**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**Form 20-F**

| o          | **Registration Statement pursuant to  Section 12(b) or (g) of the Securities Exchange Act of 1934**                                    |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | **or**                                                                                                                                                |
| x          | **Annual report pursuant to Section 13  or 15(d) of the Securities Exchange Act of 1934 for the fiscal year  ended December 31, 2005** |
| ** ** | **or**                                                                                                                                                |
| o          | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                               |
|       | **or**                                                                                                                                                |
| o          | **Shell company report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                            |
|       | Date of event requiring this shell company  report                                                                                                    |

 

**Commission file number 333-12032**

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**MOBILE TELESYSTEMS OJSC**

(Exact name of Registrant as specified inits charter)

**Not Applicable**

(Translation of Registrant’s name intoEnglish)

**RUSSIAN FEDERATION**

(Jurisdiction of incorporation ororganization)

**4 Marksistskaya Street, Moscow 109147Russian Federation**

(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) ofthe Act:

|                                                 | **Title of Each Class**         | ** ** |  | **Name of Each Exchange on which  Registered** | ** ** |
|-------------------------------------------------|---------------------------------|------------|--|------------------------------------------------|------------|
| **AMERICAN  DEPOSITARY SHARES,**                | **NEW  YORK STOCK EXCHANGE**    |
| **EACH  REPRESENTING 5 SHARES OF COMMON STOCK** |                            |
| **COMMON  STOCK, PAR VALUE 0.10 RUSSIAN**       | **NEW  YORK STOCK EXCHANGE(1)** |
| **RUBLES  PER SHARE**                           | ** **                      |

 

Securities registered or to be registeredpursuant to Section 12(g) of the Act:

**NONE**

**(Title ofClass)**

Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act:

**NONE**

**(Title ofClass)**

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Indicate thenumber of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.

1,987,925,652ordinary shares, par value 0.10 Russian rubles each and 152,710,974 AmericanDepositary Shares, as of December 31, 2005.

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

x Yes o No

If thisreport is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.

o Yes x No

Note—Checkingthe box above will not relieve any registrant required to file reports pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934 fromtheir obligations under those Sections.

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

x Yes o No

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfile, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (CheckOne):

| Large accelerated filer x |   | Accelerated Filer o |   | Non-accelerated filer o |
|--------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicate by check mark which financialstatement item the registrant has elected to follow. o Item 17 x Item 18

If this is anannual report, indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

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(1)             Listed, not for trading orquotation purposes, but only in connection with the registration of ADSspursuant to the requirements of the Securities and Exchange Commission.

 

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**TABLE OF CONTENTS**

| CAUTIONARY STATEMENT  REGARDING FORWARD-LOOKING STATEMENTS |   | 1                                                                             |   |
|------------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|
| ITEM 1.                                                    |   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                         |   | 2 |   |
| ITEM 2.                                                    |   | OFFER STATISTICS AND EXPECTED TIMETABLE                                       |   | 2 |   |
| ITEM  3.                                                   |   | KEY INFORMATION                                                               |   | 2 |   |
| A.                                                         |   | SELECTED FINANCIAL DATA                                                       |   | 2 |   |
| B.                                                         |   | CAPITALIZATION AND INDEBTEDNESS                                               |   | 5 |   |
| C.                                                         |   | REASONS FOR THE OFFER AND USE OF PROCEEDS                                     |   | 5 |   |
| D.                                                         |   | RISK FACTORS                                                                  |   | 5 |   |
| ITEM 4.                                                    |   | INFORMATION ON OUR COMPANY                                                    |   | 35 |   |
| A.                                                         |   | HISTORY AND DEVELOPMENT                                                       |   | 35 |   |
| B.                                                         |   | BUSINESS OVERVIEW                                                             |   | 37 |   |
| C.                                                         |   | ORGANIZATIONAL STRUCTURE                                                      |   | 67 |   |
| D.                                                         |   | PROPERTY, PLANT AND EQUIPMENT                                                 |   | 68 |   |
| ITEM 4A.                                                   |   | UNRESOLVED STAFF COMMENTS                                                     |   | 68 |   |
| ITEM 5.                                                    |   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                  |   | 68 |   |
| ITEM 6.                                                    |   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    |   | 123 |   |
| A.                                                         |   | DIRECTORS AND SENIOR MANAGEMENT                                               |   | 123 |   |
| B.                                                         |   | COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT                               |   | 125 |   |
| C.                                                         |   | BOARD PRACTICES                                                               |   | 127 |   |
| D.                                                         |   | EMPLOYEES                                                                     |   | 129 |   |
| E.                                                         |   | SHARE OWNERSHIP                                                               |   | 130 |   |
| ITEM 7.                                                    |   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                             |   | 130 |   |
| A.                                                         |   | MAJOR SHAREHOLDERS                                                            |   | 130 |   |
| B.                                                         |   | RELATED PARTY TRANSACTIONS                                                    |   | 131 |   |
| C.                                                         |   | INTERESTS OF EXPERTS AND COUNSEL                                              |   | 134 |   |
| ITEM  8.                                                   |   | FINANCIAL INFORMATION                                                         |   | 134 |   |
| A.                                                         |   | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL  INFORMATION                      |   | 134 |   |
| B.                                                         |   | SIGNIFICANT CHANGES                                                           |   | 135 |   |
| ITEM 9.                                                    |   | OFFER AND LISTING DETAILS                                                     |   | 136 |   |
| ITEM 10.                                                   |   | ADDITIONAL INFORMATION                                                        |   | 137 |   |
| A.                                                         |   | SHARE CAPITAL                                                                 |   | 137 |   |
| B.                                                         |   | CHARTER AND CERTAIN REQUIREMENTS OF RUSSIAN LEGISLATION                       |   | 138 |   |
| C.                                                         |   | MATERIAL CONTRACTS                                                            |   | 152 |   |
| D.                                                         |   | EXCHANGE CONTROLS                                                             |   | 156 |   |
| E.                                                         |   | TAXATION                                                                      |   | 158 |   |
| F.                                                         |   | DIVIDENDS AND PAYING AGENTS                                                   |   | 163 |   |
| G.                                                         |   | STATEMENT BY EXPERTS                                                          |   | 163 |   |
| H.                                                         |   | DOCUMENTS ON DISPLAY                                                          |   | 163 |   |
| I.                                                         |   | SUBSIDIARY INFORMATION                                                        |   | 163 |   |
| ITEM 11.                                                   |   | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                   |   | 163 |   |
| ITEM 12.                                                   |   | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                        |   | 167 |   |
| ITEM 13.                                                   |   | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                               |   | 168 |   |
| ITEM 14.                                                   |   | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY  HOLDERS AND USE OF PROCEEDS |   | 168 |   |
| ITEM 15.                                                   |   | CONTROLS AND PROCEDURES                                                       |   | 168 |   |
| ITEM 16A.                                                  |   | AUDIT COMMITTEE FINANCIAL EXPERT                                              |   | 168 |   |
| ITEM  16B.                                                 |   | CODE OF ETHICS                                                                |   | 168 |   |
| ITEM 16C.                                                  |   | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                        |   | 168 |   |
| ITEM 16D.                                                  |   | EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT  COMMITTEES                    |   | 169 |   |
| ITEM 16E.                                                  |   | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND  AFFILIATED PURCHASERS       |   | 169 |   |
| ITEM  17.                                                  |   | FINANCIAL STATEMENTS                                                          |   | 170 |   |
| ITEM  18.                                                  |   | FINANCIAL STATEMENTS                                                          |   | 170 |   |
| ITEM 19.                                                   |   | EXHIBITS                                                                      |   | 170 |   |

 

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Unless the context otherwiserequires, references to “MTS,” “we,” “us,” or “our” refer to Mobile TeleSystemsOJSC and its subsidiaries. “UMC” refers to Ukrainian Mobile Communications, ourUkrainian operations, which we acquired in March 2003. We refer to MobileTeleSystems LLC, our 49%-owned joint venture in Belarus as MTS-Belarus.As MTS-Belarus is an equity investee, our revenues and subscriber data do notinclude MTS-Belarus. Our reporting currency is the U.S. dollar and we prepareour consolidated financial statements in accordance with accounting principlesgenerally accepted in the United States, or U.S. GAAP.

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In this document, references to “U.S.dollars,” “dollars,” “$” or “USD” are to the lawful currency of the UnitedStates, references to “rubles” or “RUR” are to the lawful currency of theRussian Federation, references to “hryvnias” are to the lawful currency ofUkraine and references to “€,” “euro” or “EUR” are to the lawfulcurrency of the member states of the European Union that adopted a singlecurrency in accordance with the Treaty of Rome establishing the EuropeanEconomic Community, as amended by the treaty on the European Union, signed atMaastricht on February 7, 1992.

ii

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGSTATEMENTS**

Matters discussed in this document mayconstitute forward-looking statements within the meaning of Section 27Aof the U.S. Securities Act of 1933 (the “U.S. Securities Act”) and Section 21Eof the U.S. Securities Exchange Act of 1934 (the “U.S. Exchange Act”). ThePrivate Securities Litigation Reform Act of 1995 provides safe harborprotections for forward-looking statements in order to encouragecompanies to provide prospective information about their businesses. Forward-lookingstatements include statements concerning plans, objectives, goals, strategies,future events or performance, and underlying assumptions and other statements,which are other than statements of historical facts.

MobileTeleSystems OJSC, or MTS, desires to take advantage of the safe harborprovisions of the Private Securities Litigation Reform Act of 1995 and isincluding this cautionary statement in connection with this safe harborlegislation and other relevant law. This document and any other written or oralstatements made by us or on our behalf may include forward-lookingstatements, which reflect our current views with respect to future events andfinancial performance. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,”“forecast,” “project,” “predict,” “plan,” “will,” “may,” “should,” “could” andsimilar expressions identify forward-looking statements. Forward-lookingstatements appear in a number of places including, without limitation, “Item 3.Key Information—D. Risk Factors,” “Item 4. Information on Our Company—B.Business Overview” and “Item 5. Operating and Financial Review and Prospects,”and include statements regarding:

·       strategies,outlook and growth prospects;

·       futureplans and potential for future growth;

·       liquidity,capital resources and capital expenditures;

·       growth indemand for our services;

·       economicoutlook and industry trends;

·       developmentsof our markets;

·       the impactof regulatory initiatives; and

·       thestrength of our competitors.

The forward-looking statements inthis document are based upon various assumptions, many of which are based, inturn, upon further assumptions, including without limitation, management’sexamination of historical operating trends, data contained in our records andother data available from third parties. Although we believe that theseassumptions were reasonable when made, because these assumptions are inherentlysubject to significant uncertainties and contingencies which are difficult orimpossible to predict and are beyond our control, we cannot assure you that wewill achieve or accomplish these expectations, beliefs or projections. Inaddition to these important factors and matters discussed elsewhere herein andin the documents incorporated by reference herein, important factors that, inour view, could cause actual results to differ materially from those discussedin the forward-looking statements include the achievement of theanticipated levels of profitability, growth, cost and synergy of our recent acquisitions,the timely development and acceptance of new products, the impact ofcompetitive pricing, the ability to obtain necessary regulatory approvals, thecondition of the economies of Russia, Ukraine and certain other CIS countries,political stability in Russia, Ukraine and certain other CIS countries, theimpact of general business and global economic conditions and other importantfactors described herein and from time to time in the reports filed by us withthe U.S. Securities and Exchange Commission, or the SEC.

Except to the extent required by law,neither we, nor any of our respective agents, employees or advisors intends orhas any duty or obligation to supplement, amend, update or revise any of theforward-looking statements contained or incorporated by reference in thisdocument.

1

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**PART I**

**Item 1.**                        *Identity of Directors, Senior Management andAdvisors*

Not applicable.

**Item 2.**                        *Offer Statistics and Expected Timetable*

Not applicable.

**Item 3.**                        *Key Information*

**A.**                SelectedFinancial Data

The selectedconsolidated financial data for the years ended December 31, 2003, 2004and 2005, and as of December 31, 2004 and 2005, are derived from theaudited consolidated financial statements, prepared in accordance with U.S.GAAP included elsewhere in this document. In addition, the following tablepresents selected consolidated financial data for the years ended December 31,2001 and 2002, and as of December 31, 2001, 2002 and 2003, derived fromour audited consolidated financial statements not included in this document.Our results of operations are affected by acquisitions. Results of operationsof acquired businesses are included in our audited consolidated financialstatements from their respective dates of acquisition. The summary financialdata should be read in conjunction with our audited consolidated financialstatements, included elsewhere in this document, “D. Risk Factors” and “Item 5.Operating and Financial Review and Prospects.” Certain industry and operatingdata are also provided below. 
|                                                                                         | ** ** | **Years Ended December 31,**                                                                                                                               | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2001**                                                                                                                                                                  | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                              | ** ** | **(Amounts in thousands, except share and per share amounts,   industry and operating data and ratios)** | ** ** |
| **Consolidated statements of operations data:**                                         |       |                                                                                                                                                                      |       |   |   |   |   |   |   |   |   |
| **Net operating revenues:**                                                             |       |                                                                                                                                                                      |       |   |   |   |   |   |   |   |   |
| Service  revenues and connection fees                                              |       | $851,374                                                                                                                                                                  |       | $1,299,141 |   | $2,465,089 |   | $3,800,271 |   | $4,942,288 |   |
| Sales of  handsets and accessories                                                      |       | 41,873                                                                                                                                                                    |       | 62,615 |   | 81,109 |   | 86,723 |   | 68,730 |   |
| Total  net operating revenues                                                           |       | 893,247                                                                                                                                                                   |       | 1,361,756 |   | 2,546,198 |   | 3,886,994 |   | 5,011,018 |   |
| **Operating expenses:**                                                                 |       |                                                                                                                                                                      |       |   |   |   |   |   |   |   |   |
| Cost of  services, excluding depreciation and amortization shown separately below  |       | 143,665                                                                                                                                                                   |       | 196,445 |   | 301,108 |   | 481,097 |   | 732,867 |   |
| Cost of  handsets and accessories                                                       |       | 39,828                                                                                                                                                                    |       | 90,227 |   | 173,071 |   | 218,590 |   | 254,606 |   |
| Sales and  marketing expenses                                                           |       | 107,729                                                                                                                                                                   |       | 171,977 |   | 326,783 |   | 460,983 |   | 608,092 |   |
| Depreciation  and amortization expenses                                            |       | 133,318                                                                                                                                                                   |       | 209,680 |   | 415,916 |   | 675,729 |   | 907,113 |   |
| Sundry  operating expenses(1)                                                           |       | 134,598                                                                                                                                                                   |       | 229,056 |   | 406,722 |   | 631,532 |   | 876,309 |   |
| Impairment of  investment                                                               |       | 10,000                                                                                                                                                                    |       | — |   | — |   | — |   | — |   |
| Net  operating income                                                                   |       | 324,109                                                                                                                                                                   |       | 464,371 |   | 922,598 |   | 1,419,063 |   | 1,632,031 |   |
| Currency  exchange and transaction losses (gains)                                       |       | 2,264                                                                                                                                                                     |       | 3,474 |   | (693 | ) | (6,529 | ) | (10,319 | ) |

2

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| **Other income  (expenses):**                                                                                 |   |          |   |          |   |          |   |          |   |          |   |
|---------------------------------------------------------------------------------------------------------------|--------|---------------|--------|---------------|--------|---------------|--------|---------------|--------|---------------|--------|
| Interest  income                                                                                              |   | (11,829       | )      | (8,289        | )      | (18,076       | )      | (21,792       | )      | (24,828       | )      |
| Interest expense, net of capitalized  interest                                                                |   | 6,944         |   | 44,389        |   | 106,551       |   | 107,956       |   | 132,474       |   |
| Equity  in net income of associates                                                                           |   | —        |   | —        |   | (2,670        | )      | (24,146       | )      | (42,361       | )      |
| Other income  (expenses), net                                                                                 |   | (2,672        | )      | (2,454        | )      | 6,090         |   | (9,310        | )      | 13,211        |   |
| Total other income (expenses), net                                                                       |   | (7,557        | )      | 33,646        |   | 91,895        |   | 52,708        |   | 78,496        |   |
| Income before provision for income taxes  and minority interest                                               |   | 329,402       |   | 427,251       |   | 831,396       |   | 1,372,884     |   | 1,563,854     |   |
| Provision  for income taxes                                                                                   |   | 98,128        |   | 110,417       |   | 242,480       |   | 354,664       |   | 410,590       |   |
| Minority  interest                                                                                            |   | 7,536         |   | 39,711        |   | 71,677        |   | 30,342        |   | 26,859        |   |
| Net  income before cumulative effect of a change in accounting principle                                      |   | 223,738       |   | 277,123       |   | 517,239       |   | 987,878       |   | 1,126,405     |   |
| Cumulative  effect of a change in accounting principle, net of income taxes of $9,644 in  2001                |   | (17,909       | )      | —        |   | —        |   | —        |   | —        |   |
| Net  income                                                                                                   |   | $205,829      |   | $277,123      |   | $517,239      |   | $987,878      |   | $1,126,405    |   |
| Dividends  declared                                                                                           |   | $2,959        |   | —        |   | $111,355      | (2)    | $219,918      | (2)    | $402,692      | (2)    |
| Pro  forma net income giving effect to the change in accounting principle, had it  been applied retroactively |   | 223,738       |   | 277,123       |   | 517,239       |   | 987,878       |   | 1,126,405     |   |
| Net  income per share, basic and diluted                                                                 |   | 0.10          |   | 0.14          |   | 0.26          |   | 0.50          |   | 0.57          |   |
| Dividends  declared per share                                                                                 |   | —        |   | —        |   | 0.06          |   | 0.11          |   | 0.20          |   |
| Weighted  average number of shares of common stock outstanding                                                |   | 1,983,359,507 |   | 1,983,359,507 |   | 1,983,374,949 |   | 1,984,497,348 |   | 1,986,819,999 |   |
| **Consolidated  cash flow data:**                                                                             |   |          |   |          |   |          |   |          |   |          |   |
| Cash  provided by operating activities                                                                   |   | $338,201      |   | $412,772      |   | $965,984      |   | $1,711,589    |   | $1,797,380    |   |
| Cash  used in investing activities                                                                            |   | (441,523      | )      | (697,921      | )      | (1,910,087    | )      | (1,543,201    | )      | (2,452,117    | )      |
| (of  which capital expenditures)(3)                                                                           |   | (441,200      | )      | (574,272      | )      | (958,771      | )      | (1,358,944    | )      | (2,181,347    | )      |
| Cash  provided by financing activities                                                                        |   | 247,592       |   | 100,817       |   | 997,545       |   | 10,773        |   | 461,528       |   |
| **Consolidated  balance sheet data (end of period):**                                                         |   |          |   |          |   |          |   |          |   |          |   |
| Cash,  cash equivalents and short-term investments                                                            |   | $304,933      |   | $64,661       |   | $335,376      |   | $347,510      |   | $106,343      |   |
| Property,  plant and equipment, net                                                                           |   | 856,056       |   | 1,344,633     |   | 2,256,076     |   | 3,234,318     |   | 4,482,679     |   |
| Total  assets                                                                                                 |   | 1,727,492     |   | 2,283,296     |   | 4,225,351     |   | 5,581,187     |   | 7,545,780     |   |
| Total  debt (long-term and short-term)(4)                                                                |   | 325,840       |   | 454,485       |   | 1,660,334     |   | 1,937,148     |   | 2,850,557     |   |
| Total  shareholders’ equity                                                                              |   | 1,018,279     |   | 1,302,044     |   | 1,723,910     |   | 2,523,323     |   | 3,294,089     |   |
| Including  capital stock                                                                                      |   | 40,352        |   | 40,352        |   | 40,361        |   | 43,162        |   | 45,024        |   |
| **Financial  ratios (end of period):**                                                                        |   |          |   |          |   |          |   |          |   |          |   |
| Total  debt/total capitalization(5)                                                                           |   | 24.2          | %      | 25.9          | %      | 49.1          | %      | 43.4          | %      | 46.4          | %      |

