and W401,771 million, respectively.Details of change in property and equipment for the years ended December 31,2005 and 2004 are as follows (in millions of Korean Won) : For the year ended December 31, 2005 Beginning Ending balance Acquisition Disposal Transfer Depreciation balance Land W463,656 W723 (W4,698) W1,832 W- W461,513 Buildings and structures 1,163,069 12,255 (8,095) 33,425 (55,157) 1,145,497 Machinery 2,585,118 34,334 (18,924) 992,283 (1,163,247) 2,429,564 Vehicles 4,030 982 (116) 130 (2,240) 2,786 Other 251,377 754,542 (3,294) (626,161) (84,250) 292,214 Construction in progress 138,003 580,309 - (454,003) - 264,309 Total W4,605,253 W1,383,145 (W35,127) (W52,494) (W1,304,894) W4,595,883 For the year ended December 31, 2004 Beginning Ending balance Acquisition Disposal Transfer Depreciation balance Land W446,574 W3,394 (W2,684) W16,372 W- W463,656 Buildings and structures 840,237 7,239 (7,849) 366,296 (42,854) 1,163,069 Machinery 2,625,306 67,408 (7,659) 1,143,443 (1,243,380) 2,585,118 Vehicles 3,836 2,957 (333) 695 (3,125) 4,030 Other 326,109 720,431 (5,267) (697,118) (92,778) 251,377 Construction in progress 309,564 768,573 (756) (939,378) - 138,003 Total W4,551,626 W1,570,002 (W24,548) (W109,690) (W1,382,137) W4,605,253 7. INTANGIBLE ASSETSIntangible assets as of December 31, 2005 and 2004 are as follows (in millionsof Korean Won) : December 31, 2005 December 31, 2004 Carrying Carrying Acquisition cost Accumulated amortization amounts amounts Goodwill W2,335,532 (W514,648) W1,820,884 W1,949,546 Frequency use rights 1,384,433 (200,141) 1,184,292 1,163,319 Software development costs 221,913 (160,657) 61,256 100,579 Computer software 489,807 (210,050) 279,757 190,745 Other 103,974 (63,616) 40,358 44,430 W4,535,659 (W1,149,111) W3,386,547 W3,448,619 Details of changes in intangible assets for the years ended December 31, 2005and 2004 are as follows (in millions of Korean Won) : For the year ended December 31, 2005 Beginning Ending balance Increase Decrease Transfer Amortization balance Goodwill W1,949,546 W - W - W- (W128,662) W1,820,884 Frequency use rights 1,163,319 117,380 - - (96,407) 1,184,292 Software development costs 100,579 635 - - (39,958) 61,256 Computer software 190,745 68,252 (3) 77,645 (56,881) 279,758 Other 44,430 2,409 (289) 1,259 (7,452) 40,357 W3,448,619 W188,676 (W292) W78,904 (W329,360) W3,386,547 For the year ended December 31, 2004 Beginning Ending balance Increase Decrease Transfer Amortization balance Goodwill W2,078,208 W - W - W- (W128,662) W1,949,546 Frequency use rights 1,251,278 - - 7,800 (95,759) 1,163,319 Software development costs 133,833 3,431 (3,094) 10,545 (44,136) 100,579 Computer software 88,857 50,827 (650) 92,801 (41,091) 190,744 Other 48,092 3,369 (142) 858 (17,746) 44,431 W3,600,268 W57,627 (W3,886) W112,004 (W317,394) W3,448,619 The book value as of December 31, 2005 and residual useful lives of majorintangible assets are as follows (in millions of Korean Won) : Amount Description Residual useful lives Goodwill related to acquisition Goodwill W1,820,884 of Shinsegi Telecomm, Inc. 14 years and 3 months IMT license 1,059,871 Frequency use rights relating to W-CDMA Service (note a) WiBro license 117,000 WiBro Service (note b) DMB license 7,421 DMB Service 10 years and 6 months Software development costs 61,255 Software for business use 1 ~ 5 years (note a) Amortization of the IMT license commenced when the Company started itscommercial IMT 2000 service in December 2003, using the straight-line methodover the estimated useful life (13 years) of the IMT license which expires inDecember 2016. (note b) The Company purchased the WiBro license from MIC on March 20, 2005. The license period is seven years from that date. Amortization of the WiBrolicense will be on a straight line basis over the remaining useful life fromthe commencement date of the Company's commercial WiBro services.8. BONDS PAYABLEBonds payable as of December 31, 2005 and December 31, 2004 are as follows (inmillions of Korean Won and thousands of U.S. dollars) : Annual December December interest 31, 31, Maturity rate (%) 2005 2004 year Domestic general bonds 2005 6.0 W- W500,000 " 2006 5.0 - 6.0 800,000 800,000 " 2007 5.0 - 6.0 700,000 700,000 " 2008 5.0 300,000 300,000 " 2009 5.0 300,000 300,000 " 2010 4.0 200,000 - " 2011 3.0 200,000 200,000 Dollar denominated bonds (US$ 300,000) 2011 4.25 303,900 313,140 Convertible bonds (US$ 2009 - 385,885 385,885329,450) Total 3,189,785 3,499,025 Less discounts on bonds (40,016) (51,467) Less conversion right (65,219) (82,245)adjustments Add long-term accrued 24,808 24,808interest Net 3,109,358 3,390,121 Less portion due within one (795,150) (498,278)year Long-term portion W2,314,208 W2,891,843 All of the above bonds will be paid in full at maturity.On May 27, 2004, the Company issued zero coupon convertible bonds with amaturity of five years in the principal amount of US$329,450,000 forUS$324,923,469, with an initial conversion price of W235,625 per share of theCompany's common stock which was greater than market value at the date ofissuance. Subsequently, the initial conversion price was changed to W225,518per share in accordance with antidilution protection. The Company may redeemtheir principal amount after 3 years from the issuance date if the market priceexceeds 130% of the conversion price during a predetermined