Directors' report

NATURE OF THE BUSINESS

PROFILE AND GROUP STRUCTURE

Datatec and its subsidiaries ("the Group") is an international ICT networking and services group with operations in many of the world's leading economies. The Group's main lines of business comprise: the global distribution of advanced networking and communication products ("Westcon"), ICT infrastructure solutions and network integration ("Logicalis") and telecommunication strategy consulting ("Analysys Mason").

The Group also has other interests, which are included with the Group Head Office under Other Holdings. These interests include the subsidiaries Westcon SA, formerly Westcon AME (operating in Africa), Online Distribution (operating in the Middle East) and African Legend Indigo, formerly Rangegate (operating in SA).

GROUP FINANCIAL RESULTS

Commentary on the Group financial results is given in the finance report. Full details of the financial position and financial results of the Group are set out in the financial statements.

SHARE CAPITAL

Authorised share capital
The authorised share capital of the Company was increased during the year under review pursuant to a special resolution passed at the annual general meeting in August 2006 and is now made up of 400 000 000 ordinary shares of one cent each.

Issued share capital
As at 28 February 2007, the issued share capital amounts to R1 552 985 divided into 155 298 505 ordinary shares of one cent each (2006: R1 463 595 comprising 146 359 468 ordinary shares).

SHARE CAPITAL ISSUED DURING THE YEAR

During the year, 956 015 shares were issued to settle obligations in terms of the Datatec Share Option Scheme and 748 349 in terms of acquisitions.
A further 7 234 673 shares were issued when the Company listed on the Alternative Investment Market (AIM) of the London Stock Exchange as explained below.
Share issue expenses in the current year amount to $5 million and have been set off against the share premium account. Financial details of the movement in share capital have been reflected in the statement of changes in equity in the annual financial statements.

DIRECTORS

Full details of the current Board of Directors appear on pages 16 and 17. During the year under review two new directors joined the Board: Prof Wiseman Nkuhlu joined on 1 September 2006 and Mr Stephen Davidson joined on 1 February 2007.

All directors, including non-executive directors, are required, in terms of the Company's articles of association, to retire but may offer themselves for re-election at least every three years. All directors are subject to re-election by shareholders at the first opportunity after their appointment in addition to re-election at least every three years.

Mr Chris Seabrooke and Mr Cedric Savage retire by rotation at the forthcoming annual general meeting ("AGM") and, being eligible, offer themselves for re-election. Mr Colin Brayshaw has announced his intention to retire after the forthcoming annual general meeting.

Brief curricula vitae of directors are included and further information on the directors, including their interests in the shares of the Company and share-based remuneration schemes, are provided in the remuneration report.

GOING CONCERN

The directors believe that the Datatec Group has adequate financial resources to continue in operation for the foreseeable future and accordingly the financial statements have been prepared on a going concern basis.

The following factors support the going concern assumption:
The Group is solvent and has access to sufficient cash resources. Shareholders' funds amount to $538 million (2006: $449 million) and working capital remains well controlled. Receivables and inventory are of sound quality and adequate provisions are held against both. The Group has sufficient liquidity and borrowing capacity to meet its ongoing operating needs, including approved capital expenditure.

The Group has no need to undertake a capital restructuring and key executive management is in place. The Board is not aware of any new material changes that may adversely impact the Group relative to customers, suppliers, services or markets. The Board is not aware of any material non-compliance with statutory or regulatory requirements and there are no pending legal proceedings other than in the normal course of business. The Board is not aware of any pending changes in legislation in any of the major countries in which it operates, that may affect the Group.

AIM LISTING

On 20 October 2006, the Company successfully listed on AIM. In parallel with the listing, the Company issued 7 234 673 ordinary shares at a placement price of 192 UK pence per share (approximately 360 US cents). The listing and the new issue follows on from Datatec's strategy to grow its international shareholder base and to deliver long-term sustainable above-average returns to shareholders. The capital raised from the listing was used for the development of the Group's international businesses.

INVESTMENTS AND SUBSIDIARIES

Financial information relating to the Group's investments and interests in subsidiaries is contained in Annexure 1 of the Group financial statements and Note 4 of the Company financial statements.

ACQUISITIONS

The following significant acquisitions were concluded during 2007:

On 28 April 2006, Westcon North America purchased the distribution arm of Ronco Communications and Electronics for $13 million in cash. As a result of this acquisition, Westcon is now the leading distributor of Nortel equipment. The fair value of the net assets acquired was $5 million and goodwill recognised amounted to $8 million.