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| **Industry  and operating data:****(6)**                         |   |   |   |   |   |   |   |   |   |   |   |
|------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Mobile penetration in Russia (end of  period)                    |   | 6      | %      | 12     | %      | 25     | %      | 51     | %      | 87     | %      |
| Mobile penetration in Ukraine (end of  period)                   |   | — |   | — |   | 13     | %      | 29     | %      | 64     | %      |
| Subscribers in Russia (end of period,  thousands)(7)             |   | 2,650  |   | 6,644  |   | 13,370 |   | 26,540 |   | 44,219 |   |
| Subscribers in Ukraine (end of period,  thousands)(7)            |   | — |   | — |   | 3,349  |   | 7,374  |   | 13,327 |   |
| Overall market share in the Moscow license  area (end of period) |   | 50     | %      | 43     | %      | 43     | %      | 45     | %      | 45     | %      |
| Overall market share in Russia (end of  period)                  |   | 33     | %      | 38     | %      | 37     | %      | 36     | %      | 35     | %      |
| Overall  market share in Ukraine (end of period)                 |   | — |   | — |   | 51     | %      | 53     | %      | 44     | %      |
| Average  monthly usage per subscriber in Russia (minutes)(8)     |   | 157    |   | 159    |   | 144    |   | 157    |   | 128    |   |
| Average  monthly usage per subscriber in Ukraine (minutes)(8)    |   | — |   | — |   | 97     |   | 114    |   | 117    |   |
| Average  monthly service revenue per subscriber in Russia(9)     |   | $36    |   | $23    |   | $17    |   | $12    |   | $8     |   |
| Average  monthly service revenue per subscriber in Ukraine(9)    |   | — |   | — |   | $15    |   | $13    |   | $10    |   |
| Subscriber  acquisition costs in Russia(10)                 |   | $56    |   | $35    |   | $26    |   | $21    |   | $19    |   |
| Subscriber  acquisition costs in Ukraine(10)                     |   | — |   | — |   | $32    |   | $19    |   | $14    |   |
| Churn  in Russia(11)                                             |   | 26.8   | %      | 33.9   | %      | 47.3   | %      | 27.5   | %      | 20.7   | %      |
| Churn  in Ukraine(11)                                            |   | — |   | — |   | 23.8   | %      | 15.8   | %      | 21.8   | %      |

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(1)                 “Sundry operating expenses”consist of general and administrative expenses, provision for doubtful accountsand other operating expenses (including charges incurred in connection with the“universal services reserve fund”).

(2)                 Includes dividends on treasuryshares of $0.4 million, $1.1 million and $1.5 million for the years ended December 31,2003, 2004 and 2005, respectively. In June 2006, our shareholders approvedannual cash dividends in the amount of $561.6 million (including dividends ontreasury shares of $1.5 million) for the year 2005, payable in 2006.

(3)                 Capital expenditures includepurchases of property, plant and equipment and intangible assets.

(4)                 Includes notes payable, bankloans, capital lease obligations and other debt.

(5)                 Calculated as book value oftotal debt divided by the sum of the book values of total shareholders’ equityand total debt at the end of the relevant period. See note 5 above for thedefinition of “total debt.”

(6)                 Source: Sotovik, J’Son &Partners, AC&M-Consulting, Ukrainian News and our data. None of this datais derived from our audited consolidated financial statements.

(7)                 We define a subscriber as anindividual or organization whose account shows chargeable activity within61 days (or 183 days in the case of the “Jeans” and “SIM-SIM” brandtariffs) or whose account does not have a negative balance for more than thisperiod.  Prior to October 1, 2004,UMC used a 90-day period for such purposes with respect to its “Jeans”and “SIM-SIM” subscribers.

(8)                 Average monthly minutes ofusage per subscriber is calculated by dividing the total number of minutes ofusage during a given period by the average number of our subscribers during theperiod and dividing by the number of months in that period. For Ukraine, the2003 figure has been calculated based on the months of March through December 2003.

(9)                 Average monthly service revenueper subscriber is calculated by dividing our service revenues for a givenperiod, including guest roaming fees, by the average number of our subscribersduring that period and dividing by the number of months in that period. ForUkraine, the 2003 figure has been calculated based on the months of March throughDecember 2003.

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(10)             Subscriber acquisition costsare calculated as total sales and marketing expenses and handset subsidies fora given period divided by the total number of gross subscribers added duringthat period. For Ukraine, the 2003 figure has been calculated based on themonths of March through December 2003.

(11)             We define our churn as the total number of subscriberswho cease to be a subscriber (as defined above) during the period (whetherinvoluntarily due to non-payment or voluntarily, at such subscriber’s request),expressed as a percentage of the average number of our subscribers during thatperiod. For Ukraine, the 2003 figure has been annualized based on the months ofMarch through December 2003. The significant decrease in the 2004churn rates in Ukraine is largely attributable to the change in our churnpolicy for “Jeans” and “SIM-SIM” subscribers in Ukraine. See note 7above. Under the previous churn policy, the 2004 churn rates would have been23%.

**B.**               Capitalizationand Indebtedness

Not applicable.

**C.**               Reasonsfor the Offer and Use of Proceeds

Not applicable.

**D.**              RiskFactors

*Aninvestment in our securities involves a high degree of risk. You shouldcarefully consider the following information about these risks, together withother information contained in this document, before you decide to buy oursecurities. If any of the following risks actually occur, our business,prospects, financial condition or results of operations could be materiallyadversely affected. In that case, the value of our securities could alsodecline and you could lose all or part of your investment.*

*We have described the risks anduncertainties that our management believes are material, but these risks anduncertainties may not be the only ones we face. Additional risks anduncertainties, including those we currently are not aware of or deemimmaterial, may also result in decreased revenues, increased expenses or otherevents that could result in a decline in the value of our securities.*

**RisksRelating to Business Operations in Emerging Markets**

***Emergingmarkets such as the Russian Federation, Ukraine and other CIS countries aresubject to greater risks than more developed markets, including significantlegal, economic and political risks.***

Investors in emerging markets such as theRussian Federation, Ukraine and other CIS countries should be aware that thesemarkets are subject to greater risk than more developed markets, including insome cases significant legal, economic and political risks. Investors shouldalso note that emerging economies such as the economies of the RussianFederation and Ukraine are subject to rapid change and that the information setout herein may become outdated relatively quickly. Furthermore, in doingbusiness in various countries of the CIS, we face risks similar to (andsometimes greater than) those that we face in Russia and Ukraine. Accordingly,investors should exercise particular care in evaluating the risks involved andmust decide for themselves whether, in light of those risks, their investmentis appropriate. Generally, investment in emerging markets is only suitable forsophisticated investors who fully appreciate the significance of the risksinvolved and investors are urged to consult with their own legal and financialadvisors before making an investment in our securities.

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**Risks Relating to Our Business**

***If our purchase of UMC is found to have violatedUkrainian law or the purchase is unwound, our business, financial condition,results of operations and prospects would be materially adversely affected.***

On June 7, 2004, theGeneral Prosecutor of Ukraine filed a claim against us and others in the KievCommercial Court seeking to unwind the sale by Ukrtelecom of its 51% stake inUMC to us. The complaint also sought an order prohibiting us from alienating51% of our stake in UMC until the claim was resolved on the merits. The claimwas based on a provision of the Ukrainian privatization law that includedUkrtelecom among a list of “strategic” state holdings prohibited fromalienating or encumbering its assets during the course of its privatization.While the Cabinet of Ministers of Ukraine in May 2001 issued a decreespecifically authorizing the sale by Ukrtelecom of its entire stake in UMC, theGeneral Prosecutor asserted that the decree contradicted the privatization lawand that the sale by Ukrtelecom was therefore illegal and should be unwound. OnAugust 12, 2004, the Kiev Commercial Court rejected the General Prosecutor’sclaim.

On August 26, 2004,the General Prosecutor requested the Constitutional Court of Ukraine to reviewwhether certain provisions of the Ukrainian privatization law limiting thealienation of assets by privatized companies were applicable to the sale byUkrtelecom of UMC shares to us. As of the date of this document, theConstitutional Court of Ukraine has not yet responded to the General Prosecutor’srequest.

If the ConstitutionalCourt of Ukraine determines that Ukrtelecom’s sale of its stake in UMCcontradicted the terms of the Ukrainian privatization law, the GeneralProsecutor would be able to request the Kiev Commercial Court to reopen thecase based on new circumstances and could potentially include additionalplaintiffs that were not parties to the original proceeding and/or additionalclaims.

In addition, as UMC wasformed during the time when Ukraine’s legislative framework was developing inan uncertain legal environment, its formation and capital structure may also besubject to challenges. In the event that our purchase of UMC is found to haveviolated Ukrainian law or the purchase is unwound, in whole or in part, ourbusiness, financial condition, results of operations and prospects would bematerially adversely affected.

***Our controlling shareholder has the ability to takeactions that may conflict with the interests of holders of our ADSs.***

We are controlled bySistema, which controls 52.8% of our outstanding shares. If not otherwiserequired by law, resolutions at a shareholders’ meeting will be adopted by asimple majority in a meeting at which shareholders holding more than half ofthe issued share capital are present or represented. Accordingly, Sistema hasthe power to control the outcome of most matters to be decided by vote at ashareholders’ meeting and, as long as it holds, directly or indirectly, themajority of our shares, will control the appointment of a majority of directorsand removal of directors. Sistema is also able to control or significantlyinfluence the outcome of any vote on, among other things, any proposedamendment to our charter, reorganization proposal, proposed substantial sale ofassets or other major corporate transactions. Thus, Sistema can take actionsthat may conflict with the interests of other shareholders and holders of ourADSs.

Sistema has outstanding asignificant amount of indebtedness, including $350.0 million of notesmaturing in 2008, $350.0 million of notes maturing in 2011 and $350.0 millionoutstanding under a $600.0 million credit facility agreement Sistema enteredinto with Vneshtorgbank, maturing in 2010. In addition, the notes maturing in2011 can be redeemed at the option of the noteholders in 2007. Therefore,Sistema will require significant funds to meet its obligations, which may comein part from dividends paid by its subsidiaries, including us.

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Sistema voted in favor ofdeclaring dividends of $220.0 million in 2004, $402.6 million in 2005and $561.6 million in 2006. The indentures relating to our outstanding notes donot restrict our ability to pay dividends. As a result of paying dividends, ourreliance on external sources of financing may increase, and our cash flow andability to repay our debt obligations, or make capital expenditures,investments and acquisitions could be materially adversely affected.

Sistema also owns aninterest in Sky Link CJSC, which operates on a CDMA-2000 standard in anumber of key regions, including Moscow and St. Petersburg. Sky Link may pursuebusiness strategies that specifically target high-end businesses andresidential customers, which could result in increased competition for us.

In addition, Sistema ownsan interest in Comstar UTS, which is a leading provider of integratedcommunications services in Moscow and the Moscow region. Comstar UTS may pursuetechnologies that would allow its subscribers to take advantage of the fixedmobile convergence, or FMC, trend, resulting in increased competition for us.An FMC product such as an integrated Wi-Fi/mobile handset would automaticallyconnect to a fixed network when in close proximity and to a mobile network whenthe subscriber is far from a fixed network (*e.g*.,in transit or outside a building). Given that most mobile calls are made whenthe subscriber is stationary and/or in close proximity to a fixed network, theopportunity for fixed-line operators to take back revenue that has been lost tomobile providers with an FMC product is significant.

***Increased competition and a more diverse subscriberbase have resulted in decreasing average monthly service revenues persubscriber, which may materially adversely affect our results of operations.***

While our subscriber baseand revenues are growing as we continue to grow our operations, our averagemonthly service revenues per subscriber are decreasing. For example, ouraverage monthly service revenues per subscriber in Russia for 2003, 2004 and2005 was $17, $12 and $8, respectively. We expect our average monthly servicerevenues per subscriber to stabilize towards the end of 2006 and thereafter.See “Item 5. Operating and Financial Review and Prospects.” In addition, arecent amendment to the Federal Law on Communications to become effective July 1,2006, will implement the “calling party pays,” or CPP, principle prohibitingmobile operators from charging their subscribers for incoming calls. Currently,subscribers of fixed line operators can initiate calls to mobile phone usersfree of charge. Under the new system, fixed line operators will begin chargingtheir subscribers for such calls and transfer a percentage of the charge tomobile operators terminating such calls. The introduction of CPP may have anegative impact on our average monthly service revenues per subscriber andmargins depending on the settlement rate between mobile and fixed lineoperators set by the government. A decrease in our average monthly servicerevenues per subscriber may materially adversely affect our results ofoperations.

***A continued decline in Ukraine-Russia relationscould materially adversely affect our business, financial condition, results ofoperations and prospects.***

The relationship betweenUkraine and Russia has been historically strained due, among other things, toUkraine’s failure to pay arrears relating to the supply of energy resources,Russia’s introduction of a 18% value-added tax, or VAT, on Ukrainian importsand border disputes.

Tensions between Russiaand Ukraine were most recently ignited in relation to a dispute over thedecision of Russian gas monopoly Gazprom to increase the price of natural gassold to Ukraine. Although this dispute was settled in January 2006 withthe parties’ entry into a new gas transportation contract, the terms of thiscontract have been subject to severe criticism in both countries and led, amongother things, to the Ukrainian parliament’s attempt to dismiss the Ukrainiangovernment in January 2006.

A continued decline inUkraine-Russia relations and any changes adversely affecting energysupplies from Russia to Ukraine and/or Ukraine’s export of services and goodsto Russia could materially adversely 

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impactthe Ukrainian economy, our Ukrainian operations and our financial condition,results of operations and prospects. See “—Risks Relating to the RussianFederation and Ukraine—Political and Social Risks—Recent political turmoil inUkraine could have a material adverse effect on our operations in Ukraine, andon our business, financial condition and results of operations.”

***To comply with the requirements of Section 404 ofthe Sarbanes-Oxley Act of 2002, we will have to divert significant moneysand resources, including senior management time, from our operating businesses,which could materially adversely affect our business, results of operations andprospects.***

Section 404 of theSarbanes-Oxley Act and the SEC’s and the PCAOB’s regulations thereunderbecome applicable to us for the fiscal year ending December 31, 2006.These new regulations include a requirement that our management evaluate theeffectiveness of our internal control over financial reporting on an annualbasis and disclose any material weaknesses in our internal control overfinancial reporting. Our independent registered public accounting firm will berequired to attest management’s assessment. We believe that significant time,effort and expense, including time of senior management, beyond what wasalready spent will be required to design, maintain and evaluate the internalcontrol system over financial reporting under these new rules. These costs arehigh for us due to the geographic location of our operations and significantchanges we made in our business processes, organization structure and theimplementation of a new billing and enterprise resource planning system. Forthese reasons, the costs involved in achieving Section 404 compliancecould have a material adverse effect on our business, financial condition,results of operation and prospects.

***We are in the process of transferring to a new billingsystem, which could have a material adverse effect on our business and resultsof operations in the short term.***

We are in the process ofimplementing a new billing system, which we expect to complete in December 2006.We expect the new billing system will ultimately increase our overallefficiency and reduce our expenses in the long term. During the transitionperiod, however, we will be required to run both the old and new billingsystems simultaneously, creating additional burdens on our technical supportstaff. We may also experience technical problems with the new billing systemduring the transition period. These factors may increase our operational risksand expenses and inconvenience subscribers in the short term. The failure or breakdownof key components of our infrastructure in the future, including our billingsystem and its susceptibility to fraud, could have a material adverse effect onour business and results of operations.

***If we cannot successfully develop our network or integrateour acquired businesses, we will be unable to expand our subscriber base andmaintain our profitability.***

Weplan to expand our network infrastructure in the following ways:

·       extendcoverage and increase the capacity of our existing network in the Moscow andregional license areas;

·       furtherdevelop our operations in Ukraine, Uzbekistan and Turkmenistan and makeinvestments in MTS Belarus; and

·       introduceservice in the regions in which we have licenses and have not yet commencedoperations.

Our ability to increaseour subscriber base depends upon the success of our network expansion. We haveexpended considerable amounts of resources to enable this expansion. Limitedinformation regarding the markets into which we have or are consideringexpanding, either through acquisitions or new licenses, complicates accurateforecasts of future revenues from those regions, increasing the risk that wemay overestimate these revenues.

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In addition, we haveexpanded our network through acquisitions and we may continue to engage infurther acquisitions. We may not be able to integrate previous or futureacquisitions successfully or operate them profitably. Such integration requiressignificant time and effort from our senior management, who are alsoresponsible for managing our existing operations. Such integration may also bedifficult as our technical systems may differ from those of the acquiredbusinesses. In addition, unpopular cost cutting measures may be required andcontrol of cash flow may be difficult to establish. Any difficultiesencountered in the transition and integration process could have a materialadverse effect on our results of operations.

We also may face risksduring the course of our expansion into countries outside of the RussianFederation. Differing cultures and more uncertain business operatingenvironments could lead to lower profitability and higher risks to ourbusiness. For example, in 2005 we acquired a 51% stake in the company owningindirectly 100% of Bitel LLC (“Bitel”), a mobile operator holding a GSM900/1800 license for the entire territory of the Kyrgyz Republic. In December 2005,Bitel’s offices were seized by an unidentified group of people, possibly inconnection with a Kyrgyz Supreme Court ruling in favor of a third party recognizingtheir rights to the shares of Bitel. As a result of these events, we currentlydo not exercise operational control over Bitel and are in the process ofdefending our ownership stake in the company in the courts of the KyrgyzRepublic, British Virgin Islands and United Kingdom.

The buildout of ournetwork is also subject to risks and uncertainties, which could delay theintroduction of service in some areas and increase the cost of networkconstruction, including difficulty in obtaining base station sites oncommercially attractive terms. In addition, telecommunications equipment usedin Russia, Ukraine and other CIS countries is subject to governmentalcertification, and periodic renewals of the same. The failure of any equipmentwe use to receive timely certification or re-certification could also hinderour expansion plans. To the extent we fail to expand our network on a timelybasis, we could experience difficulty in expanding our subscriber base.

***If we cannot interconnect cost-effectively with othertelecommunications operators, we may be unable to provide services atcompetitive prices and therefore lose market share and revenues.***

Our ability to providecommercially viable services depends on our ability to continue to interconnectcost-effectively with fixed line and mobile (local, domestic and international)operators in Russia, Ukraine, and other countries in which we operate. Fees forinterconnection are established by agreements with network operators and vary,depending on the network used, the nature of the call and the call destination.