period. On theother hand, the bond holders may redeem their notes at 103.81% of the principalamount on May 27, 2007 (3 years from the issuance date). The conversion rightmay be exercised during the period from July 7, 2004 to May 13, 2009 and thenumber of common shares to be converted as of December 31, 2005 is 1,718,700shares. Conversion of notes to common shares may be prohibited under theTelecommunications Law or other legal restrictions which restrains foreigngovernments, individuals and entities from owning more than 49% of theCompany's voting stock, if this 49% ownership limitation is violated due to theexercise of conversion rights. In this case, the Company will pay a bondholder a cash settlement determined at the average price of one day after aholder exercises its conversion right or the weighted average price for thefollowing five business days. The Company intends to sell treasury sharesheld in trust by the Company that corresponds to the number of shares of commonstock that would have been delivered in the absence of the 49% foreignshareholding restrictions. The Company entered into an agreement with CreditSuisse First Boston International to reduce the effect of fluctuation withrespect to cash settlement payments that may be more or less than the proceedsfrom sales of treasury shares held in trust. Unless either previously redeemedor converted, the notes are redeemable at 106.43% of the principal amount atmaturity.9. SUBSCRIPTION DEPOSITS The Company receives subscription deposits from customers of cellular servicesat the subscription date. The Company has no obligation to pay interest onsubscription deposits but is required to return them to subscribers upontermination of the subscription contract. Long-term subscription deposits held as of December 31, 2005 and 2004 are asfollows (in millions of Korean Won except deposit per subscriber amounts) : Deposit Service type per subscriber 2005 2004 Cellular W200,000 W23,770 W31,440 The Company offers existing and new cellular subscribers the option ofobtaining credit insurance from Seoul Guarantee Insurance Company ("SGIC") inlieu of the subscription deposits. Existing subscribers who elect this optionare refunded their subscription deposits. As a result, the balance ofsubscription deposits has been decreasing.10. LEASESAs the Company merged with Shinsegi Telecomm, Inc. ("Shinsegi") in January2002, certain capital leases made by Shinsegi Were transferred to the Company. Depreciation expense related to such capital leases for the years endedDecember 31, 2005 and 2004 was nil and W37 million, respectively. For the yearended December 31, 2004, all capital leases transferred from Shinsegi Wereterminated and the Company acquired the related leased machinery free ofcharge. In addition, the Company acquired certain computer equipment and software fromSK C&C Co., Ltd. and succeeded certain capital lease agreements between SK C&CCo., Ltd. and HP Financial Service. Details of capital lease assets andliabilities acquired from SK C&C Co., Ltd. for the years ended December 31,2005 and 2004 are as follows (in millions of Korean Won) : 2005 2004 Acquisition cost Office equipment W16,919 W- Computer software 7,625 - W24,544 W- Accumulated depreciation Office equipment W744 W- Computer software 127 - W871 W- Carrying amounts Office equipment W16,175 W- Computer software 7,498 - W23,673 W- Depreciation expenses Office equipment W744 W- Computer software 127 - W871 W- The Company's minimum future lease payments as of December 31, 2005 are asfollows (in millions of Korean Won) : Annual lease payments Interest Principal 2006 W15,328 W989 W14,339 2007 8,846 353 8,495 2008 1,734 24 1,710 Total W25,908 W1,365 24,544 Less portion due Within one year (14,340) Capital lease liabilities W10,204 As the Company merged with Shinsegi, certain operating lease made by Shinsegiwas transferred to the Company and the related lease expense for the year endedDecember 31, 2005 and 2004 was nil and W261 million, respectively, as theoperating lease was terminated in 2004.11. MONETARY ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIESThe details of monetary assets and liabilities denominated in foreigncurrencies (except for bonds payable denominated in foreign currenciesdescribed in Note 8) as of December 31, 2005 and 2004 are as follows (inmillions of Korean Won, thousands of U.S. dollars, thousands of HK dollars,thousands of Japanese yen, thousands of Great Britain pounds, thousands ofChinese yuan, thousands of Singapore dollars, thousands of Swiss Franc andthousands of Euros) : 2005 2004 Foreign Korean Won Foreign Korean Won currencies equivalent currencies equivalent Cash and cash US$ 4,175 W4,229 US$ 3,851 W4,020equivalents EUR 3 3 - - Accounts receivable - US$ 9,390 9,512 US$ 2,163 2,257trade " EUR 248 298 - - Accounts receivable - US$ 3,364 3,408 US$ 2,930 3,058other Guarantee deposits JPY 16,156 139 JPY 15,756 160 " - - US$ 142 149 W17,589 W9,644 Accounts payable US$ 15,633 15,836 US$ 5,158 5,384 " JPY 8,498 73 JPY 38,618 391 " HK$ 254 33 HK$ 217 29 " GBP 453 792 GBP 67 135 " SG$ 22 13 SG$ 5 3 " EUR 504 604 EUR 119 169 " CHF 19 15 - - " - - CNY 1 1 W17,366 W6,112 12. CAPITAL STOCK AND CAPITAL SURPLUSThe Company's capital stock consists entirely of common stock with a par valueof W500. The number of authorized and issued shares