On 1 May 2006, Logicalis US acquired the consulting business of Alliance Consulting for $5 million, of which $3 million was settled in cash and $2 million in Datatec shares. The fair value of the net assets acquired was $2 million and goodwill recognised amounted to $3 million. In terms of the purchase agreement, an additional consideration of a maximum of $2 million is payable if certain profit targets are met in the nine-month period following the acquisition.

On 1 September 2006, Logicalis US acquired Computech Resources Inc, an IBM Premier Business Partner and solution provider for $6 million in cash (net of cash acquired of $1 million). The fair value of the net assets acquired was $1 million and goodwill recognised amounted to $5 million. An additional contingent consideration of $0,8 million was paid in April 2007 as certain profit targets were achieved for the 12 months to 31 December 2006.

On 1 December 2006, Logicalis UK acquired certain assets of CSF Solutions Ltd, a UK-based enterprise IT solutions provider and CSF Managed Services PLC. The aggregate consideration for the business and assets, including a data centre, was $11 million, net of cash acquired of $1 million. The initial consideration was settled partly in cash and partly by the issue of new ordinary shares in Datatec.

CSF plans, deploys and manages enterprise IT solutions, principally based around IBM and HP products, supported by a wide range of professional and managed services.

BLACK ECONOMIC EMPOWERMENT

On 1 September 2006, Datatec merged its South African operations with African Legend Technologies as part of South Africa's Black Economic Empowerment programme. Datatec retained a 55% shareholding in the merged entity and African Legend Technologies holds the remaining 45%. The merged entity was named African Legend Indigo and includes Datatec's RangeGate and the African Legend Technologies business, African Legend Indigo (Pty) Ltd.

As part of the transaction, Datatec sold 45% of Westcon SA to African Legend Technologies. Westcon SA will however continue to operate as a standalone business.

SPECIAL RESOLUTIONS OF THE GROUP

On 7 September 2006 the Company registered a special resolution after receiving shareholder approval at the AGM to repurchase its own securities.

On 7 September 2006 the Company registered a special resolution after receiving shareholder approval at the AGM to increase its authorised share capital as described above.

CORPORATE GOVERNANCE COMPLIANCE STATEMENTS

A statement on the Group's corporate governance policies and procedures is set out in the corporate governance report.

SHARE OPTION AND MANAGEMENT INCENTIVE SCHEMES

Details of the Group's share option and other management incentive schemes are set out in the remuneration report.

EVENTS OCCURRING SUBSEQUENT TO THE YEAR-END

On 27 February 2007, Datatec Limited agreed to acquire NOXS Europe B.V. and NOXS Ireland Ltd from Unit 4 Agresso N.V. for a maximum cash consideration of $69 million. NOXS is a leading European distributor of security products and services with offices in France, Belgium, The Netherlands, Germany, the United Kingdom, Ireland and Italy. NOXS' primary vendors include Juniper Networks, Checkpoint Systems, Trend Micro, Nokia and McAfee. Completion of the acquisition occurred on 24 April 2007.

On 10 April 2007 Datatec Ltd agreed to acquire Crane Telecommunications Group Ltd, a leading UK-based European value-added distributor of voice, data and converged communications solutions for a maximum consideration of $41 million. The consideration payable on completion will comprise the issue of new ordinary Datatec shares to the value of $18 million and $23 million in cash. Completion of the acquisition occurred on 3 May 2007.

On 3 May 2007 the Group raised $35 million by an institutional placing of shares. $23 million of the proceeds was used to fund part of the Crane acquisition and $11 million of cash (net of costs) has been retained in the business to fund further acquisitions.

CAPITAL DISTRIBUTION

The Company will distribute out of share premium, in lieu of a dividend, approximately 10 US cents per share (70 RSA cents per share) for the year ended 28 February 2007, in terms of the general authority granted to directors at the AGM held on 15 August 2006 (for shareholders on the Jersey branch register the distribution will be paid in GBP translated at the closing exchange rate on Friday, 6 July 2007).

The salient dates are as follows:

Share certificates may not be dematerialised or rematerialised between Monday, 2 July 2007 and Friday, 6 July 2007, both daysinclusive.

The Company has instituted a policy of making an annual distribution to shareholders subject to annual review which will be influenced by business growth, acquisition activity, or changes in reported earnings resulting from applying fair value accounting principles.

ANNUAL GENERAL MEETING

The AGM will be held at 11:00 on 6 August 2007 at the Sandton Sun Intercontinental, 5th Street, Sandton. In addition to the ordinary business of the meeting, as special business, shareholder consent will be sought to authorise directors to repurchase the Company's shares from time to time according to certain guidelines and to change the articles of association in relation to certain aspects of Board meetings. Refer to the notice of the annual general meeting for further details.