In Russia, the governmentplans to privatize Svyazinvest, a holding company that controls Rostelecom, anddomestic and international long distance operator, and certain regional fixedline operators. In Ukraine, the government plans to privatize Ukrtelecom, whichhas a market share of over 80% of all fixed line telecommunications services inUkraine. The timing of these privatizations is not yet known, and it is unclearhow these privatizations will affect our interconnection arrangements andcosts.

Although Russianlegislation requires that operators of public switched telephone networks, orPSTNs, may not refuse to provide interconnections or discriminate against oneoperator over another, we believe that, in practice, some public networkoperators attempt to impede wireless operators by delaying interconnectionapplications, by establishing technical conditions for interconnection feasibleonly to certain operators. Any difficulties or delays in interconnectingcost-effectively with other networks could hinder our ability to provideservices at competitive prices or at all, causing us to lose market share andrevenues, which could have a material adverse effect on our business andresults of operations.

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***Governmental regulation of our interconnect rates inUkraine could adversely affect our results of operations.***

Under the UkrainianTelecommunications Law adopted in November 2003, the National Commissionfor the Regulation on Communications, or the NCRC, commencing January 1,2005, has been entitled to regulate the tariffs for public telecommunicationsservices rendered by fixed line operators, whereas the mobile cellularoperators (including UMC) are entitled to set their retail tariffs andnegotiate interconnect rates with other operators. However, the NCRC would beentitled to regulate the interconnect rates of any mobile cellular operatordeclared a “dominant market force” by the Antimonopoly Committee of Ukraine, orthe AMC. Although UMC currently has over a 35% market share of the wirelesscommunications market in Ukraine, it has not been declared a dominant marketforce by the AMC. Government regulation of our interconnect rates could limitor decrease our interconnect revenues, which could have a material adverseeffect on our results of operations.

In addition, we believethat the state-owned fixed line operator monopolies, Ukrtelecom and UTEL,are currently able to influence telecommunications policy and regulation andmay cause substantial increases in interconnect rates for access to fixed lineoperators’ networks by the mobile cellular operators. Such increases couldcause our costs to increase, which could have a material adverse effect on ourresults of operations. Similarly, Ukrtelecom and UTEL may cause substantialdecreases in interconnect rates for access to mobile cellular operators’networks by the fixed line operators, which could cause our revenues todecrease and materially adversely affect our results of operations.

***If frequencies currently assigned to us are reassignedto other users or if we fail to obtain renewals of our frequency allocations,our network capacity will be constrained and our ability to expand limited,resulting in a loss of market share and lower revenues.***

There is a limited numberof frequencies available for wireless operators in each of the regions in whichwe operate or hold licenses to operate. We are dependent on access to adequatespectrum allocation in each market in which we operate in order to maintain andexpand our subscriber base. While we believe that our current spectrumallocations are sufficient, frequency may not be allocated to us in the futurein the quantities, with the geographic span and for time periods that wouldallow us to provide wireless services on a commercially feasible basisthroughout all of our license areas. For example, the availability offrequencies in the GSM 900 MHz band in Ukraine is limited by the fact that theUkrainian military has a number of frequencies for its exclusive use. While futurecapacity constraints could be reduced by an increase in the GSM frequenciesallocated to us, including additional frequencies in the GSM 1800 MHz band, wemay not be awarded some or any of the remaining GSM spectrum. In addition, theUkrainian government is currently delaying the allocation of new frequencies towireless communications operators in Ukraine which, in turn, may constrain ournetwork capacity in those areas of Ukraine characterized by high subscriberusage.

A loss of assignedspectrum allocation, which is not replaced by other adequate allocations, couldalso have a substantial adverse impact on our network capacity. In addition,frequency allocations are often issued for periods that are shorter than theterms of the licenses, and such allocations may not be renewed in a timelymanner or at all. If our frequencies are revoked or we are unable to renew ourfrequency allocations, our network capacity would be constrained and ourability to expand limited, resulting in a loss of market share and lowerrevenues.

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***Because we lack a comprehensive back-up system for ournetwork and insurance for our computer systems, a network or computer systemsfailure could prevent us from operating our business and lead to a loss ofsubscribers, damage to our reputation and violations of the terms of ourlicenses and subscriber contracts and penalties.***

We are able to deliverservices only to the extent that we can protect our network systems againstdamage from communications failures, computer viruses, power failures, naturaldisasters and unauthorized access. Any system failure, accident or securitybreach that causes interruptions in our operations could impair our ability toprovide services to our customers and materially adversely affect our businessand results of operations. In addition, to the extent that any disruption orsecurity breach results in a loss of or damage to customers’ data orapplications, or inappropriate disclosure of confidential information, we mayincur liability as a result, including costs to remedy the damage caused bythese disruptions or security breaches.

We have back-up capacityfor our network management, operations and maintenance systems, but automatictransfer to back-up capacity is limited. In the event that the primary networkmanagement center was unable to function, significant disruptions to oursystems would occur, including our inability to provide services. Disruptionsin our services occurred in the Moscow license area on May 30, 2003, inthe Kiev license area on August 31, 2004 and September 1-2,2004, in the Nizhny Novgorod license area on December 10, 2004, 2005, inthe Kirov license area on December 21, 2004, in the Ekaterinburg licensearea on February 21-22, 2005, in the Moscow license area on May 25-27,2005, in the Saransk license area on September 1, 2005 and October 6,2005 and in the Orenburg license area on November 15, 2005. See “Item 4.Information on Our Company—B. Business Overview—Regulation in Ukraine—Competition”for a description of the recommendation issued by the AMC to UMC following theKiev area disruptions. These types of disruptions may recur, which could leadto a loss of subscribers, damage to our reputation, violations of the terms ofour licenses and subscriber contracts and penalties.

Our computer andcommunications hardware is protected through physical and software safeguards.However, it is still vulnerable to fire, storm, flood, loss of power,telecommunications failures, interconnection failures, physical or softwarebreak-ins, viruses and similar events. Although we have insured our computerand communications hardware against fires, storms and floods, we do not carrybusiness interruption insurance to protect us in the event of a catastrophe,even though such an event could have a material adverse effect on our business.

***Failure to fulfill the terms of our licenses couldresult in their suspension or termination, which could have a material adverseeffect on our business and results of operations.***

Each of our licensesrequires service to be started by a specific date and most contain furtherrequirements as to network capacity and territorial coverage to be reached byspecified dates. If we fail to comply with the requirements of applicableRussian, Ukrainian or other applicable legislation or we fail to meet any termsof our licenses, our licenses and other authorizations necessary for ouroperations may be suspended or terminated. A suspension or termination of ourlicenses or other necessary governmental authorizations could have a materialadverse effect on our business and results of operations.

***If we are unable to maintain our favorable brandimage, we may be unable to attract new subscribers and retain existingsubscribers, leading to loss of market share and revenues.***

Our ability to attract newsubscribers and retain existing subscribers depends in part on our ability tomaintain what we believe to be our favorable brand image. Negative publicity orrumors regarding our company or shareholders and affiliates or our servicescould negatively affect this brand image, which could lead to loss of marketshare and revenues.

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***The failure of our new re-branding effortslaunched in 2006 could adversely affect our financial condition and results ofoperations.***

InMay 2006, Sistema introduced a universal brand featuring a new logo foreach of the telecommunications companies operating within the Sistema Telecomgroup, including us. We have spent significant time and resources on ourre-branding efforts. For example, we are currently circulating new paymentcards and have launched a federal advertising campaign with new advertising andinformational materials. We introduced a revised website with the new logo and have begun redesigning our salesoffices to better serve existing and potential customers. Although we expectour re-branding efforts to increase our recognition among subscribers, promotecross-sales of the companies using the brand and enhance subscriber loyalty, wecannot assure you that our efforts will be successful. The failure of ournew-re-branding efforts could adversely affect our financial condition and resultsof operations.

***We may be unable to obtain licenses forthird-generation, or UMTS, wireless services on commercially reasonableterms or at all, which would hinder us from competing effectively withoperators who are able to provide these services and limit our ability toexpand our services.***

During the pastfew years, the Ministry of Information Technologies and Communications hasstated its intention to announce the procedures for the award of licenses forUMTS wireless services. To date, however, no procedures have been announced.Depending upon the procedures adopted, we may be unable to obtain UMTS licenseson commercially reasonable terms or at all. Failure to obtain UMTS licenses forthe Moscow and other license areas or Ukraine would hinder us from competingeffectively with operators who are able to provide these services and limit ourability to expand our services, which could have a material adverse effect onour business, financial condition, results of operations and prospects.

In addition, weemploy technology based primarily on the Global System for MobileCommunications, or GSM, standard. The UMTS standard is significantly superiorto existing second-generation standards such as GSM. The adoption of UMTSmay consequently increase the competition we face. The technology we currentlyuse may become obsolete or uncompetitive and, if we are not able to develop astrategy compatible with this or any other new technology, we may not be ableto acquire new technologies necessary to compete on reasonable terms. Inaddition, expenditures in connection with new technology may adversely affectour ability to expand in other areas.

Licenses forthe use of code division multiple access, or CDMA, technology have already beengranted for the provision of fixed wireless services in a number of regionsthroughout Russia. CDMA is a second-generation digital cellular telephonytechnology that can be used for the provision of both wireless and fixedservices. Although CDMA technology is currently classified in Russia as a fixedradio-telephone service, it may be used for wireless communications, andit may be offered for use via portable handsets. Currently, CDMA technology isoffered by certain mobile operators in Russia using the NMT-450 standard.If CDMA operators were able to develop a widespread network throughout Russia,we would face increased competition.

***Failure to renew our licenses or receiverenewed licenses with similar terms to our existing licenses could have amaterial adverse effect on our business and results of operations.***

Ourtelecommunications licenses expire in various years from 2006 to 2016 and maybe renewed upon application to the relevant governmental authorities.Government officials in Russia and the other CIS countries in which we operatehave broad discretion in deciding whether to renew a license, and may notrenew  licenses after expiration. Iflicenses are renewed, they may be renewed with additional obligations,including payment obligations.

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In addition,the license requirements in our current telecommunications licenses may notcomply with the requirements set forth in the new regulations effective from January 1,2006. Although such non-compliance will not invalidate our licenses, theFederal Service for Supervision in the Area of Communications is requiringcommunications operators to apply for amendments of all their licenses grantedprior to January 1, 2004. We were not able to have all our licenses issuedprior to January 1, 2004, amended prior to January 1, 2006.

Failure torenew our telecommunications licenses or receive renewed licenses with similarterms to existing licenses could significantly limit our operations, whichcould have a material adverse effect on our business and results of operations.

***We engage in transactions with relatedparties, which may present conflicts of interest, potentially resulting in theconclusion of transactions on terms not determined by market forces.***

We havepurchased interests in various mobile telecommunications companies from Sistemaand entered into arrangements with subsidiaries of Sistema for advertising(Maxima and Mediaplanning), interconnection services (MTT), insurance services(Rosno), interconnection and telephone numbering capacity (MGTS, Comstar UTSand MTU-Inform), IT services and hardware purchases (Kvazar-Micro),banking services (MBRD), office leases (MGTS) and the purchase of a new billingsystem (STROM Telecom). Furthermore, we have entered into a number of equipmentlease agreements with Invest-Svyaz Holding, one of our shareholders and awholly-owned subsidiary of Sistema.

Related partytransactions with Sistema and other companies within the Sistema group maypresent conflicts of interest, potentially resulting in the conclusion oftransactions on terms less favorable than could be obtained in arm’s-lengthtransactions.

***If the Federal Antimonopoly Service was toconclude that we acquired or created a new company in contravention ofantimonopoly legislation, it could impose administrative sanctions and requirethe divestiture of this company or other assets.***

Our businesseshave grown substantially through the acquisition and formation of companies,many of which required the prior approval of, or subsequent notification to,the Federal Antimonopoly Service or its predecessor agencies. In part, relevantlegislation in certain cases restricts the acquisition or formation ofcompanies by groups of companies or individuals acting in concert without suchprior approval or notification. While we believe that we have complied with theapplicable legislation for our acquisitions and formation of new companies,this legislation is sometimes vague and subject to varying interpretations. Ifthe Federal Antimonopoly Service was to conclude that an acquisition orformation of a new company was done in contravention of applicable legislation,it could impose administrative sanctions and require the divestiture of thiscompany or other assets, which could have a material adverse effect on ourbusiness, financial condition and results of operations.

In addition, ifwe or any of our subsidiaries were to be classified by the Federal AntimonopolyService (or the AMC with respect to our operations in Ukraine) as a dominantmarket force or as having a dominant position in the market, the FederalAntimonopoly Service would have the power to impose certain restrictions ontheir businesses. These restrictions could result in competitive disadvantages,and materially adversely affect the business and results of operations of theseentities. See “—Risks Relating to Our Business—If we are found to have adominant position in our markets, the government may regulate our tariffs andrestrict our operations.”

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***In the event that our minority shareholdersor minority shareholders of our subsidiaries were to challenge successfullypast or future interested party transactions, or do not approve interestedparty transactions or other matters in the future, the invalidation of suchtransactions or failure to approve such matters could have a material adverseeffect on our business, financial condition, results of operations andprospects.***

We own lessthan 100% of the equity interests in some of our subsidiaries. In addition,certain of our wholly-owned subsidiaries have had other shareholders in thepast. We and our subsidiaries in the past have carried out, and continue tocarry out, transactions with us and others which may be considered to be “interestedparty transactions” under Russian law, requiring approval by disinteresteddirectors, disinterested independent directors or disinterested shareholdersdepending on the nature of the transaction and parties involved. The provisionsof Russian law defining which transactions must be approved as “interestedparty transactions” are subject to different interpretations. We cannot assureyou that our and our subsidiaries’ applications of these concepts will not besubject to challenge by former and current shareholders. Any such challenges,if successful, could result in the invalidation of transactions, which couldhave a material adverse effect on our business, financial condition, results ofoperations and prospects.

In addition,Russian law requires a three-quarters majority vote of the holders ofvoting stock present at a shareholders’ meeting to approve certain transactionsand other matters, including, for example, charter amendments, majortransactions involving assets in excess of 50% of the assets of the company,repurchase by the company of shares and certain share issuances. In some cases,minority shareholders may not approve interested party transactions requiringtheir approval or other matters requiring approval of minority shareholders orsupermajority approval. In the event that these minority shareholders were tochallenge successfully past interested party transactions, or do not approveinterested party transactions or other matters in the future, we could belimited in our operational flexibility and our business, financial condition,results of operations and prospects could be materially adversely affected.

***All or part of our subscriber database,containing private information relating to our subscribers, was illegallycopied and stolen in early 2003 and is currently publicly sold in Russia.***

In January 2003,we discovered that part of our database of subscribers, containing privatesubscriber information, was illegally copied and stolen. The database containedinformation such as the names, addresses, home phone numbers, passport detailsand other personal information of approximately five million of oursubscribers. Following its theft, this database was available for sale inRussia. In addition, in May 2003, certain subscriber databases of severaloperators in the North-West region, including those of MTS, MegaFon, DeltaTelecom and two other operators, were stolen and are currently being sold.

In December 2003,we completed our internal investigation relating to the theft of our subscriberdatabases and found that these incidents were due to weaknesses in our internalsecurity in relation to physical access to such information. We have takenmeasures that we believe will prevent such incidents from occurring in thefuture, but such incidents may nonetheless recur.

In January 2003,lawsuits were filed by two of our subscribers seeking compensation for damagesresulting from the leak of the subscribers’ confidential information. While thesubscribers subsequently withdrew their claims, if similar lawsuits aresuccessful in the future, we might have to pay significant damages, includingconsequential damages, which could have a material adverse effect on ourresults of operations. Future breaches of security may also negatively impactour reputation and our brand image and lead to a loss of market share, whichcould materially adversely affect our business, financial condition, results ofoperations and prospects.

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***We face increasing competition that mayresult in reduced operating margins and loss of market share, as well asdifferent pricing, service or marketing policies.***

The Russianwireless telecommunications services market is highly competitive. The trend inRussian government licensing policies has been to increase competition amongwireless telecommunications service providers. Russian regulatory authoritieshave moved from granting exclusive licenses for each technology standard perregion to granting multiple licenses covering the same territory. Increasedcompetition, including from the potential introduction of new mobile operatorsin the markets where we operate, may result in reduced operating margins andloss of market share, as well as different pricing, service or marketingpolicies.

***A merger between our largest competitorswould result in a competitor substantially larger than us with leading marketshares in the Russian and/or Ukrainian mobile communications markets.***

In August 2003,Russian financial industrial conglomerate Alfa Group, which owns a 25.1% stakein Vimpelcom, announced its purchase of CT-Mobile, which owns a 25.1% stake inMegaFon. This acquisition gives Alfa Group a 25.1% blocking stake in MegaFonand the press reported that Alfa Group might seek to merge Vimpelcom andMegaFon, Russia’s second and third largest wireless communications providersand our two largest competitors. In 2006, the press reported that Vimpelcom’s shareholders,Alfa Group and Telenor, announced that they are considering the merger ofVimpelcom and Kyivstar, the leading mobile operator in Ukraine. According tothe reports, Vimpelcom made a proposal to Kyivstar’s shareholders to acquiretheir shares, but subsequently withdrew the offer in June 2006. Though itis unclear whether such mergers might occur, in the event that they do, theywould result in a competitor substantially larger than us with leading marketshares in the Russian and/or Ukrainian wireless communications markets.

***If we are found to have a dominant positionin our markets, the government may regulate our tariffs and restrict ouroperations.***

Under Russianlegislation, the Federal Antimonopoly Service may categorize a company as adominant force in a market. Current Russian legislation does not clearly define“market” in terms of the types of services or the geographic area. As of December 31,2005, MTS OJSC is categorized as a company with a market share exceeding 35% inMoscow and the Moscow region. This classification, in turn, gives the FederalAntimonopoly Service the power to impose certain restrictions on the businessesof those entities.

Additionally,UMC, which has over a 40% market share of the Ukrainian wireless communicationsmarket, can be categorized as a company with a dominant position in the marketand become subject to specific government-imposed restrictions. While UMCis currently not categorized as a company with a dominant position in themarket, it reduced certain of its tariffs at the recommendation of theAntimonopoly Committee of Ukraine, or the AMC, in April 2004. See “Item 4.Information on Our Company—B. Business Overview—Regulation in Ukraine—Competition”for additional information.

If we or any ofour subsidiaries were classified as a dominant market force or as having adominant position in the market, the imposition of government-determinedtariffs could result in competitive disadvantages, and our business and resultsof operations could be materially adversely affected. Our refusal to adjust ourtariffs according to such government-determined rates could result in thewithholding of all our revenues by Russian authorities. Additionally,restrictions on expansion or government-mandated withdrawal from regions ormarkets could reduce our subscriber base and prevent us from implementing ourbusiness strategy. Moreover, we could be required to make additional licenseapplications at an additional unexpected cost.