as of December 31, 2005and 2004 are as follows : 2005 2004 Authorized shares 220,000,000 220,000,000 Issued shares 82,276,711 82,276,711 Significant changes in capital stock and capital surplus during the years endedDecember 31, 2005 and 2004 are as follows (in millions of Korean Won) : Number of shares Capital Capital issued stock surplus At January 1, 2004 82,276,711 W44,639 W2,915,964 Excess unallocated purchase price (note a) - - (77) Consideration for conversion rights (note b) - - 67,279 At December 31, 2004 82,276,711 44,639 2,983,166 Deferred tax liabilities deducted from capital surplus (note c) - - (18,501) Transferred from stock option in capital adjustment (note d) - - 1,533 December 31, 2005 82,276,711 W44,639 W2,966,198 (note During the year ended December 31, 2004, the Company paid W77 million to a) certain former shareholders of Shinsegi Telecomm, Inc. in accordance With the ruling of the court and deducted it from capital surplus in accordance with Korean GAAP. The Company issued zero coupon convertible bonds in the principal amount of US$329,450,000 at US$324,923,469 With an initial conversion price of W235,625 per share of the Company's common stock on May 27, 2004 and the (note consideration for conversion right of W67,279 million was added to b) capital surplus in accordance With Korean GAAP (See Note 2 (i)). (note The tax effects of consideration for conversion rights, which resulted inc) temporary differences, was deducted directly from related components of stockholders' equity, pursuant to adoption of SKAS No. 16 for the year ended December 31, 2005. (note During the year ended December 31, 2005, the exercisable period for the d) stock options representing 17,800 shares, of which recognized compensation costs was W1,533 million, expired and the related stock options of W1,533 million in capital adjustments were transferred to capital surplus in accordance with Korean GAAP (See Note 2 (n)). 13. RETAINED EARNINGSRetained earnings as of December 31, 2005 and 2004 are as follows (in millionsof Korean Won) : 2005 2004 Appropriated W5,470,701 W4,733,936 Unappropriated 1,799,160 1,422,772 W7,269,860 W6,156,708 The details of appropriated retained earnings as of December 31, 2005 andDecember 31, 2004 are as follows (in millions of Korean Won) : 2005 2004 Legal reserve W22,320 W22,320 Reserve for improvement of financial structure 33,000 33,000 Reserve for loss on disposal of treasury stock 477,182 477,182 Reserve for research and manpower development 822,061 776,296 Reserve for business expansion 4,116,138 3,425,138 Total W5,470,701 W4,733,936 a. Legal ReserveThe Korean Commercial Code requires the Company to appropriate as a legalreserve at least 10% of cash dividends for each accounting period until thereserve equals 50% of outstanding capital stock. The legal reserve may not beutilized for cash dividends, but may only be used to offset a future deficit,if any, or may be transferred to capital stock.b. Reserve for Improvement of Financial StructureThe Financial Control Regulation for listed companies in Korea requires that atleast 10% of net income (net of accumulated deficit), and an amount equal tonet gain (net of related income taxes, if any) on the disposal of property andequipment be appropriated as a reserve for improvement of financial structureuntil the ratio of stockholders' equity to total assets reaches 30%. Thereserve for improvement of financial structure may not be utilized for cashdividends, but may only be used to offset a future deficit, if any, or may betransferred to capital stock. c. Reserves for Loss on Disposal of Treasury Stock and Research and ManpowerDevelopmentReserves for loss on disposal of treasury stock and research and manpowerdevelopment were appropriated in order to recognize certain tax deductiblebenefits through the early recognition of future expenditures for taxpurposes. These reserves will be unappropriated from appropriated retainedearnings in accordance with the relevant tax laws. Such unappropriation willbe included in taxable income in the year of unappropriation.14. TREASURY STOCKUpon the issuances of stock dividends and new common stock and the merger withShinsegi Telecomm, Inc. and SK IMT Co., Ltd., the Company acquired fractionalshares totaling 77,970 shares for W6,110 million through 2004. In addition,the Company acquired 7,452,810 shares of treasury stock in the market orthrough the trust funds for W1,771,507 million through 2004 in order tostabilize the market price of its stock. Under the Mutual Agreement on Stock Exchange between the Company and KTCorporation, on December 30, 2002 and January 10, 2003, the Company acquired8,266,923 shares of the Company's common stock from KT Corporation forW1,853,643 million. On January 13, 2002, the Company merged with Shinsegi Telecomm, Inc. anddistributed 2,677,653 shares of treasury stock to minority shareholders ofShinsegi Telecomm, Inc., of which the cost was W584,646 million.On January 6, 2003, the Company retired 4,457,635 shares of treasury stock thatwere purchased from KT Corporation as mentioned above in accordance with aresolution of the board of directors dated December 26, 2002 and reducedunappropriated retained earnings by W1,008,882 million including the tax effectof W9,373 million, in accordance with the Korean Commercial Laws.On June 30, 2003, in accordance with a resolution of the board of directorsdated June 24, 2003, the Company announced a stock repurchase program toacquire 2,544,600 shares of common stock in the market in order to enhancestockholders' interest and to stabilize the stock price. Pursuant to theprogram, the Company acquired a total of 2,544,600 shares of Company'soutstanding common stock for W525,174 million during the period from June 30,2003 to August 11, 2003 and retired such treasury shares on August 20, 2003,which reduced the unappropriated retained earnings by W537,138 millionincluding the tax effect of W11,964 million, in accordance with KoreanCommercial Laws.15. STOCK OPTIONSOn March 17, 2000, March 16, 2001 and March 8, 2002, in accordance with theapproval of its stockholders or its board of directors, the Company grantedstock options to its management, representing 17,800 shares at an exerciseprice of W424,000 per share, 43,820 shares at an exercise price of W211,000 pershare and 65,730 shares at an exercise price of W267,000 per share. The stockoptions will become exercisable after three years from the date of grant andshall be exercisable for two years from the first exercisable date. Uponexercise of stock options, the Company will issue its common stock. If theemployees leave the Company within three years after the grant of stockoptions, such employees forfeit their unvested stock options awarded. Duringthe year ended December 31, 2004, stock options representing 530 shares, ofwhich total compensation cost was W3 million, Were forfeited. The value of stock options granted is determined using the Black-Scholesoption-pricing model, without considering the volatility factor in estimatingthe value of its stock options, as permitted under Korean GAAP. The followingassumptions are used to estimate the fair value of options granted in 2000,2001 and 2002; risk-free interest rate of 9.1% for 2000, 5.9% for 2001 and 6.2%for 2002; expected life of three years for 2000, 2001 and 2002; expecteddividend of W500 per share for 2000, 2001 and 2002. Under these assumptions,total compensation cost, the recognized compensation cost (included in laborcost) for the years ended December 31, 2005 and 2004 and the outstandingbalance of stock option in capital adjustment as of December 31, 2005 and 2004are as follows (in millions of Korean Won) : Total Recognized Stock option in compensation compensation cost capital adjustment Grant date cost 2005 2004 2005 2004 March 17, 2000 (note) W1,533 W - W - W- W1,533 March 16, 2001 234 - 10 234 234 March 8, 2002 3,246 180 1,082 3,246 3,066 W5,013 W180 W1,092 W3,480 W4,833 (note) During the year ended December 31, 2005, the exercisable period expired for stock options representing 17,800 shares, for which the Company had recognized compensation cost of W1,533 million. The related capital adjustment of W1,533 million was transferred to capital surplus. Therefore, stock options in capital adjustments as of December 31, 2005 are nil, and there is no compensation cost to be recognized for periods after December 31, 2005. The pro forma net income and net income per common share, if the Company hadnot excluded the volatility factor (expected volatility of 66.8% for optionsgranted in 2000, 67.5% for options granted in 2001 and 63.0% for optionsgranted in 2002) in estimating the value of its stock options, for years endedDecember 31, 2005, 2004 and 2003 are as follows : 2005 2004 2003 Pro forma ordinary income before income taxes (in millions of Korean Won) W2,554,315 W2,114,841 W2,711,080 Pro forma net income (in millions of Korean Won) 1,871,082 1,492,914 1,939,636 Pro forma net income and ordinary income per common share (in Korean Won) 25,417 20,280 25,835 16. INCOME TAXESa. Details of income tax expenseIncome tax expense for the years ended December 31, 2005 and 2004 consist ofthe following (in millions of Korean Won) : 2005 2004 Current W678,722 W540,129 Changes in net deferred tax liabilities (note a) 4,511 80,797 Income tax expenses W683,233 W620,926 (note a) Changes in net deferred tax liabilities for the years ended December31, 2005 and 2004 are as follows (in millions of Korean Won) : 2005 2004 Ending balance of net deferred tax liabilities W348,563 W323,096 Beginning balance of net deferred tax liabilities (323,096) (242,057) Adjustment to the beginning net deferred income tax liabilities based on tax return filed 8,536 (242) Tax effect of temporary differences charged or credited directly to related components of stockholders' equity (29,492) - W4,511 W80,797 b. Reconciling items between accounting income and taxable incomeReconciling items between accounting income and taxable income for the yearsended December 31, 2005 and 2004 are as follows (in millions of Korean Won) : 2005 2004 (Temporary Differences) Additions : Allowance for doubtful accounts W142,420 W59,622 Accrued interest income 8,823 5,978 Reserves for research and manpower development 131.467 84,235 Equity in losses of affiliates 94,821 - Foreign currency translation gain - 2,802 Depreciation 14,826 12,073 Loss on impairment of long-term investment securities 1,793 32,074 Loss on impairment of other assets 7,461 21,070 Loss on valuation of derivative instruments - 15,789 Accrued severance indemnities 24,879 19,636 Deposits for severance indemnities 12,552 10,540 Consideration