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***Alleged medical risks of cellulartechnology may subject us to negative publicity or litigation, decrease ouraccess to base station sites, diminish subscriber usage and hinder access toadditional financing.***

Electromagneticemissions from transmitter masts and mobile handsets may harm the health ofindividuals exposed for long periods of time to these emissions. The actual orperceived health risks of transmitter masts and mobile handsets couldmaterially adversely affect us by reducing subscriber growth, reducing usageper subscriber, increasing the number of product liability lawsuits, increasingthe difficulty in obtaining or maintaining sites for base stations and/orreducing the financing available to the wireless communications industry.

**Risks Relating to Our Financial Condition**

***Servicing and refinancing our indebtednesswill require a significant amount of cash. Our ability to generate cash orobtain financing depends on many factors beyond our control.***

We have asubstantial amount of outstanding indebtedness, primarily consisting of theobligations we entered into in connection with our notes and bank loans. At December 31,2005, our consolidated total debt, including capital lease obligations, wasapproximately $2,850.6 million, and we have signed several agreements foradditional financing for an aggregate amount of approximately $1,430.0 millionsince December 31, 2005. Our interest expense was approximately$132.5 million, net of amounts capitalized as of December 31, 2005.

Our ability toservice, repay and refinance our indebtedness and to fund planned capitalexpenditures will depend on our ability to generate cash in the future. This,to a certain extent, is subject to general economic, financial, competitive,legislative, regulatory and other factors that are beyond our control. If weare unable to generate sufficient cash flow or otherwise obtain funds necessaryto make required payments, we may default under the terms of our indebtedness,and the holders of our indebtedness would be able to accelerate the maturity ofsuch indebtedness, potentially causing cross-defaults under and acceleration ofour other indebtedness.

We may not beable to generate sufficient cash flow or access international capital marketsor incur additional indebtedness to enable us to service or repay ourindebtedness or to fund our other liquidity needs. We may be required torefinance all or a portion of our indebtedness on or before maturity, sellassets, reduce or delay capital expenditures or seek additional capital.Refinancing or additional financing may not be available on commerciallyreasonable terms or at all, and we may not be able to sell our assets, or ifsold, the proceeds therefrom may not be sufficient to meet our debt serviceobligations. Our inability to generate sufficient cash flow to satisfy our debtservice obligations, or to refinance debt on commercially reasonable terms,would materially adversely affect our business, financial condition, results ofoperations and prospects. See “Item 5. Operating and Financial Review andProspects—Liquidity and Capital Resources.”

***If we are unable to obtain adequatecapital, we may have to limit our operations substantially, which could have amaterial adverse effect on our business, financial condition, results ofoperations and prospects.***

We will need to make significant capital expenditures, particularly inconnection with the development, construction and maintenance of, and thepurchasing of software for, our GSM network. We spent approximately$958.8 million in 2003, approximately $1,358.9 million in 2004 and approximately$2,181.3 million in 2005 for the fulfillment of our capital spendingplans. In addition, the acquisition of UMTS licenses and frequency allocationsand the buildout of a UMTS network will require additional capitalexpenditures. However, future financings and cash flow from our operations maynot be sufficient to meet our planned needs in the event of variousunanticipated potential developments, including the following:

·       a lack ofexternal financing sources;

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·       changes inthe terms of existing financing arrangements;

·       constructionof the wireless networks at a faster rate or higher capital cost thananticipated;

·       pursuit ofnew business opportunities or investing in existing businesses that requiresignificant investment;

·       acquisitionsor development of any additional wireless licenses;

·       slowerthan anticipated subscriber growth;

·       slowerthan anticipated revenue growth;

·       regulatorydevelopments;

·       changes inexisting interconnect arrangements; or

·       adeterioration in the Russian economy.

Also, currentlywe are not able to raise equity financing through depositary receipts such asADRs due to Russian securities regulations providing that no more than 35%(which, prior to December 31, 2005, and at the time of our initial publicoffering, was 40%) of a Russian company’s shares may be circulated abroadthrough sponsored depositary receipt programs. If we cannot obtain adequatefunds to satisfy our capital requirements, we may need to limit our operationssignificantly, which could have a material adverse effect on our business,financial condition, results of operations and prospects.

***Changes in the exchange rate of the rubleagainst the U.S. dollar could adversely impact our revenues and costs.***

A significantportion of our costs, expenditures and liabilities, including capitalexpenditures and borrowings (including our U.S. dollar-denominatednotes), are either denominated in, or closely linked to, the U.S. dollar, whilesubstantially all of our revenues are denominated in rubles. As a result, thedevaluation of the ruble against the U.S. dollar can adversely affect us byincreasing our costs in ruble terms. Although the ruble has not declinedagainst the U.S. dollar in the years presented in the consolidated financialstatements included elsewhere in this annual report, we nonetheless link ourtariffs in most parts of Russia, which are payable in rubles, to the U.S.dollar in order to hedge against this risk. The effectiveness of this hedge islimited, however, as we may not be able to increase prices in line with rubledevaluation against the U.S. dollar due to competitive pressures or regulatoryrestrictions, leading to a loss of revenue in U.S. dollar terms. We do notengage in any other currency hedging arrangements. Additionally, if the ruble declinesagainst the U.S. dollar and price increases cannot keep pace, we could havedifficulty repaying or refinancing our U.S. dollar-denominatedindebtedness, including our notes. The devaluation of the ruble also results inlosses in the value of ruble-denominated assets, such as ruble deposits.

The decline inthe value of the ruble against the U.S. dollar also reduces the U.S. dollarvalue of tax savings arising from the depreciation of our property, plant andequipment, since their basis for tax purposes is denominated in rubles at thetime of the investment. Increased tax liability would increase total expenses.Furthermore, the increase in the value of the ruble against the U.S. dollarcould result in a net foreign exchange loss due to an increase in the costsassociated with our ruble-denominated liabilities and, as a result, our netincome could decrease.

***Inflationcould increase our costs and adversely affect our results of operations.***

The Russianeconomy has been characterized by high rates of inflation. In both 2004 and2005, the inflation rate, combined with the nominal appreciation of the ruble,resulted in the appreciation of the ruble against the U.S. dollar in realterms. As we tend to experience inflation-driven increases in certain of 

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ourcosts, including salaries and rents, which are sensitive to rises in thegeneral price level in Russia, our costs in U.S. dollar terms will rise. Inthis situation, due to competitive pressures, we may not be able to raise theprices we charge for our products and services sufficiently to preserveoperating margins. Accordingly, high rates of inflation in Russia couldincrease our costs and decrease our operating margins.

***Russiancurrency control regulations hinder our ability to conduct our business.***

The CentralBank of Russia has from time to time imposed various currency controlregulations, and may take further actions in the future. Furthermore, thegovernment and the Central Bank of Russia may impose additional requirements oncash inflows and outflows into and out of Russia or on the use of foreigncurrency in Russia, which could prevent us from carrying on necessary businesstransactions, or from successfully implementing our business strategy.

The existingframework law on exchange controls took effect on June 18, 2004. This lawempowers the government and the Central Bank of Russia to further regulate andrestrict currency control matters, including operations involving foreignsecurities and foreign currency borrowings by Russian companies. The law alsoabolished the need for companies to obtain transaction-specific licensesfrom the Central Bank of Russia, envisaging instead the implementation ofgenerally applicable restrictions on currency operations. This regulatoryregime continues to be restrictive.

***Restrictions on investments outside Russiaor in hard-currency-denominated instruments in Russia expose our cashholdings to devaluation.***

Currencyregulations established by the Central Bank of Russia restrict investments byRussian companies outside Russia and in most hard-currency-denominatedinstruments in Russia, and there are only a limited number of ruble-denominatedinstruments in which we may invest our excess cash. Any balances maintained inrubles will give rise to losses if the ruble devalues against the U.S. dollar.

Additionally,Russian companies must repatriate 100% of offshore foreign currency earnings toRussia. In 2005, Russian companies were required to convert 10% of thoseearnings into rubles within seven days of receipt. While this conversionrequirement was abolished in April 2006, Russian legislation allows theCentral Bank of Russia to reinstate the conversion requirement in any amount upto 30%. We earned approximately $112.0 million, $93.3 million and$99.4 million in foreign currency in 2003, 2004 and 2005, respectively,primarily from our roaming agreements. This requirement further increasesbalances in our ruble-denominated accounts and, consequently, ourexposure to devaluation risk.

***Continued or increased limitations on the conversionof rubles to foreign currency in Russia could increase our costs when makingpayments in foreign currency to suppliers and creditors and could cause us todefault on our obligations to them.***

Many of ourmajor capital expenditures are denominated and payable in various foreigncurrencies, including the U.S. dollar and euro. For example, as of December 31,2005, we had $388.2 million committed under non-binding contracts withforeign suppliers for the purchase of network infrastructure that were primarilydenominated in U.S. dollars. Russian legislation currently permits theconversion of rubles into foreign currency. However, the market in Russia forthe conversion of rubles into foreign currencies is limited and may notcontinue to exist.

Additionally,any delay or other difficulty in converting rubles into a foreign currency tomake a payment or delay in or restriction on the transfer of foreign currencycould limit our ability to meet our payment and debt obligations, which couldresult in the loss of suppliers, acceleration of debt obligations and cross-defaultsand, consequently, have a material adverse effect on our business, financialcondition and results of operations.

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***Indentures relating to our notes and ourcontrolling shareholder Sistema’s notes contain, and some of our loanagreements contain, restrictive covenants, which limit our ability to incurdebt and to engage in various activities.***

The indenturesrelating to our outstanding notes contain covenants limiting our ability toincur debt, create liens on our properties and enter into sale and lease-backtransactions. The indentures also contain covenants limiting our ability tomerge or consolidate with another person or convey our properties and assets toanother person, as well as our ability to sell or transfer any of our or oursubsidiaries’ GSM licenses for the Moscow, St. Petersburg, Krasnodar andUkraine license areas. Some of our loan agreements contain similar and othercovenants. Failure to comply with these covenants could cause a default andresult in the debt becoming immediately due and payable, which would materiallyadversely affect our business, financial condition and results of operations.

In addition,Sistema, which controls 52.8% of our outstanding shares and consolidates ourresults in its financial statements, is subject to various covenants in theindentures related to its $350.0 million in aggregate principal amount ofnotes due 2008 and $350.0 million in aggregate principal amount of notesdue 2011, which impose restrictions on Sistema and its restricted subsidiaries(including us) with respect to, *inter alia*,incurrence of indebtedness, creation of liens and disposal of assets. In theseindentures, Sistema undertakes that it will not, and will not permit itsrestricted subsidiaries (including us) to, incur indebtedness unless a certaindebt/EBITDA (as defined therein) ratio is met. In addition to us, Sistema hasother businesses that require capital and, therefore, the consolidated Sistemagroup’s capacity to incur indebtedness otherwise available to us could bediverted to its other businesses. Sistema may also enter into other agreementsin the future that may further restrict it and its restricted subsidiaries(including us) from engaging in these and other activities. We expect Sistemato exercise its control over us in order for Sistema, as a consolidated group,to meet its covenants, which could materially limit our ability to obtain additionalfinancing required for the implementation of our business strategy.

***If a change in control occurs, ournoteholders and other debt holders may require us to redeem notes or otherdebt, which could have a material adverse effect on our financial condition andresults of operations.***

Under the terms of our outstanding notes, if a change in controloccurs, our noteholders will have the right to require us to redeem notes notpreviously called for redemption. The price we will be required to pay uponsuch event will be 101% of the principal amount of the notes, plus accruedinterest to the redemption date. A change in control will be deemed to haveoccurred in any of the following circumstances:

·       Any personacquires beneficial ownership of 50% or more of the total voting power of allshares of our common stock; provided that the following transactions would notbe deemed to result in a change in control:

·        anyacquisition by Sistema or its subsidiaries that results in the 50% thresholdbeing exceeded; and

·        anyacquisition by us, our subsidiary or our employee benefit plan.

·       We mergeor consolidate with or into, or convey, sell, lease or otherwise dispose of allor substantially all of our assets to, another entity or another entity mergesinto us and, immediately following such transaction, Sistema and T-Mobiletogether do not beneficially own at least 50% of the total voting power of allshares of common stock of such entity.

·       We nolonger beneficially own more than 50% of the issuer’s share capital.

If a change incontrol occurs, and our noteholders and other debt holders exercise their rightto require us to redeem all of their notes or debt, such event could have amaterial adverse effect on our financial condition and results of operations.

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**RisksRelating to the Russian Federation and Ukraine**

**EconomicRisks**

***Economic instability in Russia and Ukrainecould adversely affect our business.***

Sincethe dissolution of the Soviet Union in 1991, the Russian and Ukrainianeconomies have experienced at various times:

·       significantdeclines in gross domestic product;

·       hyperinflation;

·       anunstable currency;

·       highgovernment debt relative to gross domestic product;

·       a weakbanking system providing limited liquidity to domestic enterprises;

·       highlevels of loss-making enterprises that continued to operate due to the lack ofeffective bankruptcy proceedings;

·       significantuse of barter transactions and illiquid promissory notes to settle commercialtransactions;

·       widespreadtax evasion;

·       growth ina black and grey market economy;

·       pervasivecapital flight;

·       highlevels of corruption and the penetration of organized crime into the economy;

·       significantincreases in unemployment and underemployment; and

·       theimpoverishment of a large portion of the population.

Although Russia and Ukraine have benefitedrecently from the increase in global commodity prices, providing an increase indisposable income and an increase in consumer spending, the economies of thesecountries have been subject to abrupt downturns in the past. In particular, on August 17,1998, in the face of a rapidly deteriorating economic situation, the Russiangovernment defaulted on its ruble-denominated securities, the CentralBank of Russia stopped its support of the ruble and a temporary moratorium wasimposed on certain foreign currency payments. These actions resulted in animmediate and severe devaluation of the ruble and a sharp increase in the rateof inflation; a substantial decline in the prices of Russian debt and equitysecurities; and an inability of Russian issuers to raise funds in theinternational capital markets. Certain other CIS countries, including Ukraineand Belarus, were similarly affected by these events. These problems wereaggravated by a major banking crisis in the Russian banking sector after theevents of August 17, 1998, as evidenced by the termination of the bankinglicenses of a number of major Russian banks. This further impaired the abilityof the banking sector to act as a consistent source of liquidity to Russiancompanies and resulted in the losses of bank deposits in some cases.

Recently, theRussian and Ukrainian economies have experienced positive trends, such as theincrease in the gross domestic product, relatively stable national currencies,strong domestic demand, rising real wages and a reduced rate of inflation;however, these trends may not continue or may be abruptly reversed.

***TheRussian banking system remains underdeveloped, and another banking crisis couldplace severe liquidity constraints on our business.***

Russia’s banking and other financialsystems are less developed or regulated in comparison with other countries, andRussian legislation relating to banks and bank accounts is subject to varyinginterpretations 

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andinconsistent application. The August 1998 financial crisis resulted in thebankruptcy and liquidation of many Russian banks and almost entirely eliminatedthe developing market for commercial bank loans at that time. Many Russianbanks currently do not meet international banking standards, and thetransparency of the Russian banking sector in some respects still lags farbehind internationally accepted norms. Aided by inadequate supervision by theregulators, certain banks do not follow existing Central Bank of Russiaregulations with respect to lending criteria, credit quality, loan lossreserves or diversification of exposure. Furthermore, in Russia, bank depositsmade by corporate entities generally are not insured.

Recently, there has been a rapid increasein lending by Russian banks, which many believe has been accompanied by adeterioration in the credit quality of the borrowers. In addition, a robustdomestic corporate debt market is leading to Russian banks increasingly holdinglarge amounts of Russian corporate ruble bonds in their portfolios, which isfurther deteriorating the risk profile of Russian bank assets. The seriousdeficiencies in the Russian banking sector, combined with the deterioration inthe credit portfolios of Russian banks, may result in the banking sector beingmore susceptible to market downturns or economic slowdowns, including due toRussian corporate defaults that may occur during any such market downturn oreconomic slowdown. In addition, the Central Bank of Russia has from time totime revoked the licenses of certain Russian banks, which resulted in marketrumors about additional bank closures and many depositors withdrawing theirsavings. If a banking crisis were to occur, Russian companies would be subjectto severe liquidity constraints due to the limited supply of domestic savingsand the withdrawal of foreign funding sources that would occur during such acrisis.

There iscurrently a limited number of sufficiently creditworthy Russian banks. We holdthe bulk of our excess ruble and foreign currency cash in Russian banks,including subsidiaries of foreign banks, in part, because we are required to doso by Central Bank of Russia regulations and because the ruble is nottransferable or convertible outside of Russia. There are few, if any, saferuble denominated instruments in which we may invest our excess ruble cash.Another banking crisis or the bankruptcy or insolvency of the banks from whichwe receive or with which we hold our funds could result in the loss of ourdeposits or affect our ability to complete banking transactions in Russia,which could have a material adverse effect on our business, financial conditionand results of operations.

***The infrastructure in Russia and Ukraine isinadequate, which could disrupt normal business activity.***

The physical infrastructure in Russia andUkraine largely dates back to Soviet times and has not been adequately fundedand maintained over the past decade. Particularly affected are the rail androad networks, power generation and transmission systems; communication systemsand building stock. In May 2005, a fire and explosion in one of the Moscowpower substations built in 1963 caused a major power outage in a large sectionof Moscow and some surrounding regions. The blackout disrupted ground electrictransport, including the metro system, led to road traffic accidents andmassive traffic congestion, disrupted electricity and water supply in officeand residential buildings and affected mobile communications. The trading onexchanges and the operation of many banks, stores and markets were also halted.Road conditions throughout Russia and Ukraine are poor, with many roads notmeeting minimum quality requirements. The Russian and Ukrainian governments areactively considering plans to reorganize the nations’ rail, electricity andcommunications systems. Any such reorganization may result in increased chargesand tariffs while failing to generate the anticipated capital investment neededto repair, maintain and improve these systems.

Thedeterioration of physical infrastructure in Russia and Ukraine harms thenational economies, disrupts the transportation of goods and supplies, addscosts to doing business in these countries and can interrupt businessoperations. These difficulties can impact us directly; for example, we haveneeded to keep portable electrical generators available to help us maintainbase station operations in the event of 

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powerfailures. Further deterioration in the physical infrastructure could have amaterial adverse effect on our business and the value of our securities.

***Fluctuationsin the global economy may materially adversely affect the Russian and Ukrainianeconomies and our business.***

The Russian andUkrainian economies are vulnerable to market downturns and economic slowdownselsewhere in the world. As has happened in the past, financial problems or anincrease in the perceived risks associated with investing in emerging economiescould dampen foreign investment in Russia and Ukraine and Russian and Ukrainianbusinesses could face severe liquidity constraints, further adversely affectingtheir economies. Additionally, because Russia produces and exports largeamounts of oil, the Russian economy is especially vulnerable to the price ofoil on the world market and a decline in the price of oil could slow or disruptthe Russian economy. Recent military conflicts and international terroristactivity have also significantly impacted oil and gas prices, and poseadditional risks to the Russian economy. Russia and Ukraine are also majorproducers and exporters of metal products and their economies are vulnerable toworld commodity prices and the imposition of tariffs and/or antidumpingmeasures by the United States, the European Union or by other principal exportmarkets.