of conversion right 17,027 - Other 76,180 57,719 Sub-total 532,249 321,538 Deductions: Reserves for research and manpower development (190,000) (130,000) Allowance for doubtful accounts (59,612) (67,482) Depreciation (80,359) (183,861) Accrued interest income (8,331) (7,797) Foreign currency translation loss - (5,617) Equity in earnings of affiliates (9,387) (53,825) Loss on impairment of other assets (21,070) (22,459) Loss on impairment of long-term investment securities - (20,342) Gain on valuation of derivative instruments (2,545) - Accrued severance indemnities (12,552) (19,636) Deposits for severance indemnities (24,879) (10,540) Other (110,143) (88,358) Sub-total (518,878) (609,917) Total Temporary Differences 13,371 (288,379) (Permanent Differences) 211,489 200,043 Total W244,860 (W88,336) c. Change in cumulative temporary differences and deferred tax assets(liabilities)Changes in cumulative temporary differences for the years ended December 31,2005 and 2004 and deferred tax assets (liabilities) as of December 31, 2005 and2004 are as follows (in millions of Korean Won) :For the year ended December 31, 2005 January 1, Increase Decrease December 31, Description 2005 (note b) (note b) 2005 Current : Allowance for doubtful accounts W59,622 W122,551 W59,612 W122,561 Accrued interest income (7,796) (558) (4,423) (3,931) Other 235,000 42,010 25,495 251,515 Total 286,826 W164,003 W80,684 370,145 Temporary differences unlikely to be realized (note a) (128,555) (19,219) - (147,774) Total current cumulative temporary differences-net W158,271 144,784 80,684 W222,371 Current deferred tax assets-net (note c) W43,525 W61,152 Non-current : Property and equipment (127,822) (61,386) 7,238 (196,446) Loss on impairment of long-term investment securities 106,752 1,393 - 108,145 Loss on impairment of other long-term assets 21,070 7,461 21,070 7,461 Reserves for research and manpower development (709,467) (190,000) (131,467) (768,000) Reserves for loss on disposal of treasury stock (474,081) - - (474,081) Equity in (earnings) losses of affiliates (89,441) 166,434 - 76,993 Equity in capital adjustment of affiliates - (109,468) - (109,468) Unrealized loss on valuation of long-term investment securities - 58,116 - 58,116 Accrued severance indemnities 139,524 21,493 12,552 148,465 Deposits for severance indemnities (139,524) (21,493) (12,552) (148,465) Loss on valuation of derivative instruments 15,789 - 2,545 13,244 Loss on valuation of derivative instruments -capital adjustment - 19,554 - 19,554 Considerations for conversion right - (67,279) - (67,279) Other (75,966) 186,801 131,886 (21,051) Total (1,333,166) W11,626 W31,272 (1,352,812) Temporary differences unlikely to be realized (note a) - (137,061) - (137,061) Total non-current cumulative temporary differences-net (W1,333,166) (125,435) 31,272 (W1,489,873) Total non-current deferred tax liabilities-net (note c) (W323,096) (W409,715) (note a) Through 2004, the tax effects of temporary differences, which areunlikely to be realized, and temporary differences directly adjusted to capitalsurplus or capital adjustments, such as net unrealized loss on valuation oflong-term investment securities, were excluded in determining the net deferredtax assets or liabilities. However, effective January 1, 2005, pursuant toadoption of SKAS No. 16, "Income Taxes", temporary differences are presented ona gross basis, including temporary differences which are unlikely to berealized. In addition, tax effects of temporary differences related toadjustments made directly to capital surplus or capital adjustments areincluded in determining the net deferred tax assets or liabilities.(note b) These changes include adjustment to reflect the change in accumulatedtemporary differences based on the prior year tax return.(note c) Effective January 1, 2005, pursuant to adoption of SAKS No. 16deferred tax assets and liabilities are separated into current and non-currentamounts based on the classification of related assets or liabilities forfinancial reporting purpose. The tax rate used in measuring deferred taxassets and liabilities is 27.5%.For the year ended December 31, 2004 January 1, Increase Decrease December 31, Description 2004 (note b) (note b) 2004 Property and equipment W41,373 (W159,764) W9,431 (W127,822) Allowance for doubtful accounts 66,833 60,271 67,482 59,622 Loss on impairment of investment securities 95,269 32,074 20,591 106,752 Foreign currency translation loss 5,617 - 5,617 - Foreign currency translation gain (2,802) - (2,802) - Reserves for research and manpower development (663,702) (130,000) (84,235) (709,467) Reserves for loss on disposal of treasury stock (474,081) - - (474,081) Accrued interest income (5,978) (7,797) (5,978) (7,797) Equity in earnings of affiliates (35,616) (53,825) - (89,441) Loss on impairment of other assets 22,459 21,070 22,459 21,070 Accrued severance indemnities 148,963 19,636 29,075 139,524 Deposits for severance indemnities (139,054) (19,636) (19,166) (139,524) Loss on valuation of currency swap - 15,789 - 15,789 Other 57,547 34,788 61,854 30,481 Total temporary differences (W883,172) (W187,394) W104,328 (W1,174,894) Deferred tax liabilities-net (note a) (W242,057) (W323,096) (note a) The tax effects of temporary differences which are not realizable andthe net unrealized loss on valuation of long-term investment securities areexcluded in determining the above net deferred tax liabilities.(note b) These changes include adjustment to reflect the change in accumulatedtemporary differences based on the prior year tax return.Deferred tax assets and liabilities before offsetting each other are as follows(in millions of Korean Won) : 2005 2004 Deferred tax assets W192,044 W166,895 Deferred tax liabilities (540,607) (489,991) Deferred tax assets (liabilities), net (W 348,563) (W 323,096) Current, net W61,152 W- Non-current, net (W409,715) (W323,096) d. Deferred tax assets (liabilities) added to (deducted from) capital surplusor capital adjustmentsDeferred tax assets (liabilities) added to (deducted from) capital surplus orcapital adjustments as of December 31, 2005 are as follows (in millions ofKorean Won) :Considerations for conversion right (W18,502) Unrealized loss on valuation of 15,982long-term investment securities Equity in capital adjustment of affiliates, net (32,349) Loss on valuation of currency swap 5,377 Total (W29,492) e. Effective tax rateEffective tax rates for the years ended December 31, 2005 and 2004 are asfollows (in millions of Korean Won) : 2005 2004 Income before income tax expenses W2,554,613 W2,115,778 Income tax expenses 683,233 620,926 Effective tax rate 26.75% 29.35% f. Income taxes payable and prepaid income taxes before offsetIncome taxes payable and prepaid income taxes as of December 31, 2005 and 2004are as follows (in millions of Korean Won) : 2005 2004 Prepaid income taxes (W312,143) (W272,332) Income taxes payable 678,722 540,129 Income taxes payable-net W366,579 W267,797 17. NET INCOME AND ORDINARY INCOME PER SHAREThe Company's net income and ordinary income per share amounts for the yearsended December 31, 2005 and 2004 are computed as follows (in millions of KoreanWon, except for per share data) :Net income and ordinary income per share 2005 2004 Net income and ordinary income W1,871,380 W1,494,852 Weighted average number of common shares outstanding 73,614,296 73,614,297 Net income and ordinary income per share (in Korean Won) W25,421 W20,307 The Weighted average number of common shares outstanding for the years endedDecember 31, 2005 and 2004 is calculated as follows : Number of Weighted Weighted shares number of days number of shares For 2005 At January 1, 2005 82,276,711 365 / 365 82,276,711 Treasury stock, at the (8,662,415) 365 / 365 (8,662,415) beginning Total 73,614,296 73,614,296 For 2004 At January 1, 2004 82,276,711 366 / 366 82,276,711 Treasury stock, at the (8,662,403) 366 / 366 (8,662,403) beginning Purchase of fractional shares related to merger with SK IMT (12) 316 / 366 (11) Co., Ltd. Total 73,614,296 73,614,297 Diluted net income and ordinary income per share amounts for the years endedDecember 31, 2005 and 2004 are computed as follows (in millions of Korean Won,except for per share data) :Diluted net income and ordinary income per share 2005 2004 Adjusted net income and ordinary income W1,884,435 W1,502,169 Adjusted Weighted average number of common shares outstanding 75,332,996 74,596,777 Diluted net income and ordinary income per share W25,015 W20,137 Adjusted net income and ordinary income per share and the adjusted weightedaverage number of common shares outstanding for the years ended December 31,2005 and 2004 are calculated as follows (in millions of Korean Won) : 2005 2004 Net income and ordinary income W1,871,380 W1,494,852 Effect of stock option (note a) - - Effect of convertible bonds (note b) 13,055 7,317 Adjusted net income and ordinary income W1,884,435 W1,502,169 2005 2004 Weighted average number of common shares outstanding 73,614,296 73,614,297 Effect of stock options (note a) - - Effect of convertible bonds (note b) 1,718,700 982,480 Adjusted weighted average number of common shares outstanding 75,332,996 74,596,777 (note a) In the years ended December 31, 2005 and 2004, the outstanding stockoptions did not have a dilutive effect because the exercise price exceeded theaverage market price of common stock for the years ended December 31, 2005 and2004.(note b) Effect of convertible bonds represents the dilutive effect of suchbonds on net income and ordinary income per share determined on an as ifconverted basis.18. RESTRICTED CASH AND CASH EQUIVALENTSa. At December 31, 2005, the Company has guarantee deposits restricted for its checking accounts totaling W26 million and deposits restricted for the interest of the public totaling W10,000 million of which due date is August 10, 2006. b. The Company entered into a contract to sell the investment in common stock of KPMS Corporation, which was held by the Company and accounted for as available-for-sale securities, with First Data Corporation. Some portion of proceeds from sales of such investment totaling W1,137 million is kept in escrow accounts in accordance With the Escrow Agreement, which is restricted for use until November 16, 2007 (final settlement date). 