**Politicaland Social Risks**

***Politicaland governmental instability could materially adversely affect our business,financial condition, results of operations and prospects and the value of ourshares and ADSs.***

Since 1991, Russia has sought to transformfrom a one-party state with a centrally-planned economy to a democracywith a market economy. As a result of the sweeping nature of the reforms, andthe failure of some of them, the Russian political system remains vulnerable topopular dissatisfaction, including dissatisfaction with the results ofprivatizations in the 1990s, as well as to demands for autonomy from particularregional and ethnic groups.

Current andfuture changes in the government, major policy shifts or lack of consensusbetween various branches of the government and powerful economic groups coulddisrupt or reverse economic and regulatory reforms. In addition, the Russianpresidential elections scheduled for 2008 could bring more volatility to themarket. Any disruption or reversal of reform policies could lead to politicalor governmental instability or the occurrence of conflicts among powerfuleconomic groups, which could have a material adverse effect on our business,financial condition, results of operations and prospects and the value of ourshares and ADSs.

***Conflictbetween central and regional authorities and other conflicts could create anuncertain operating environment, hindering our long-term planning ability.***

The Russian Federation is a federation of88 sub-federal political units, consisting of republics, territories, regions,cities of federal importance and autonomous regions and districts. Thedelineation of authority and jurisdiction among the members of the RussianFederation and the federal government is, in many instances, unclear andremains contested. Lack of consensus between the federal government and localor regional authorities often results in the enactment of conflictinglegislation at various levels and may lead to further political instability. Inparticular, conflicting laws have been enacted in the areas of privatization,land legislation and licensing. Some of these laws and governmental andadministrative decisions implementing them, as well as certain transactionsconsummated pursuant to them, have in the past been challenged in the courts, andsuch challenges may occur in the future. This lack of consensus hinders ourlong-term planning efforts and creates uncertainties in our operatingenvironment, both of which may prevent us from effectively and efficientlyimplementing our business strategy.

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Additionally, ethnic, religious, historicaland other divisions have, on occasion, given rise to tensions and, in certaincases, military conflict, such as the continuing conflict in Chechnya, whichhas brought normal economic activity within Chechnya to a halt and disruptedthe economies of neighboring regions. Various armed groups in Chechnya haveregularly engaged in guerrilla attacks in that area. Violence and attacksrelating to this conflict have spread to other parts of Russia, and several terroristattacks have been carried out by Chechen terrorists in other parts of Russia,including in Moscow. The further intensification of violence, includingterrorist attacks and suicide bombings, or its spread to other parts of Russia,could have significant political consequences, including the imposition of astate of emergency in some or all of Russia. Moreover, any terrorist attacksand the resulting heightened security measures are likely to cause disruptionsto domestic commerce and exports from Russia. These factors could materiallyadversely affect our business and the value of our shares and ADSs.

In Ukraine,tensions between certain regional authorities and the central government wereignited following the November 2004 presidential elections. Amid the massdemonstrations and strikes that took place throughout Ukraine to protest theelection process and results, the regional authorities in three regions ineastern Ukraine threatened to conduct referendums on creating a separate,autonomous region within Ukraine. Though the regional authorities backed downfrom these threats, and tensions in Ukraine appear to have subsided followingthe invalidation of the November election results and the new presidentialelection held in December 2004, the long-term effects of these events andtheir effect on relations among Ukrainians is not yet known.

***Recentpolitical turmoil in Ukraine could have a material adverse effect on ouroperations in Ukraine, and on our business, financial condition and results ofoperations.***

The Ukrainian parliament voted to dismissthe Ukrainian government on January 10, 2006, less than four monthsafter the last government was dismissed by the Ukrainian president. The latestvote occurred in the wake of widespread criticism of the government for signinga controversial agreement on gas supplies from Russia earlier in the month andahead of the Ukrainian parliamentary election in March 2006. After the March 26,2006 elections, the previous government continues to perform its duties until theappointment of a new government. Failure to appoint a new government within acertain timeframe may result in the dissolution of the newly elected parliamentby the President and new parliamentary elections would follow.

Changes to the Ukrainian constitutionintroduced on January 1, 2006, shifted important powers from thepresident to parliament, including the right to name the prime minister andform a government. With these new powers, there is a risk that the impassebetween the president and parliament will evolve into a protracted politicalstruggle and cause Ukraine’s economy to decline.

Any disruption or reversal of politicalreforms in Ukraine could cause a deterioration in the political, social andeconomic environment in Ukraine which, in turn, could have a material adverseeffect on our operations in Ukraine, and on our business, financial conditionand results of operations. See also “—Risks Relating to Our Business—Acontinued decline in Ukraine-Russia relations could materially adverselyaffect our business, financial condition, results of operations and prospects.”

***Crime and corruption could disrupt ourability to conduct our business.***

The politicaland economic changes in Russia and Ukraine in recent years have resulted insignificant dislocations of authority. The local and international press havereported that significant organized criminal activity has arisen, particularlyin large metropolitan centers. Property crime in large cities has increasedsubstantially. In addition, the local and international press have reportedhigh levels of official corruption, including the bribing of officials for thepurpose of initiating investigations by government agencies. Press reports havealso described instances in which government officials engaged in selective 

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investigationsand prosecutions to further the commercial interests of certain governmentofficials or individuals. Additionally, some members of the Russian andUkrainian media regularly publish disparaging articles in return for payment.The depredations of organized or other crime, demands of corrupt officials orclaims that we have been involved in official corruption could result innegative publicity, could disrupt our ability to conduct our business and couldthus materially adversely affect our business, financial condition, results ofoperations and prospects.

***Social instability could increase supportfor renewed centralized authority, nationalism or violence.***

The failure ofthe government and many private enterprises to pay full salaries on a regularbasis and the failure of salaries and benefits generally to keep pace with therapidly increasing cost of living have led in the past, and could lead in thefuture, to labor and social unrest. Labor and social unrest may have political,social and economic consequences, such as increased support for a renewal ofcentralized authority; increased nationalism, with restrictions on foreigninvolvement in the economies of Russia and Ukraine; and increased violence. Anoccurrence of any of the foregoing events could restrict our operations andlead to the loss of revenue, materially adversely affecting our business,financial condition, results of operations and prospects.

**LegalRisks**

***Weaknessesrelating to the legal system and legislation in Russia and Ukraine create anuncertain environment for investment and business activity.***

Each ofRussia and Ukraine is still developing the legal framework required to supporta market economy. The following risk factors relating to the Russian andUkrainian legal systems create uncertainty with respect to the legal andbusiness decisions that we make, many of which uncertainties do not exist incountries with more developed market economies:

·       inconsistenciesbetween and among the Constitution, federal and regional laws, presidentialdecrees and governmental, ministerial and local orders, decisions, resolutionsand other acts;

·       conflictinglocal, regional and federal rules and regulations;

·       the lackof judicial and administrative guidance on interpreting legislation;

·       therelative inexperience of judges and courts in interpreting legislation;

·       the lackof an independent judiciary;

·       a highdegree of discretion on the part of governmental authorities, which couldresult in arbitrary actions such as suspension or termination of our licenses;and

·       poorlydeveloped bankruptcy procedures that are subject to abuse.

Furthermore,several fundamental laws have only recently become effective. The recent natureof much of Russian and Ukrainian legislation, the lack of consensus about thescope, content and pace of economic and political reform and the rapidevolution of the Russian and Ukrainian legal systems in ways that may notalways coincide with market developments place the enforceability andunderlying constitutionality of laws in doubt and results in ambiguities,inconsistencies and anomalies. In addition, Russian and Ukrainian legislationoften contemplates implementing regulations that have not yet been promulgated,leaving substantial gaps in the regulatory infrastructure. All of theseweaknesses could affect our ability to enforce our rights under our licensesand under our contracts, or to defend ourselves against claims by others. Wecannot assure you that regulators, judicial authorities or third parties willnot challenge our internal procedures and by-laws or our compliance withapplicable laws, decrees and regulations.

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***Thejudiciary’s lack of independence and overall inexperience, the difficulty ofenforcing court decisions and governmental discretion in enforcing claims couldprevent us or you from obtaining effective redress in a court proceeding.***

The independence of the judicial system andits immunity from economic, political and nationalistic influences in each ofRussia and Ukraine remain largely untested. The court system in each of Russiaand Ukraine is understaffed and underfunded. Judges and courts are generallyinexperienced in the area of business and corporate law. Judicial precedentsgenerally have no binding effect on subsequent decisions. Not all Russian andUkrainian legislation and court decisions are readily available to the publicor organized in a manner that facilitates understanding. The Russian andUkrainian judicial systems can be slow or unjustifiably swift. Enforcement ofcourt orders can, in practice, be very difficult in Russia and Ukraine. All ofthese factors make judicial decisions in Russia and Ukraine difficult topredict and effective redress uncertain. Additionally, court claims are oftenused in furtherance of political aims or infighting. We may be subject to suchclaims and may not be able to receive a fair hearing. Additionally, courtorders are not always enforced or followed by law enforcement agencies, and thegovernment may attempt to invalidate court decisions by backdating orretroactively applying relevant legislative changes.

These uncertainties also extend to property rights. During Russia andUkraine’s transformation from centrally planned economies to market economies,legislation has been enacted in both countries to protect private propertyagainst expropriation and nationalization. However, it is possible that due tothe lack of experience in enforcing these provisions and due to potentialpolitical changes, these protections would not be enforced in the event of anattempted expropriation or nationalization. Expropriation or nationalization ofany of our entities, their assets or portions thereof, including UMC,potentially without adequate compensation, would have a material adverse effecton our business financial condition, results of operations and prospects.

***Selectiveor arbitrary government action may have a material adverse effect on ourbusiness, financial condition, results of operations and prospects.***

Governmental authorities in Russia andUkraine have a high degree of discretion and, at times, act selectively orarbitrarily, without hearing or prior notice, and sometimes in a manner that isinconsistent with legislation or influenced by political or commercialconsiderations. Selective or arbitrary governmental actions have reportedlyincluded the denial or withdrawal of licenses, sudden and unexpected taxaudits, criminal prosecutions and civil actions. Federal and local governmententities have also used ordinary defects in matters surrounding share issuancesand registration as pretexts for court claims and other demands to invalidatesuch issuances and registrations or to void transactions. Moreover, thegovernment also has the power in certain circumstances, by regulation orgovernment act, to interfere with the performance of, nullify or terminatecontracts. Standard & Poor’s has expressed concerns that “Russiancompanies and their investors can be subjected to government pressure throughselective implementation of regulations and legislation that is eitherpolitically motivated or triggered by competing business groups.” In thisenvironment, our competitors may receive preferential treatment from thegovernment, potentially giving them a competitive advantage over us.

In addition,recently, the Russian tax authorities have aggressively brought tax evasionclaims relating to certain Russian companies’ use of tax-optimization schemes,and press reports have speculated that these enforcement actions have beenselective and politically motivated. Selective or arbitrary government action,if directed at us, could have a material adverse effect on our business,financial condition, results of operations and prospects.

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***Failure to comply with existing laws andregulations or to obtain all approvals, authorizations and permits required tooperate telecommunications equipment, or the findings of government inspectionsor increased governmental regulation of our operations, could result in adisruption of our  business and  substantial additional compliance costs andsanctions.***

Our operationsand properties are subject to regulation by various government entities andagencies in connection with obtaining and renewing various licenses, approvals,authorizations and permits, as well as with ongoing compliance with existinglaws, regulations and standards. Regulatory authorities exercise considerablediscretion in matters of enforcement and interpretation of applicable laws, regulationsand standards, the issuance and renewal of licenses, approvals, authorizationsand permits and in monitoring licensees’ compliance with the terms thereof.Governmental authorities have the right to, and frequently do, conduct periodicinspections of our operations and properties throughout the year. Any suchfuture inspections may conclude that we or our subsidiaries have violated laws,decrees or regulations, and we may be unable to refute such conclusions orremedy the violations. See also “—The regulatory environment fortelecommunications in Russia and Ukraine is uncertain and subject to politicalinfluence or manipulation, which may result in negative and arbitraryregulatory and other decisions against us on the basis of other than legal considerationsand in preferential treatment for our competitors.”

Due primarily to delays in the issuance of permits, approvals andauthorizations by regulatory authorities, frequently it is not possible toprocure all of the permits for each of our base stations or other aspects ofour network before we put the base stations into commercial operation or toamend or maintain all of the permits when we make changes to the location ortechnical specifications of our base stations. At times, there can be a significantnumber of base stations or other communications facilities and other aspects ofour networks for which we do not have final permits to operate and there can bedelays in obtaining the final permits, approvals and authorizations forparticular base stations or other communications facilities and other aspectsof our networks.

Our failure tocomply with existing laws and regulations or to obtain all approvals,authorizations and permits required to operate telecommunications equipment orthe findings of government inspections may also result in the imposition offines or penalties or more severe sanctions including the suspension, amendmentor termination of our licenses, approvals, authorizations and permits, or inrequirements that we cease certain of our business activities, or in criminaland administrative penalties applicable to our officers. Moreover, an agreementmade or transaction executed in violation of a law may be invalidated andunwound by a court decision. Any such decisions, requirements or sanctions, orany increase in governmental regulation of our operations, could result in adisruption of our business and substantial additional compliance costs andcould materially adversely affect our business, financial condition, results ofoperations and prospects.

***Developing corporate and securities lawsand regulations in Russia may limit our ability to attract future investment.***

The regulation and supervision of the securities market, financialintermediaries and issuers are considerably less developed in Russia than inthe United States and Western Europe. Securities laws, including those relatingto corporate governance, disclosure and reporting requirements, have onlyrecently been adopted, whereas laws relating to anti-fraud safeguards, insidertrading restrictions and fiduciary duties are rudimentary. In addition, theRussian securities market is regulated by several different authorities, whichare often in competition with each other. These include:

·       theFederal Service for the Financial Markets;

·       theMinistry of Finance;

·       theFederal Antimonopoly Service;

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·       theCentral Bank of Russia; and

·       variousprofessional self-regulatory organizations.

The regulationsof these various authorities are not always coordinated and may becontradictory.

In addition,Russian corporate and securities rules and regulations can change rapidly,which may materially adversely affect our ability to conduct securities-relatedtransactions. While some important areas are subject to virtually no oversight,the regulatory requirements imposed on Russian issuers in other areas result indelays in conducting securities offerings and in accessing the capital markets.It is often unclear whether or how regulations, decisions and letters issued bythe various regulatory authorities apply to our company. As a result, we may besubject to fines or other enforcement measures despite our best efforts atcompliance.

***Shareholder liability under Russianlegislation could cause us to become liable for the obligations of our subsidiaries.***

The Civil Code of the Russian Federation dated January 26, 1996,or the Civil Code, and the Federal Law on Joint Stock Companies of December 26,1995, or the Joint Stock Companies Law, generally provide that shareholders ina Russian joint stock company are not liable for the obligations of the jointstock company and bear only the risk of loss of their investment. This may notbe the case, however, when one entity is capable of determining decisions madeby another entity. The entity capable of determining such decisions is deemedan “effective parent.” The entity whose decisions are capable of being sodetermined is deemed an “effective subsidiary.” Under the Joint Stock CompaniesLaw, an effective parent bears joint and several responsibility for transactionsconcluded by the effective subsidiary in carrying out these decisions if:

·       this decision-making capability is provided for in the charterof the effective subsidiary or in a contract between the companies; and

·       theeffective parent gives obligatory directions to the effective subsidiary.

In addition, aneffective parent is secondarily liable for an effective subsidiary’s debts ifan effective subsidiary becomes insolvent or bankrupt resulting from the actionor inaction of an effective parent. This is the case no matter how theeffective parent’s ability to determine decisions of the effective subsidiaryarises. For example, this liability could arise through ownership of votingsecurities or by contract. In these instances, other shareholders of theeffective subsidiary may claim compensation for the effective subsidiary’slosses from the effective parent which caused the effective subsidiary to takeaction or fail to take action knowing that such action or failure to takeaction would result in losses. Accordingly, we could be liable in some casesfor the debts of our subsidiaries. This liability could have a material adverseeffect on our business, results of operations and financial condition.

***Shareholderrights provisions under Russian law may impose additional costs on us.***

Russian law provides that shareholders that vote against or abstainfrom voting on certain matters have the right to sell their shares to thecompany at market value in accordance with Russian law. The decisions thattrigger this right to sell shares include:

·       decisionswith respect to a reorganization;

·       theapproval by shareholders of a “major transaction,” which, in general terms, isa transaction involving property worth more than 50% of the gross book value ofour assets calculated according to Russian accounting standards, regardless ofwhether the transaction is actually consummated; and

·       theamendment of our charter in a manner that limits shareholder rights.

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Our (or, as thecase may be, our subsidiaries’) obligation to purchase shares in thesecircumstances, which is limited to 10% of the company’s net assets calculatedin accordance with Russian accounting standards at the time the matter at issueis voted upon, could have a material adverse effect on our business, financialcondition, results of operations and prospects.

***Limitationson foreign investment could impair the value of your investment and couldhinder our access to additional capital.***

Russian andUkrainian legislation governing foreign investment activities does not prohibitor restrict foreign investment in the telecommunications industry. However, alack of consensus exists over the manner and scope of government control overthe telecommunications industry. While draft legislation protecting the rightsof foreign investors specifically in the telecommunications industry has beenconsidered at various times, the Law on Foreign Investment in the RussianFederation does not provide any specific protections in this regard, nor arethere specific protections in Ukraine. Because the telecommunications industryis widely viewed as strategically important to Russia and Ukraine, governmentalcontrol over the telecommunications industry may increase, and foreigninvestment in or control over the industry may be limited. Any such increase ingovernmental control or limitation on foreign investment could impair the valueof your investment and could hinder our access to additional capital.

***Theimplementation of the Federal Law on Communications imposed an additionalfinancial burden on us and may restrict our operations, which could materiallyadversely affect our financial condition and results of operations.***

The Federal Law on Communications, whichcame into force on January 1, 2004, provided for the establishment of a “universalservices reserve fund” for the purpose of supporting communications companiesoperating in less developed regions of Russia. This reserve fund is funded by alevy imposed on all communication services operators, including us. Accordingto a government decree enacted on April 21, 2005, such operators must makequarterly payments in the amount of 1.2% of the difference between their totalrevenues from telecommunications services and revenues generated byinterconnection and traffic transmission services. This additional levy, whichis subject to change in the future, increases our costs and could materiallyadversely affect our financial condition and results of operations.

In addition, a recent amendment to theFederal Law on Communications, which will become effective July 1, 2006,will implement the CPP principle prohibiting mobile operators from chargingtheir subscribers for incoming calls. Currently, subscribers of fixed lineoperators can initiate calls to mobile phone users free of charge. It iscurrently contemplated that under the new system, fixed line operators willbegin charging their subscribers for such calls and transfer a percentage ofthe charge to mobile operators terminating such calls. No assurance can begiven as to whether we will be able to enter into payment settlement agreementswith fixed line operators on favorable terms that would mitigate any negativeeffect of the CPP regime. In addition, potential regulatory changes that may beenacted in the future, such as mobile numbering portability and theintroduction of new rules surrounding the mobile virtual network ofoperators could weaken our competitive position in the mobiletelecommunications market and, as a result, materially adversely affect ourfinancial position and results of operations.

As only a portion of the legislationimplementing the new regulatory regime has been approved, it is currentlydifficult to assess the possible effects these and other changes to thecommunications laws and regulations may have on our business, financialcondition and results of operations.