19. DIVIDEND DISCLOSUREDetails of dividends which were declared for the years ended December 31, 2005and 2004 are as follows (in millions of Korean Won except for per share data) : Face Number of value shares per Dividend Dividend type outstanding share ratio Dividends 2005 Cash dividends 73,614,296 W500 200% W73,614 (interim) Cash dividends (year-end) 73,614,296 W500 1,600% 588,914 Total W662,528 2004 Cash dividends 73,614,308 W500 200% W73,614 (interim) Cash dividends (year-end) 73,614,296 W500 1,860% 684,613 Total W758,227 Dividends payout ratios (including interim dividend) for the years endedDecember 31, 2005 and 2004 are as follows (in millions of Korean Won) : 2005 2004 Dividends W662,528 W758,227 Net income 1,871,380 1,494,852 Dividends payout ratio 35.40% 50.72% Dividends yield ratios for the years ended December 31, 2005 and 2004 are asfollows (in Korean Won) : 2005 2004 Dividend per share W9,000 W10,300 Stock price at the year-end 181,000 197,000 4.97% 5.23% 20. INSURANCEAt December 31, 2005, certain of the Company's assets are insured with localinsurance companies as follows (in millions of Korean Won and thousands of U.S.dollars) : Insured Risk Carrying Coverage value US$ 65,000Property and Fire and comprehensive equipment liability W3,694,810 W7,255,411 In addition, the Company carries directors and officers liability coverageinsurance totaling W50,000 million.21. TRANSACTIONS WITH RELATED COMPANIESSignificant related party transactions and balances as of and for the yearsended December 31, 2005 and 2004 were as follows (in millions of Korean Won) : For the year For the year ended ended Description December 31, 2005 December 31, 2004 Transactions SK C&C Co., Ltd. : Purchases of property and equipment W246,600 W126,648 Commissions paid and other expenses 321,046 289,933 Commission and other income 7,853 7,918 SK Engineering & Construction Co., Ltd. : Construction 257,823 419,871 Commissions paid and other expenses 6,593 6,148 Commissions and other income 2,470 1,081 SK Networks Co., Ltd. : Purchases of property and equipment 5,857 3,087 Commissions paid and other expenses 425,832 400,290 Commissions and other income 12,546 13,196 SK Corporation : Purchases of property and equipment 1,106 4,071 Commissions paid and other expenses 44,746 47,438 Commissions and other income 8,926 7,994 Innoace Co., Ltd. : Purchases of property and equipment 13,634 23,776 Commissions paid and other expenses 2,109 4,337 Commissions and other income 218 296 SK Communications Co., Ltd. : Purchases of property and equipment 132 229 Commissions paid and other expenses 46,040 39,090 Commissions and other income 1,097 13,660 SK Telesys Co., Ltd. : Purchases of property and equipment 294,829 188,822 Commissions paid and other expenses 7,410 3,102 Commissions and other income 575 322 WiderThan Co., Ltd. : Purchases of property and equipment 13,248 4,418 Commissions paid and other expenses 97,869 82,364 Commissions and other income 1,727 1,084 Global credit & information Co.,Ltd. : Commissions paid and other expenses 37,549 35,617 Commissions and other income 1,106 865 Helio Inc. : Commissions and other income 11,914 - December 31, December 31, Description 2005 2004 Balances SK C&C Co., Ltd. : Accounts receivable W91 W77 Accounts payable 174,884 75,802 Guarantee deposits received 346 346 SK Engineering & Construction Co., Ltd. : Accounts receivable 97 76 Accounts payable 21,326 135,213 Guarantee deposits received 942 408 SK Networks Co., Ltd. : Accounts receivable 1,760 1,102 Guarantee deposits 113 113 Accounts payable 20,465 18,696 Guarantee deposits received 2,700 955 SK Corporation : Accounts receivable 1,643 2,392 Guarantee deposits paid 1,307 103,720 Accounts payable 6,767 19,917 Guarantee deposits received 6,173 10,194 Innoace Co., Ltd. : Accounts payable 6,100 15,199 Guarantee deposits received 2,138 2,138 SK Communications Co., Ltd. : Accounts receivable 195 235 Accounts payable 5,891 11,509 Guarantee deposits received 3,681 11,127 SK Telesys Co., Ltd. : Accounts receivable 3 11 Accounts payable 65,496 51,954 SK Wyverns Baseball Club Co., Ltd. : Long-term and short-term loans 5,857 7,957 WiderThan Co., Ltd. : Accounts receivable 4 58 Accounts payable 17,398 9,829 Global credit & information Co.,Ltd. : Accounts receivable 70 20 Accounts payable 6,533 6,140 Helio Inc. : Accounts receivable 11,914 - 22. PROVISION FOR MILEAGE POINTSThe Company, for its marketing purposes, grants certain mileage points("Rainbow Points") to its subscribers based on their usage of the Company'sservices. Rainbow Points provision was provided based on the historical usageexperience and the Company's marketing policy. Such provision as of December31, 2005 totaled W52,172 million and was recorded as accrued expenses.Details of change in the provisions for such mileage points for the years endedDecember 31, 2005 and 2004 are as follows (in millions of Korean Won) : 2005 2004 Beginning balance W61,596 W103,679 Present value discount (note a) (7,415) - Increase 7,265 - Decrease (9,274) (42,083) Ending Balance W52,172 W61,596 (note a) Effective January 1, 2005, pursuant to adoption of SKAS No.17 (See Note 2 .