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In addition, the new Ukrainian Law onTelecommunications also came into force on January 1, 2004. However,regulations implementing the new law have not yet been promulgated and certainregulatory bodies established by the new law have not yet commenced theirregulatory functions. For example, the regulatory body tasked with regulatingthe telecommunications industry and issuing telecommunications licenses inUkraine, the NCRC was formed in January 2005 and, in June 2005, beganto perform its regulatory functions. However, the appointment of the NCRCmembers is currently being challenged in the Ukrainian courts. Although thefirst two court rulings confirmed the validity of the members’ appointment, ahearing before the Higher Administrative Court of Ukraine is still pending. Ifthe Higher Administrative Court invalidates the appointment of the NCRCmembers, uncertainty will ensue with respect to the NCRC and its role in theregulation of the Ukrainian telecommunications industry. As a result, ourfinancial position and results of operations may be adversely affected.

In addition,the new Ukrainian Law on Telecommunications, among other things, may requirecompanies with a dominant position in the telecommunications market to developpublic telecommunications services if directed to do so by the regulatoryauthorities. As UMC’s estimated market share in mobile telecommunicationsservices in Ukraine is 44%, implementation of the new law may materiallyadversely affect our financial condition and results of operations. See “Item4. Information on Our Company—B. Business Overview—Regulation in Ukraine—Legislation.”

***Characteristicsof and changes in the Russian tax system could materially adversely affect ourbusiness, financial condition, results of operations and prospects.***

Generally,taxes payable by Russian companies are substantial and numerous. These taxesinclude, among others:

·       incometaxes;

·       VAT;

·       unified social tax; and

·       propertytax.

The tax environment in Russia historicallyhas been complicated by the fact that various authorities have often issuedcontradictory tax legislation. This uncertainty potentially exposes us tosignificant fines and penalties and enforcement measures despite our bestefforts at compliance, and could result in a greater than expected tax burdenand the suspension or termination of our licenses.

Recently, there have been significantchanges to the Russian taxation system. Global tax reforms commenced in 1999with the introduction of Part One of the Tax Code of the Russian Federation,or the Tax Code, which sets general taxation guidelines. Since then, Russia hasbeen in the process of replacing legislation regulating the application ofmajor taxes such as corporate income tax, VAT and property tax with newchapters of the Tax Code.

In practice, the Russian tax authoritiesgenerally interpret the tax laws in ways that rarely favor taxpayers, who oftenhave to resort to court proceedings to defend their position against the taxauthorities. Recent events within the Russian Federation suggest that the taxauthorities may be taking a more assertive position in their interpretations ofthe legislation and assessments. Differing interpretations of tax regulationsexist both among and within government ministries and organizations at thefederal, regional and local levels, creating uncertainties and inconsistentenforcement. Tax declarations, together with related documentation such ascustoms declarations, are subject to review and investigation by a number ofauthorities, each of which may impose fines, penalties and interest charges.Generally, in an audit, taxpayers are subject to inspection with respect to thethree calendar years which immediately proceeded the year in which the audit iscarried out. Previous audits do not completely exclude subsequent 

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claims relatingto the audited period because Russian tax law authorizes upper-level taxinspectorates to review the results of tax audits conducted by subordinate taxinspectorates. In addition, on July 14, 2005, the Russian ConstitutionalCourt issued a decision that allows the statute of limitations for taxliabilities to be extended beyond the three-year term set forth in the tax lawsif a court determines that a taxpayer has obstructed or hindered a tax audit.Because none of the relevant terms are defined, tax authorities may have broaddiscretion to argue that a taxpayer has “obstructed” or “hindered” an audit andultimately seek penalties beyond the three-year term. In some instances,new tax regulations have been given retroactive effect.

Moreover, financial results of Russiancompanies cannot be consolidated for tax purposes. Therefore, each of ourRussian subsidiaries pays its own Russian taxes and may not offset its profitor loss against the loss or profit of any of our other subsidiaries. Inaddition, intercompany dividends are subject to a withholding tax of 9%, ifbeing distributed to Russian companies, and 15%, if being distributed toforeign companies. If the receiving company itself pays a dividend, it mayoffset tax withheld against its own withholding liability of the onwarddividend although not against any withholding made on a distribution to aforeign company. These tax requirements impose additional burdens and costs onour operations, including management resources.

The foregoingconditions create tax risks in Russia that are more significant than typicallyfound in countries with more developed tax systems, imposing additional burdensand costs on our operations, including management resources. In addition to oursubstantial tax burden, these risks and uncertainties complicate our taxplanning and related business decisions, potentially exposing us to significantfines and penalties and enforcement measures despite our best efforts atcompliance, and could materially adversely affect our business, financialcondition, results of operations and prospects and the value of our shares and ADSs.

***Theimplications of the tax system in Ukraine are uncertain and various tax lawsare subject to different interpretations.***

Ukraine currently has a number of lawsrelated to various taxes imposed by both central and regional governmentalauthorities. Applicable taxes include VAT, corporate income tax (profits tax),customs duties, payroll (social) taxes and other taxes. These tax laws have notbeen in force for significant periods of time compared to more developed marketeconomies and are constantly changed and amended. Accordingly, few precedentsregarding tax issues are available.

Although the Ukrainian Constitutionprohibits retroactive enforcement of any newly enacted tax laws and the Law onTaxation System specifically requires legislation to adopt new tax laws atleast six months prior to them becoming effective, such rules have largelybeen ignored. In addition, tax laws are often vaguely drafted, making itdifficult for us to determine what actions are required for compliance.Differing opinions regarding the legal interpretation of tax laws often existboth among and within governmental ministries and organizations, including thetax administration, creating uncertainties and areas of conflict for taxpayersand investors. In practice, the Ukrainian tax authorities tend to interpret thetax laws in an arbitrary way that rarely favors taxpayers.

Taxdeclarations/returns, together with other legal compliance areas (*e.g.*, customs and currency control matters), may be subjectto review and investigation by various administrative divisions of the taxauthorities, which are authorized by law to impose severe fines, penalties andinterest charges. These circumstances create tax risks in Ukraine substantiallymore significant than typically found in countries with more developed taxsystems. Generally, tax declarations/returns in Ukraine remain open and subjectto inspection for a three-year period. However, this term may not beobserved or may be extended under certain circumstances, including in thecontext of a criminal investigation. While we believe that we are currently incompliance with the tax laws affecting our operations in Ukraine, it ispossible that relevant 

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authoritiesmay take differing positions with regard to interpretative issues, which mayresult in a material adverse effect on our results of operations and financialcondition.

***Vaguelydrafted Russian transfer pricing rules and lack of reliable pricinginformation may impact our business results of operations.***

Russian transfer pricing rules enteredinto force in 1999, giving Russian tax authorities the right to control pricesfor transactions between related entities and certain other types oftransactions between independent parties, such as foreign trade transactions ortransactions with significant price fluctuations. The Russian transfer pricing rules arevaguely drafted, leaving wide scope for interpretation by Russian taxauthorities and arbitration courts and their use in politically motivatedinvestigations and prosecutions. We believe that the prices we have used aremarket prices and, therefore, comply with the requirements of Russian tax lawon transfer pricing. However, due to the uncertainties in interpretation oftransfer pricing legislation, the tax authorities may challenge our prices andpropose adjustments. If such price adjustments are upheld by the Russianarbitration courts and implemented, our results of operations could bematerially adversely affected. In addition, we could face significant lossesassociated with the assessed amount of prior tax underpaid and related interestand penalties, which would have a material adverse effect on our financial conditionand results of operations.

In addition, anumber of draft amendments to the transfer pricing law have recently beenintroduced which, if implemented, would considerably toughen the existing law.The proposed changes would, among other things, shift the burden of provingmarket prices from the tax authorities to the taxpayer, cancel the existingpermitted deviation threshold and introduce specific documentation requirementsfor proving market prices.

***Theregulatory environment for telecommunications in Russia and Ukraine isuncertain and subject to political influence or manipulation, which may resultin negative and arbitrary regulatory and other decisions against us on thebasis of other than legal considerations and in preferential treatment for ourcompetitors.***

We operate in an uncertain regulatoryenvironment. The legal framework with respect to the provision oftelecommunications services in Russia and Ukraine and in other countries inwhich we operate or may operate in the future is not well developed, and anumber of conflicting laws, decrees and regulations apply to thetelecommunications sector.

Moreover,regulation is conducted largely through the issuance of licenses andinstructions, and governmental officials have a high degree of discretion. Inthis environment, political influence or manipulation could be used to affectregulatory, tax and other decisions against us on the basis of other than legalconsiderations. For example, Russian government authorities investigatedVimpelcom in late 2003 on grounds that it was illegally operating in Moscowpursuant to a license issued to its wholly-owned subsidiary rather thanto Vimpelcom itself. In addition, some of our competitors may receivepreferential treatment from the government, potentially giving them asubstantial advantage over us. For example, according to press reports, MegaFonand Kyivstar, our competitors in Russia and Ukraine, respectively, receivedpreferential treatment in regulatory matters in the past.

***We face similar risks in other countries ofthe CIS.***

In addition toRussia and Ukraine, we currently have operations in other CIS countries,including Belarus, Uzbekistan and Turkmenistan. We may acquire additionaloperations in other countries of the CIS. In many respects, the risks inherentin transacting business in these countries are similar to those in Russia andUkraine, especially those risks set out above in “—Risks Relating to theRussian Federation and Ukraine.”

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**RisksRelating to the Shares and ADSs and the Trading Market**

***Becausethe depositary may be considered the beneficial holder of the shares underlyingthe ADSs, these shares may be arrested or seized in legal proceedings in Russiaagainst the depositary.***

Because Russian law may not recognize ADSholders as beneficial owners of the underlying shares, it is possible that youcould lose all your rights to those shares if the depositary’s assets in Russiaare seized or arrested. In that case, you would lose all the money you haveinvested.

Russian law might treat the depositary asthe beneficial owner of the shares underlying the ADSs. This would be differentfrom the way other jurisdictions treat ADSs. In the United States, althoughshares may be held in the depositary’s name or to its order, making it a “legal”owner of the shares, the ADS holders are the “beneficial,” or real owners. InU.S. courts, an action against the depositary, the legal owner of the shares,would not result in the beneficial owners losing their shares. Russian law maynot make the same distinction between legal and beneficial ownership, and itmay only recognize the rights of the depositary in whose name the shares areheld, not the rights of ADS holders, to the underlying shares.

Thus, inproceedings brought against a depositary, whether or not related to sharesunderlying ADSs, Russian courts may treat those underlying shares as the assetsof the depositary, open to seizure or arrest. In the past a lawsuit has beenfiled against a depositary bank other than our depositary seeking the seizureof various Russian companies’ shares represented by ADSs issued by thatdepositary. In the event that this type of suit were to be successful in thefuture, and the shares were to be seized or arrested, the ADS holders involvedwould lose their rights to the underlying shares.

***Yourvoting rights with respect to the shares represented by our ADSs are limited bythe terms of the deposit agreement for our ADSs and relevant requirements ofRussian law.***

ADS holders will have no direct votingrights with respect to the shares represented by the ADSs. They will be able toexercise voting rights with respect to the shares represented by ADSs only inaccordance with the provisions of the deposit agreement relating to the ADSsand relevant requirements of Russian law. Therefore, there are practicallimitations upon the ability of ADS holders to exercise their voting rights dueto the additional procedural steps involved in communicating with them. Forexample, the Federal Law on Joint Stock Companies and our charter require us tonotify shareholders no less than 30 days prior to the date of any meetingand at least 50 days prior to the date of an extraordinary meeting toelect our Board of Directors. Our ordinary shareholders will receive noticedirectly from us and will be able to exercise their voting rights by eitherattending the meeting in person or voting by power of attorney.

As an ADS holder, you, by comparison, willnot receive notice directly from us. Rather, in accordance with the depositagreement, we will provide the notice to the depositary. The depositary hasundertaken in turn, as soon as practicable thereafter, to mail to you thenotice of such meeting, voting instruction forms and a statement as to themanner in which instructions may be given by holders. To exercise your votingrights, you must then instruct the depositary how to vote its shares. Becauseof this extra procedural step involving the depositary, the process forexercising voting rights may take longer for you than for holders of shares.ADSs for which the depositary does not receive timely voting instructions willnot be voted at any meeting.

In addition,although securities regulations expressly permit the depositary to split thevotes with respect to the shares underlying the ADSs in accordance withinstructions from ADS holders, there is little court or regulatory guidance onthe application of such regulations, and the depositary may choose to refrainfrom voting at all unless it receives instructions from all ADS holders to votethe shares in the same manner. You may thus have significant difficulty inexercising voting rights with respect to the shares underlying the ADSs. Therecan be no assurance that holders and beneficial owners of ADSs will (i) receivenotice of shareholder meetings to enable the timely return of votinginstructions to the 

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depositary,(ii) receive notice to enable the timely cancellation of ADSs in respectof shareholder actions or (iii) be given the benefit of dissenting orminority shareholders’ rights in respect of an event or action in which theholder or beneficial owner has voted against, abstained from voting or notgiven voting instructions.

***You may be unable to repatriate yourearnings from our shares and ADSs.***

We anticipatethat any dividends we may pay in the future on the shares represented by theADSs will be declared and paid to the depositary in rubles and will beconverted into U.S. dollars by the depositary and distributed to holders ofADSs, net of the depositary’s fees and expenses. The ability to convert rublesinto U.S. dollars is subject to the availability of U.S. dollars in Russia’scurrency markets. Although there is an existing, albeit limited, market withinRussia for the conversion of rubles into U.S. dollars, including the interbankcurrency exchange and over-the-counter and currency futures markets, thefurther development of this market is uncertain. At present, there is no marketfor the conversion of rubles into foreign currencies outside of Russia and noviable market in which to hedge ruble and ruble-denominated investments.

***You may not be able to benefit from theUnited States-Russia income tax treaty.***

In accordancewith Russian legislation, dividends paid to a non-resident holder generallywill be subject to Russian withholding at a rate of 15% for legal entities andorganizations and at a rate of 30% for individuals. This tax may be reduced to5% or 10% for legal entities and organizations and to 10% for individuals underthe Convention between the United States of America and the Russian Federationfor the Avoidance of Double Taxation and the Prevention of Fiscal Evasion withrespect to Taxes on Income and Capital (the “United States-Russia incometax treaty”) for U.S. tax residents. However, the Russian tax rules applicableto ADS holders are characterized by significant uncertainties. In 2005, theMinistry of Finance expressed an opinion that ADS holders (rather than thedepositary) should be treated as the beneficial owners of the underlying sharesfor the purposes of the double tax treaty provisions applicable to taxation ofdividend income from the underlying shares, provided that tax residencies ofthe ADS holders are duly confirmed. However, in the absence of any specificprovisions in the Russian tax legislation with respect to the concept ofbeneficial ownership and taxation of income of beneficial owners, it is unclearhow the Russian tax authorities and courts will ultimately treat the ADSholders in this regard. Thus, we may be obliged to withhold tax at standardrates when paying out dividends, and U.S. ADS holders may be unable to benefitfrom these treaties. See “Item 10. Additional Information—E. Taxation—RussianIncome and Withholding Tax Considerations” for additional information.

***Capital gain from the sale of shares andADSs may be subject to Russian income tax.***

Under Russian tax legislation, gainsrealized by non-resident legal entities or organizations from the dispositionof Russian shares and securities, as well as financial instruments derived fromsuch shares, such as the ADSs, may be subject to Russian profits tax orwithholding income tax if immovable property located in Russia constitutes morethan 50% of our assets. However, no procedural mechanism currently exists towithhold and remit this tax with respect to sales made to persons other thanRussian companies and foreign companies with a registered permanentestablishment in Russia. Gains arising from the disposition at foreign stockexchanges of the foregoing types of securities listed on these exchanges byforeign holders who are legal entities or organizations are not subject totaxation in Russia.

Gains arisingfrom the disposition of the foregoing types of securities and derivativesoutside of Russia by U.S. holders who are individuals not resident in Russiafor tax purposes will not be considered Russian source income and will not betaxable in Russia. Gains arising from disposition of the foregoing types ofsecurities and derivatives in Russia by U.S. holders who are individuals notresident in Russia for tax 

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purposesmay be subject to tax either at the source in Russia or based on an annual taxreturn, which they may be required to submit with the Russian tax authorities.

***Foreign judgments may not be enforceableagainst us.***

Our presence outside the United States maylimit your legal recourse against us. We are incorporated under the laws of theRussian Federation. Substantially all of our directors and executive officersnamed in this document reside outside the United States. All or a substantialportion of our assets and the assets of our officers and directors are locatedoutside the United States. As a result, you may not be able to effect serviceof process within the United States on us or on our officers and directors.Similarly, you may not be able to obtain or enforce U.S. court judgmentsagainst us, our officers and directors, including actions based on the civilliability provisions of the U.S. securities laws. In addition, it may bedifficult for you to enforce, in original actions brought in courts in jurisdictionsoutside the United States, liabilities predicated upon U.S. securities laws.

There is notreaty between the United States and the Russian Federation providing forreciprocal recognition and enforcement of foreign court judgments in civil andcommercial matters. These limitations may deprive you of effective legalrecourse for claims related to your investment in the ADSs. The depositagreement provides for actions brought by any party thereto against us to besettled by arbitration in accordance with the Commercial Arbitration Rules ofthe American Arbitration Association, provided that any action under the U.S.federal securities laws or the rules or regulations promulgated thereundermay, but need not, be submitted to arbitration. The Russian Federation is aparty to the United Nations (New York) Convention on the Recognition andEnforcement of Foreign Arbitral Awards, but it may be difficult to enforcearbitral awards in the Russian Federation due to a number of factors, includingthe inexperience of Russian courts in international commercial transactions,official and unofficial political resistance to enforcement of awards againstRussian companies in favor of foreign investors and Russian courts’ inabilityto enforce such orders and corruption.

**OtherRisks**

***We have not independently verifiedinformation we have sourced from third parties.***

We have sourcedcertain information contained in this document from third parties, includingprivate companies and Russian government agencies, and we have relied on theaccuracy of this information without independent verification. The officialdata published by Russian federal, regional and local governments may besubstantially less complete or researched than those of Western countries.Official statistics may also be produced on different bases than those used inWestern countries. Any discussion of matters relating to Russia in thisdocument must, therefore, be subject to uncertainty due to concerns about thecompleteness or reliability of available official and public information. Inaddition, the veracity of some official data released by the Russian governmentmay be questionable. In 1998, the Director of the Russian State Committee onStatistics and a number of his subordinates were arrested and subsequentlysentenced by a court in 2004 in connection with their misuse of economic data.

***Becauseno standard definition of a subscriber, average monthly service revenue persubscriber (ARPU), average monthly usage per subscriber (MOU) or churn existsin the mobile telecommunications industry, comparisons between certainoperating data of different companies may be difficult to draw.***

The methodologyfor calculating subscriber numbers, ARPU, MOU and churn varies substantially inthe mobile telecommunications industry, resulting in variances in reportednumbers from that which would result from the use of a uniform methodology.Therefore, comparisons of certain operating data between different mobilecellular communications companies may be difficult to draw.

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**Item 4.**                        *Information on Our Company*

**A.**                Historyand Development

Mobile TeleSystems CJSC, or MTS CJSC, ourpredecessor, was formed in 1993. The founding shareholders included MGTS andthree other Russian telecommunications companies, which collectively held 53%of our original share capital, and two German companies, Siemens AG andT-Mobile Deutschland GmbH, an affiliate of Deutsche Telekom AG, whichcollectively held the remaining 47%. JSFC Sistema, or Sistema, currently owns52.8% of our share capital. See “Item 7. Major Shareholders and Related PartyTransactions—A. Major Shareholders.”

MTS CJSC inaugurated service in the Moscowlicense area in 1994 and began expanding into nearby regions in 1997. Sincethat time, we have continued to grow by applying for GSM licenses in newregions, investing in new GSM licensees, increasing our ownership percentage inthese licensees and acquiring existing GSM license holders and operators.

Mobile TeleSystems OJSC was created on March 1,2000, through the merger of MTS CJSC and RTC CJSC, a wholly-ownedsubsidiary. In accordance with Russian merger law, MTS CJSC and RTC CJSC ceasedto exist and MTS OJSC was created with the assets and obligations of thepredecessor companies. Our charter was registered with the State Registration Chamberon March 1, 2000, which is our date of incorporation, and with the MoscowRegistration Chamber on March 22, 2000. Our initial share issuance wasregistered by the Russian Federal Commission on the Securities Market on April 28,2000.

We completed our initial public offering onJuly 6, 2000, and listed our shares of common stock, represented byAmerican Depositary Shares, or ADSs, on the New York Stock Exchange under thesymbol “MBT.” Each ADS represents five underlying shares of our common stock.Prior to January 1, 2005, each ADS represented 20 shares.

In April 2003 and December 2004,T-Mobile completed offerings of approximately 5.0% and 15.1% of our shares,respectively, in the form of GDRs through an unsponsored GDR program. In September 2005,T-Mobile sold its remaining 10.1% interest in us on the open market.

Our legal name is Mobile TeleSystems OJSC,and we are incorporated under the laws of the Russian Federation. Our headoffice is located at 4 Marksistskaya Street, Moscow 109147, Russian Federation,and the telephone number of our investor relations department is +7 495 911-6553.We maintain a website at www1.mtsgsm.com. The information on our website is nota part of this report. We have appointed Puglisi & Associates, 850Library Avenue, Suite 204, Newark, Delaware 19715 as our authorized agentfor service of process for any suit or proceeding arising out of or relating toour shares, ADSs or the Deposit Agreement.

Article 2.1of our charter provides that our principal purpose is to obtain profits throughthe planning, marketing and operation of a radiotelephone mobile cellularnetwork in the Russian Federation. We are recorded in the Unified StateRegister of Legal entities with registration number 1027700149124.

**Expansion**

**Russia**

In furtherance of our goal to be anationwide operator in Russia, we have extended our focus beyond our originalmarket of Moscow and the Moscow region with a view towards developing ourexisting license areas in the regions, acquiring new regional licenses andacquiring regional operators. For a listing of our acquisitions in the lastthree years, see “Item 5. Operating and Financial Review and Prospects—Acquisitions”and Note 3 to our audited consolidated financial statements.

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We spent $1,447.9 million in 2005 fornetwork development in Russia, including $1,145.4 million in cash expenditureson property, plant and equipment, and $302.5 million for the purchase ofintangible assets. In addition, we expect to spend approximately $1,165.0million for further network development.

**Belarus**

In September 2001,we won a tender held by the Telecommunications Ministry of the Belarus Republicto form a joint venture with a GSM 900/1800 license to operate in Belarus.Belarus had a population of approximately 9.8 million and a nationwidemobile penetration rate of approximately 41% as of December 31, 2005,according to AC&M-Consulting. Pursuant to the tender conditions:

·       we formed a company in Belarus, MTS Belarus, and contributedapproximately $2.5 million in exchange for 49% of the share capital of thecompany (the other 51% of which is held by a state-owned enterprise);

·       we paid alump sum of $10 million to the government of Belarus;

·       MTSBelarus made a one-time payment of $5 million (which was funded by a$5 million loan from us to it); and

·       we willpay a total of $6 million to the government of Belarus in five annualinstallments of $1.2 million from 2003 through 2007.

On June 26, 2002, MTS Belarus receivedall of the governmental approvals and licenses required to commence operationsin Belarus and it began operations on June 27, 2002.

Under the termsof the tender, MTS Belarus’ license will be valid for ten years, after which itmay be prolonged an additional five-year period as long as the joint venturefulfills the terms of the license. At the time we won the tender, CellularDigital Network, or Velcom, already held a GSM 900 license to operate inBelarus. Velcom’s license was issued in 1998 and is also valid for ten yearsand may be renewed for an additional five-year period. Velcom is a jointventure between Beltelecom and Beltechexport, two Belarusian state enterprises,which collectively have a controlling stake in Velcom and several othercompanies.

**Ukraine**

In March 2003,we purchased a 57.7% stake in UMC for $199.0 million. We purchased a16.33% stake from KPN, a 16.33% stake from Deutsche Telekom, and a 25.0% stakefrom Ukrtelecom. In June 2003, we purchased an additional 26.0% stake inUMC from Ukrtelecom for $87.6 million pursuant to a call option agreement,which increased our ownership in UMC to 83.7%. We purchased the remaining16.33% stake in UMC from TDC for $91.7 million in July 2003 pursuantto a put and call option agreement. Prior to our entering into the agreementsfor the purchase of UMC, UMC did not make payments when due under certain loansfrom certain of its shareholders. In connection with our agreement to acquireUMC, UMC agreed to restructure, and we guaranteed, such indebtedness. As of December 31,2004, these loans were fully repaid.

**Uzbekistan**

In August 2004,we acquired a 74% stake in Uzdunrobita, the largest wireless operator inUzbekistan, for $126.4 million in cash. We also entered into put and calloption agreements with the existing shareholders to acquire the remaining 26%stake for not less than $37.7 million. The exercise period for the calland put option is 48 months from the acquisition date.

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**Turkmenistan**

In two separatepurchases in June and November 2005, we acquired 100% of BCTI, theleading wireless operator in Turkmenistan, for $46.7 million in cash.

**CapitalExpenditures**

We spent intotal $2,181.4 million in 2005 for network development in Russia and othercountries, which included $1,758.0 million in cash expenditures onproperty, plant and equipment, and $423.4 million for the purchase ofintangible assets. In addition, we expect to spend approximately $1,800 millionin 2006 for further network development, which we plan to finance mostly through operating cash flows,and to the extent necessary, through additional external financing activities.

**Belarus**

MTS Belarusspent $84.1 million in 2005 for network development in Belarus and expectsto spend approximately $157.0 million in 2006 for further networkdevelopment. MTS Belarus has developed GSM 900 and 1800 networks in Belarus’major cities and regions, including Minsk and the Minsk region, the Gomelregion, the Mogilev region and the Brest region, as well as throughout certainmajor highways, including the Moscow-Brest highway and train route. MTSBelarus has also developed its network in certain areas near Belarus’ borderwith Ukraine and Russia, and plans to further extend and improve the technicalcapabilities of its network throughout Belarus.

**Ukraine**

UMC spent$675.7 million in 2005 for network development in Ukraine, including$571.1 million in cash expenditures on property, plant and equipment, and$104.6 million for the purchase of intangible assets. In addition, UMC expectsto spend approximately $554.0 million in 2006 for further network development.

**Uzbekistan**

Uzdunrobitaspent $56.3 million in 2005 for network development in Uzbekistan,including $40.0 million in cash expenditures on property, plant andequipment, and $16.3 million for the purchase of intangible assets. Inaddition, Uzdunrobita expects to spend approximately $76.0 million in 2006for further network development.

**Turkmenistan**

BCTI expects tospend approximately $12.0 million in 2006 for network development.

**B.**               BusinessOverview

We are a leading provider of mobile cellularcommunications services in the Russian Federation, Ukraine and certain otherCIS countries, employing technology based primarily on Global System for MobileCommunications, or GSM. In 2005, we generated net revenues of$5,011 million and had a subscriber base of 58.2 million(44.2 million in Russia, 13.3 million in Ukraine, 0.6 million inUzbekistan and 0.1 million in Turkmenistan) at December 31, 2005, makingus the largest mobile operator in Russia, Uzbekistan and Turkmenistan and thesecond largest in Ukraine in terms of subscribers.

In addition to standard voice services, weoffer our subscribers value-added services including voice mail, shortmessage service, or SMS, general packet radio service, or GPRS, and variousSMS- and GPRS-based information and entertainment services (including multi-mediamessage service, or MMS). We also offer our subscribers the ability to roamautomatically throughout Europe and in much of the rest of the 

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world, and asof December 31, 2005, we had bilateral roaming agreements with 400wireless operators in 192 countries.

We have grown rapidly since 1999 through organic growth, as well asacquisitions. The table below sets forth our total subscribers as of the endof, and net revenues for each of, the last five years:
| Period     | ** ** | ** **              | ** ** | **Subscribers**(1) | ** ** | **Net revenues** | ** ** |
|------------|------------|-------------------------|------------|--------------------|------------|-----------------------|------------|
| ** ** | ** ** | **(in thousands)** | ** ** |
| 2001       |       |                    | 2,650      |               |       | $                     | 893,247    |   |
| 2002       |       |                    | 6,644      |               |       | $                     | 1,361,756  |   |
| 2003       |       |                    | 16,719     |               |       | $                     | 2,546,198  |   |
| 2004       |       |                    | 34,224     |               |       | $                     | 3,886,994  |   |
| 2005       |       |                    | 58,194     |               |       | $                     | 5,011,018  |   |

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(1)                We define a subscriber as an individual or organization whoseaccount shows chargeable activity within 61 days (or 183 days in thecase of the “Jeans” and “SIM-SIM” brand tariffs) or whose account doesnot have a negative balance for more than this period. Prior to October 1,2004, UMC used a 90-day period for such purposes with respect to its “Jeans”and “SIM-SIM” subscribers.

According to AC&M-Consulting, we had aleading 35% market share of total wireless subscribers in Russia at December 31,2005. Our market share in the Moscow license area, which encompasses the Cityof Moscow and the Moscow region, was higher at 45%. The Moscow license areaaccounts for approximately 17% of our total subscriber base. In Ukraine, we hada leading 44% market share at December 31, 2005, according toAC&M-Consulting. Our subscriber base continued to grow in 2006. At May 31,2006, we had approximately 62.9 million subscribers, of which 47.1 millionwere in Russia, 14.9 million were in Ukraine, 0.8 million were inUzbekistan and 0.1 million in Turkmenistan.

Russia is our principal market, both interms of subscribers and revenues. At December 31, 2005, approximately 76%of our subscriber base was in Russia and approximately 23% was in Ukraine. Forthe year ended December 31, 2005, approximately 74% of our revenues camefrom operations in Russia and 24% from operations in Ukraine.

Overall wireless penetration in Russia wasat approximately 87% at December 31, 2005, and higher in Moscow at 135%,according to AC&M-Consulting. Mobile cellular penetration in Ukraine waslower than in Russia at approximately 64% at December 31, 2005, accordingto AC&M-Consulting. Mobile cellular penetration in Uzbekistan was atapproximately 4% at December 31, 2005, according to the Uzbek Agency forCommunications and Informatization. Mobile cellular penetration in Turkmenistanwas at approximately 1.5% at December 31, 2005, according to ourestimates.

As of December 31, 2005, we hadlicenses to operate in 86 regions of Russia with a population of approximately142.6 million people, or approximately 98.2% of the country’s total population,for the entire territory of Ukraine with a population of approximately47.5 million people, for the entire territory of Uzbekistan with apopulation of approximately 26.1 million people and for the entire territory ofTurkmenistan with a population of approximately 6.7 million people. As of December 31,2005, we had commercial operations in 82 regions of Russia, with a combinedpopulation of approximately 139.9 million people, in all of Ukraine and inselected areas of Uzbekistan and Turkmenistan.

To maintain and increase our market shareand brand awareness, we use a combination of print media, radio, television,direct mail and outdoor advertising, focusing on brand and image advertising,as well as promotion of particular tariff plans. Supporting these efforts, wehave developed an extensive distribution network comprised of 457 of our ownsales and customer service centers and approximately 34,000 additional pointsof sale operated by our dealers, as of December 31, 2005.

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We seek to minimize our exposure to thecredit risk of our subscribers through our advance-payment billingsystem, which is used by over 89% of our subscribers in Russia andapproximately 90% of our subscribers in Ukraine. Under this system, oursubscribers prepay for their access, usage and value-added service fees.

MTS Belarus had2.1 million subscribers and a leading market share of 51.6% at December 31,2005, according to AC&M-Consulting. The subscriber base of MTS Belarus grewto 2.5 million at May 31, 2006. Belarus, a country with a populationof approximately 9.8 million, had a mobile cellular penetration rate of41% at December 31, 2005, according to AC&M-Consulting.

**BusinessStrategy**

Ourprimary goal is to maintain our position as a leading wirelessoperator in each of the territories in which we operate. In addition,we intend to take advantage of opportunities to expand ournetwork coverage in the Russian Federation and other countries with afocus on the former Soviet Republics, excluding the Baltic states.To achieve this, we intend to continue to implement thefollowing strategies:

·       Maintainour leading position in the Moscow license area by expanding andupgrading our subscriber base and focusing on the requirements of thevarious subscriber groups, encouraging loyalty through high qualityof service, cost control and development of services and incentives.

·       Developour operations in regions we currently service, in particular,in St. Petersburg, which we consider to be the second mostimportant mobile market in Russia after Moscow.

·       Selectivelyextend our network to regions of Russia in whichwe do not already operate, focusing on densely populated areaswith relatively high per capita incomes, such as regional capitals andalong transportation routes.

·       Expand ouroperations and further develop our commercial services in Ukraine, Belarusand other countries of the CIS as attractive opportunities arisethrough the acquisition of existing operators or new licenses.

·       Providenew and varied tariff plans and value-added service options that appealto the various subscriber groups within our network.

·       Use theMoscow license area as a platform from which to test and launch new productsand services.

In the past few years, we have rapidlyexpanded into the Russian regions and selected CIS countries through launchesof operations in territories in which we had licenses and through acquisitionsof other mobile operators. Starting in 2003, we have become particularlyfocused on the integration of our existing businesses into a single companywith a unified marketing approach and centralized network and operationsmanagement. In addition, we intend to continue to consolidate our ownership inregional subsidiaries by acquiring remaining minority stakes.

Our capital expenditures (consisting ofpurchases of property, plant and equipment and intangible assets) in 2004 and2005 were $1,358.9 million and $2,181.3 million, respectively, and weexpect to invest approximately $1,800 million in 2006. These investmentsare required to support the growth in our subscriber base (*i.e*.,to improve network capacity) and to develop our network in the new regions forwhich we received licenses.

We may also expand our operations intoother countries of the CIS through the acquisition of existing operators or newlicenses as attractive opportunities arise.

Implementationof these strategies is subject to a number of risks. See “Item 3. KeyInformation—D. Risk Factors” for a description of these and other risks weface.

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**CurrentOperations**

**Subsidiaries**

For a list of our major subsidiaries andour ownership percentages in these subsidiaries, see Note 2 to our auditedconsolidated financial statements.

Consistent with our strategy, in November 2004,the general meeting of our shareholders approved a reorganization of MTS OJSCin the form of a merger with Telecom XXI, Kuban-GSM, UDN-900, Dontelecom,MTS Barnaul, MTS-NN, Amur Cellular Communication (“ACC”) and Telecom-900.We completed the merger in July 2005.

To improvemanagement efficiency and consolidate administratively our majority-ownedsubsidiaries, our shareholders approved a further reorganization of MTS OJSC inFebruary 2006 in the form of a merger with nine of our wholly-ownedsubsidiaries, including Gorizont RT, TAIF Telcom, MTS RTK, Sibchallenge, TomskCellular Communications (“TSS”), BM Telekom, Far East Cellular Systems—900 (“FECS—900”),Siberian Cellular Systems—900 (“SCS—900”) and Uraltel. We completed the mergerin March 2006.

**LicenseAreas**

The followingtable shows, as of May 31, 2006, information with respect to the licenseareas in which we and our subsidiaries and affiliates provide or expect toprovide GSM services:
|                                                  | ** ** | **GSM 900** | ** ** | **GSM 1800**      | ** ** |
|--------------------------------------------------|------------|------------------|------------|------------------------|------------|
| **License Region**                          | ** ** | ** **       | ** ** | **Licensee**           | ** ** | **Expiry date** | ** ** | **Licensee** | ** ** | **Expiry date** | ** ** |
| **Moscow  License Area**                         |       |             |       |                   |       |   |   |   |   |
| Moscow                                           |       | MTS OJSC         |       | April 28, 2008    |       | MTS OJSC |   | April 28, 2008 |   |
| Moscow  region                                   |       | MTS OJSC         |       | April 28, 2008    |       | MTS OJSC |   | April 28, 2008 |   |
| **St. Petersburg License Area**                  |       |             |       |                   |       |   |   |   |   |
| St.  Petersburg                                  |       | MTS OJSC         |       | April 28, 2008    |       | MTS OJSC |   | April 28, 2008 |   |
| Leningrad  region                                |       | MTS OJSC         |       | April 28, 2008    |       | MTS OJSC |   | April 28, 2008 |   |
| **Russian Regional License Areas**               |       |             |       |                   |       |   |   |   |   |
| **European  Russia**                             |       |             |       |                   |       |   |   |   |   |
| Adygeya  Republic                                |       | MTS OJSC         |       | April 28, 2008    |       | MTS OJSC |   | April 28, 2008 |   |
| Arkhangelsk  region                              |       | MTS OJSC         |       | April 28, 2008    |       | MTS OJSC |   | April 28, 2008 |   |
| Astrahansk  region                               |       | MTS OJSC         |       | December 11, 2013 |       | Astrahan-Mobile |   | October 18, 2011 |   |
| Bashkortostan  Republic                          |       | MTS OJSC         |       | August 22, 2007   |       | MTS OJSC |   | August 22, 2007 |   |
| Belgorod  region                                 |       | MTS OJSC         |       | April 28, 2008    |       | MTS OJSC |   | April 28, 2008 |   |
| Belgorod  region                                 |       | ReCom            |       | May 15, 2008      |       | — |   | — |   |
| Bryansk  region                                  |       | ReCom            |       | May 15, 2008      |       | — |   | — |   |
| Bryansk  region                                  |       | —           |       | —                 |       | MTS OJSC |   | April 28, 2008 |   |
| Chuvashia  Republic                              |       | MTS OJSC         |       | December 30, 2013 |       | MTS OJSC |   | December 30, 2013 |   |
| Dagestan  Republic(1)                            |       | MTS OJSC         |       | December 30, 2013 |       | MTS OJSC |   | December 30, 2013 |   |
| Ivanovo  region                                  |       | MTS OJSC         |       | April 28, 2008    |       | MTS OJSC |   | April 28, 2008 |   |
| Ingushetia  Republic                             |       | MTS OJSC         |       | December 30, 2013 |       | MTS OJSC |   | December 30, 2013 |   |
| Kabardino-Balkar  Republic                       |       | —           |       | —                 |       | MTS OJSC |   | December 30, 2013 |   |
| Kaliningrad  region                              |       | MTS OJSC         |       | April 28, 2008    |       | MTS OJSC |   | April 28, 2008 |   |
| Kalmykia  Republic                               |       | MTS-RTK          |       | January 25, 2011  |       | MTS OJSC |   | December 30, 2013 |   |
| Kaluga  region                                   |       | MTS OJSC         |       | April 28, 2008    |       | MTS OJSC |   | April 28, 2008 |   |
| Karachaevo-Cherkesia  Republic    |       | MTS OJSC         |       | December 30, 2013 |       | MTS OJSC |   | December 30, 2013 |   |
| Karelia  Republic                                |       | MTS OJSC         |       | April 28, 2008    |       | MTS OJSC |   | April 28, 2008 |   |
| Kirov  region                                    |       | MTS OJSC         |       | April 28, 2008    |       | MTS OJSC |   | April 28, 2008 |   |
| Komi  Republic                                   |       | MTS OJSC         |       | August 22, 2007   |       | MTS OJSC |   | April 28, 2008 |   |
|                                                  |            |                  |            |                        |            |  |  |  |  |  |  |