(l)), Rainbow Points provision is recorded at the present value, whichwas recorded at nominal value through 2004.23. DERIVATIVE INSTRUMENTSThe Company has entered into a foreign currency forward contract and afixed-to-fixed cross currency swap contract with Citi Bank, BNP Paribas andCredit Suisse First Boston International to hedge the foreign currency risk ofunguaranteed US dollar denominated bonds with face amounts totalingUS$300,000,000 at annual fixed interest rate of 4.25% issued on April 1, 2004. As of December 31, 2005, in connection with unsettled foreign currency swapcontract to which the cash flow hedge accounting is applied, an accumulatedloss on valuation of derivatives amounting to W14,177 million (excluding taxeffect totaling W5,377 million and foreign exchange translation gain arisingfrom unguaranteed US dollar denominated bonds totaling W40,652 million) wasaccounted for as a capital adjustment.In addition, the Company has entered into a fixed-to-fixed cross currency swapcontract with Credit Suisse First Boston International to hedge foreigncurrency risk of unguaranteed US dollar denominated convertible bonds With faceamounts of US$329,450,000 issued on May 27, 2004. In connection with unsettledfixed-to-fixed cross currency swap contract to which the cash flow hedgeaccounting is not applied, a gain on valuation of currency swap of W2,545million for the year ended December 31, 2005 and loss on valuation of currencyswap of W15,789 million for the year ended December 31, 2004 were chargedtocurrent operations. As of December 31, 2005, fair values of above derivativestotaling W73,450 million are recorded in long-term liabilities.Details of derivative instruments as of December 31, 2005 are as follows (inthousands of US dollars and millions of Korean Won) : Fair value Duration Designated Not Face of as cash Type Hedged item amount contract flow hedge Designated Total Fix-to-fixed Unguaranteed March cross US dollar 23, 2004 currency denominated ~ April swap bonds US$300,000 1, 2011 W60,206 W- W60,206 Unguaranteed Fix-to-fixed US dollar May 27, cross denominated 2004 currency convertible ~ May 27, swap bond US$100,000 2009 - 13,244 13,244 W60,206 W13,244 W73,450 The above derivative instruments designated as cash flow hedge mature within 63months from December 31, 2005 at the longest; and the expected portion ofcapital adjustments as of December 31, 2005, related to loss on valuation ofcurrency swap, to be recorded in earnings within the next 12 months amounts toW6,146 million.24. SUBSTANTIAL CHANGES IN THE BUSINESS ENVIRONMENTAcquisition of WiBro LicenseThe Company, together With KT Corporation and Hanaro Telecom Inc., acquired alicense for WiBro, a portable internet service That is scheduled to startcommercial operations in June 2006, as a result of the decision of theCommittee of Information and Communication Policy dated January 20, 2005. Withregard to this service, the Company paid W117 billion and received the WiBrolicense from the Ministry of Information and Technology in March 2005, whichwas recorded as an intangible asset.Establishment of Helio, Inc., a joint venture company in the U.S.A.In accordance with the resolution of the Company's board of directors datedJanuary 26, 2005, the Company and EarthLink, Inc., an internet service providerin the United States of America, agreed to establish 'Helio, Inc.', a jointventure company, in the United States of America in February 2005 in order toprovide wireless telecommunication service across the United States ofAmerica. The Company, via SK Telecom USA Holdings, Inc., its wholly-ownedsubsidiary in the United States of America, will invest US$220 million for a50% equity interest in the joint venture company from 2005 through 2007. Helio, Inc. will launch cellular voice and data services extensively across theUnited States of America during the second quarter of 2006 by renting networksfrom network operators throughout the United States of America also known aspartial mobile virtual network operator (MVNO) system.25. OPERATING RESULTS FOR THE FOURTH QUARTERThe Company's key operating results for the three months ended December 31,2005 and 2004 are as follows (in millions of Korean Won, except for income pershare) : 4th Quarter of 2005 2004 (unaudited) (unaudited) Operating revenue W2,626,557 W2,484,849 Ordinary income 567,123 481,355 Net income 447,975 348,072 Net income per share (in Korean Won) 6,085 4,728 Looking-Looking Statement DisclaimerThe material above contains looking-looking statements. Statements that arenot historical facts, including statements about our beliefs and expectations,are looking-looking statements. These statements are based on current plans,estimates and projections, and therefore you should not place undue reliance onthem. Such looking-looking statements involve known and unknown risks,uncertainties and other factors which may cause our actual results orperformance to be materially different from any future results or performanceexpressed or implied by such looking-looking statements. We do not make anyrepresentation or warranty, express or implied, as to the accuracy orcompleteness of the information contained herein, and nothing contained hereinis, or shall be relied upon as, a promise or representation, whether as to thepast or the future. Looking-looking statements speak only as of the date theyare made, and we undertake no obligation to update publicly any of them inlight of new information or future events. Additional information concerningthese and other risk factors are contained in our latest annual report on Form20-F and in our other filings with the U.S. Securities and Exchange Commission.SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized. SK Telecom Co., Ltd. (Registrant) By: /s/ Hyun Jong Song (Signature) Name: Hyun JongSong Title: Vice PresidentDate: April 10, 2006ENDSK TELECOM CO LD (GDR)
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