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| Komi-Permyatsk Autonomous District            |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
|-----------------------------------------------|--------|-----------------|--------|------------------------|--------|------------------|--------|------------------------|--------|
| Kostroma  region                              |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Krasnodar  territory                          |   | MTS OJSC        |   | May 30, 2007      |   | MTS OJSC         |   | May 30, 2007      |   |
| Kursk  region                                 |   | —          |   | —                 |   | MTS OJSC         |   | April 28, 2008    |   |
| Kursk  region                                 |   | ReCom           |   | May 15, 2008      |   | —           |   | —                 |   |
| Lipetsk  region                               |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Lipetsk  region                               |   | ReCom           |   | May 15, 2008      |   | —           |   | —                 |   |
| Mari-El  Republic                             |   | Mar Mobile GSM  |   | January 15, 2012  |   | Mar Mobile GSM   |   | January 15, 2012  |   |
| Mordovia  Republic                            |   | MTS OJSC        |   | December 30, 2013 |   | MTS OJSC         |   | December 30, 2013 |   |
| Murmansk  region                              |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Nenetsk  Autonomous District             |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Nizhny  Novgorod region                       |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Novgorod  region                              |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Orel  region                                  |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Orel  region                                  |   | ReCom           |   | May 15, 2008      |   | —           |   | —                 |   |
| Orenburg  region                              |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Perm  region                                  |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Rostov  region                                |   | MTS OJSC        |   | July 1, 2010      |   | MTS OJSC         |   | July 1, 2010      |   |
| Pskov  region                                 |   | MTS OJSC        |   | October 1, 2006   |   | —           |   | —                 |   |
| Pskov  region                                 |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Ryazan  region                                |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Samara  region                                |   | MTS OJSC        |   | December 30, 2012 |   | MTS OJSC         |   | December 30, 2012 |   |
| Saratov  region                               |   | MTS OJSC        |   | July 11, 2012     |   | MTS OJSC         |   | July 11, 2012     |   |
| Severnaya  Osetia-Alania Republic   |   | Telesot Alania  |   | April 28, 2011    |   | Telesot Alania   |   | April 28, 2011    |   |
| Severnaya  Osetia-Alania Republic   |   | —          |   | —                 |   | MTS OJSC         |   | December 30, 2013 |   |
| Smolensk  region                              |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Stavropol  territory                          |   | MTS OJSC        |   | December 30, 2013 |   | MTS OJSC         |   | December 30, 2013 |   |
| Tambov  region                                |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Tatarstan  Republic                           |   | MTS OJSC        |   | June 26, 2007     |   | MTS OJSC         |   | June 26, 2007     |   |
| Tula  region                                  |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Tver  region                                  |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Udmurt  Republic                              |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Udmurt  Republic                              |   | MTS OJSC        |   | February 21, 2007 |   | —           |   | —                 |   |
| Ulyanovsk  region                             |   | —          |   | —                 |   | MTS OJSC         |   | December 30, 2013 |   |
| Vladimir  region                              |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Volgograd  region                             |   | —          |   | —                 |   | Volgograd-Mobile |   | October 4, 2011   |   |
| Vologda  region                               |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Voronezh  region                              |   | ReCom           |   | May 15, 2008      |   |             |   |                   |   |
| Voronezh  region                              |   | —          |   | —                 |   | MTS OJSC         |   | April 28, 2008    |   |
| Yaroslavl  region                             |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| **Asian Russia**                              |   |            |   |                   |   |             |   |                   |   |
| Aginski-Buryatski  Autonomous District        |   | Sibintertelecom |   | July 1, 2013      |   | Sibintertelecom  |   | October 31, 2008  |   |
| Aginski-Buryatski  Autonomous District        |   | Primtelefon     |   | April 28, 2008    |   | Primtelefon      |   | April 28, 2008    |   |
| Altaisk  territory                            |   | MTS OJSC        |   | September 8, 2010 |   | MTS OJSC         |   | September 8, 2010 |   |
| Altai  Republic                               |   | MTS OJSC        |   | July 19, 2011     |   | MTS OJSC         |   | December 30, 2013 |   |
| Amur  region                                  |   | MTS OJSC        |   | January 10, 2007  |   | MTS OJSC         |   | January 10, 2007  |   |
| Amur  region                                  |   | Primtelefon     |   | April 28, 2008    |   | Primtelefon      |   | April 28, 2008    |   |
| Buryatiya  Republic                           |   | Primtelefon     |   | April 28, 2008    |   | Primtelefon      |   | April 28, 2008    |   |
| Chelyabinsk  region                           |   | MTS OJSC        |   | April 28, 2008    |   | MTS OJSC         |   | April 28, 2008    |   |
| Chita  region                                 |   | Sibintertelecom |   | January 1, 2011   |   | Sibintertelecom  |   | January 1, 2011   |   |
| Chita region                                  |   | Primtelefon     |   | April 28, 2008    |   | Primtelefon      |   | April 28, 2008    |   |

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| Chukotsk Autonomous District(1)         |       | Primtelefon  |       | April 28, 2008     |       | Primtelefon  |       | April 28, 2008     |       |
|---------------------------------------------------|------------|--------------|------------|-------------------------|------------|--------------|------------|-------------------------|------------|
| Evenkia  Autonomous District(1)    |       | MTS OJSC     |       | December 30, 2013  |       | MTS OJSC     |       | December 30, 2013  |       |
| Jewish  Autonomous region                         |       | Primtelefon  |       | April 28, 2008     |       | Primtelefon  |       | April 28, 2008     |       |
| Irkutsk  region                                   |       | MTS OJSC     |       | December 30, 2013  |       | —       |       | —                  |       |
| Irkutsk  region                                   |       | Primtelefon  |       | April 28, 2008     |       | Primtelefon  |       | April 28, 2008     |       |
| Kamchatka  region                                 |       | Primtelefon  |       | April 28, 2008     |       | Primtelefon  |       | April 28, 2008     |       |
| Kemerov  region                                   |       | MTS OJSC     |       | December 30, 2013  |       | MTS OJSC     |       | December 30, 2013  |       |
| Khabarovsk  Territory                             |       | MTS OJSC     |       | January 10, 2007   |       | MTS OJSC     |       | January 10, 2007   |       |
| Khabarovsk  Territory                             |       | Primtelefon  |       | April 28, 2008     |       | Primtelefon  |       | April 28, 2008     |       |
| Khakassiya  Republic                              |       | MTS OJSC     |       | September 13, 2011 |       | MTS OJSC     |       | September 13, 2011 |       |
| Khanty  Mansiysk Autonomous District              |       | MTS OJSC     |       | April 28, 2008     |       | MTS OJSC     |       | April 28, 2008     |       |
| Koryakski  Autonomous District(1)       |       | Primtelefon  |       | April 28, 2008     |       | Primtelefon  |       | April 28, 2008     |       |
| Krasnoyarsk  Territory                            |       | MTS OJSC     |       | December 21, 2010  |       | MTS OJSC     |       | September 13, 2011 |       |
| Kurgan  region                                    |       | MTS OJSC     |       | April 28, 2008     |       | MTS OJSC     |       | April 28, 2008     |       |
| Magadan  region                                   |       | Primtelefon  |       | April 28, 2008     |       | Primtelefon  |       | April 28, 2008     |       |
| Novosibirsk  region                               |       | MTS OJSC     |       | February 21, 2007  |       | MTS OJSC     |       | February 21, 2007  |       |
| Omsk  region                                      |       | MSS          |       | December 20, 2006  |       | MSS          |       | December 20, 2006  |       |
| Primorsky  Territory                              |       | Primtelefon  |       | April 28, 2008     |       | Primtelefon  |       | April 28, 2008     |       |
| Sakha  Republic (Yakutia)                         |       | Primtelefon  |       | April 28, 2008     |       | Primtelefon  |       | April 28, 2008     |       |
| Sakha  Republic (Yakutia)                         |       | MTS OJSC     |       | July 1, 2010       |       | —       |       | —                  |       |
| Sakhalin  region                                  |       | Primtelefon  |       | April 28, 2008     |       | Primtelefon  |       | April 28, 2008     |       |
| Sverdlovsk  region                                |       | MTS OJSC     |       | March 1, 2011      |       | MTS OJSC     |       | March 1, 2011      |       |
| Sverdlovsk  region                                |       | —       |       | —                  |       | MTS OJSC     |       | April 28, 2008     |       |
| Taimyr  Autonomous District                       |       | Sibchallenge |       | December 21, 2010  |       | Sibchallenge |       | September 13, 2011 |       |
| Tomsk  region                                     |       | MTS OJSC     |       | June 5, 2008       |       | MTS OJSC     |       | June 5, 2008       |       |
| Tyumen  region                                    |       | MTS OJSC     |       | April 28, 2008     |       | MTS OJSC     |       | April 28, 2008     |       |
| Tyva  Republic                                    |       | MTS OJSC     |       | July 19, 2011      |       | MTS OJSC     |       | December 30, 2013  |       |
| Ust-Ordynski  Buriatsk Autonomous District        |       | Primtelefon  |       | April 28, 2008     |       | Primtelefon  |       | April 28, 2008     |       |
| Yamalo-Nenetsk  Autonomous District               |       | MTS OJSC     |       | April 28, 2008     |       | MTS OJSC     |       | April 28, 2008     |       |
| **Ukraine**                                       |       |         |       |                    |       |         |       |                    |       |
| Ukraine                                           |       | UMC          |       | December 3, 2013   |       | UMC          |       | December 3, 2013   |       |
| **Uzbekistan**                                    |       |         |       |                    |       |         |       |                    |       |
| Uzbekistan                                        |       | Uzdunrobita  |       | June 30, 2016      |       | Uzdunrobita  |       | June 30, 2016      |       |
| **Turkmenistan**                                  | ** ** | ** **   | ** ** | ** **              | ** ** | ** **   | ** ** | ** **              | ** ** |
| Turkmenistan                                      |       | BCTI         |       | February 1, 2009   |       | BCTI         |       | February 1, 2009   |       |
| **Belarus**                                       |       |         |       |                    |       |         |       |                    |       |
| Belarus                                           |       | MTS Belarus  |       | April 30, 2012     |       | MTS Belarus  |       | April 30, 2012     |       |

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(1)                Our regional license areas in which we have not commenced commercialoperations as of the date of this document.

Each of our licenses requires service to bestarted by a specific date and most contain further requirements as to networkcapacity and territorial coverage to be reached by specified dates. We have metthese targets or received extensions to these dates in those regional licenseareas in which we have not commenced operations. Neither the government norother parties have taken or attempted to take legal actions to suspend,terminate or challenge the legality of any of our licenses. We have notreceived any notice of violation of any of our licenses, and we believe that weare in compliance with all material terms of our licenses.

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**ServicesOffered**

**NetworkAccess**

We primarily offer mobile cellular voice,data and facsimile communication services to our subscribers on the basis ofvarious tariff plans. In general, we offer tariff plans that do not requiresubscribers to pay a monthly subscription fee. However, certain tariff plansrequire subscribers to pay a monthly subscription fee and a per-minute chargefor usage. See “—Tariffs.”

**AutomaticRoaming**

Roaming allows our customers, bothsubscribers and guest roamers, to receive and make international, local andlong-distance calls while traveling outside of their home network. Roaming isprovided through individual agreements between us and other GSM operators.Unlike many non-GSM providers that require additional equipment or prior notification,our roaming service is instantaneous, automatic and requires no additionalequipment.

As of December 31, 2005, we hadbilateral roaming contracts with 400 wireless operators in approximately 192countries, including with regional operators in Russia. We continually seek toexpand our roaming capability and are currently in negotiations with additionaloperators. In Russia, as of December 31, 2005, in addition to our networkcoverage area in 82 regions of Russia, GSM service is available to our subscribersin several regions of Russia where we do not currently operate through ourroaming agreements with 13 regional operators.

Roaming agreements regulate the relationsand billing procedures between operators. The host operator sends the roamer’shome operator a bill for the roaming services provided to the roamer. Theroamer’s home operator pays the host operator directly for the roaming servicesand then includes the amount due for the provision of roaming services in theroamer’s monthly bill.

**Value-AddedServices**

We offerseveral value-added services to our customers. These services may beincluded in the tariff plan selected by the subscriber or subscribers may payadditional monthly charges and, in some cases, usage charges for them. Somebasic value-added services that we offer include:

·       CallDivert/Forwarding;

·       CallBarring;

·       Caller IDDisplay and anti-Caller ID Display;

·       CallWaiting;

·       ConferenceCalling;

·       MelodyRing Tones;

·       Wi-Fi;

·       MissedCall Alert;

·       MobileOffice;

·       Itemizationof Monthly Bills;

·       Voicemail;

·       Informationand Directory Service;

·       InternationalAccess Service;

·       AutomaticCustomer Care System;

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·       CustomerCare System via the Internet;

·       ShortMessage Service, or SMS;

·       GeneralPacket Radio Service, or GPRS;

·       Multi-MediaMessage Service, or MMS;

·       WirelessApplication Protocol, or WAP;

·       Newtechnologies-based services, including wireless local area network, orWLAN, location based services, or LBS, and others;

·       SIM-browser;

·       I-mode;

·       Real IP;and

·       Location-BasedService, or LBS.

We also provide many voice and SMS-basedvalue-added services in cooperation with various content providers.

**OtherServices**

In addition to cellular communicationservices, we offer corporate clients a number of telecommunications services suchas design, construction and installation of local voice and data networkscapable of interconnecting with fixed line operators, installation andmaintenance of cellular payphones, lease of digital communication channels,access to open computer databases and data networks, including the Internet,and provision of fixed, local and long-distance telecommunications services, aswell as video conferencing.

**Salesand Marketing**

**TargetCustomers**

Our target customers historically includedcompanies, professionals, high-income individuals, reporters, governmentorganizations, businesspersons and diplomats. However, with mobile cellularpenetration in these segments becoming saturated, we began offering mobilecellular services to a much wider group of the population. Over time, weadjusted our service model to provide differentiated levels of service to meetthe needs of distinctive customer segments as such segments have developed. In2002, we launched the “Jeans” group of tariff plans, which appealed tomass-market subscribers as these prepaid plans had, and continue to have, lowconnection and no monthly fees. We also continue to actively target high-endcustomers who provide us with larger profit margins through high ARPU and MOU.For example, the “Profi” and “Exclusive” tariff plans offer a higher level ofcustomer service, technical support and a wide range of services, includingpersonalized service and support with minimum waiting time. Today, we areconsidered a mass-market mobile network operator with a wide range ofsubscribers in all customer segments.

To promote subscriber loyalty, we offerdiscounts with respect to our tariff plans for customers willing to enter intoextended contracts with us. This strategy also helps to mitigate churn ratesamong our subscribers in a highly competitive market.

**Advertisingand Marketing**

Our advertisingand public relations initiatives include:

·       brand andimage advertising and public relations to position us as the leading mobilecellular operator in Russia, Ukraine, Uzbekistan and Turkmenistan;

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·       informationadvertising and promotion to inform potential customers of the advantages ofthe high quality and variety of our services and the extensive coverage weoffer; and

·       product-and tariff-related advertising and promotion for specific marketingcampaigns, new tariffs and pricing discounts.

We use a combination of newspaper,magazine, radio, television and outdoor advertising, including billboards andsigns on buses and kiosks, and exhibitions to build brand awareness andstimulate demand. Our indirect advertising includes sponsorship of selectedtelevision programs, sporting events, concerts and other popular events. Wealso coordinate the advertising policies of our dealers to capitalize on theincreased volume of joint advertising and preserve the integrity andhigh-quality image of the MTS brand. As we have expanded our network, we haveconcentrated a greater part of our advertising and marketing effort onpositioning the MTS and Jeans brands as national brands. In addition, we focusour advertising and marketing on the affordability and variety of our tariffplans, on the broad coverage of our network and the use and availability ofnational roaming.

**Renewedbrand**

On May 10, 2006, Sistema introduced auniversal brand featuring a new egg-shaped logo for each of thetelecommunications companies operating within the Sistema Telecom group,including us. We believe that our new brand symbolizes leadership and a dynamicand innovative approach to doing business. The re-branding reflects a shift inour marketing strategy with a renewed focus on the simplification of ourcommunications to the general public. One of the goals through our re-brandingefforts is to create a simple set of tariff plans with clear advantages over ourcompetitors and easy-to-understand descriptions of the wide range of ourservices and product offerings. In addition, we aim to simplify the purchasingexperience for our customers by creating a universal format for our salesoffices, transforming them into visually appealing, practical and convenientvenues where buyers can obtain product information and test our latest productsand services.

The changes relating to our brand renewalwill impact each of our operational regions, as well as the relationship wehave with our subscribers. For example, we are circulating new payment cardsand will phase out the old cards as they expire. We have launched a federaladvertising campaign with new advertising and informational materials. Ourrevised website with the new brand and logo is already available online atwww1.mtsgsm.com. New signs will be hung at our sales offices, which will beredesigned to reflect the service standards and philosophy of the new brand.

Under this universal brand, our subscriberswill have access to a wide range of telecommunications products and services,including Internet access, mobile and fixed-line telephones, single billing anda single interface for all of the subscriber’s telecommunications needs. Webelieve that our re-branding efforts will increase our recognition amongexisting and potential clients, promote cross-sales of the companies using thebrand and enhance subscriber loyalty.

**Salesand Distribution**

As of December 31, 2005, we had 398sales and customer service centers in Russia, 36 in Ukraine, 21 in Uzbekistanand ten in Turkmenistan. In response to the demand shift to mass-marketsubscribers, we have developed an extensive distribution network throughindependent dealers that operate numerous outlets in places of high consumeractivity, such as supermarkets and malls. Under our current policy, dealersreceive a commission per subscriber connected based on revenues generatedduring the first six months by subscribers that they enroll. The commission inthe Moscow license area currently ranges between $25 and $120 per subscriberand dealer commissions in the other regional license areas in Russia arebetween $5 and $50. Dealer commissions in Ukraine range from $3 to $40. Dealersgenerally receive a commission of approximately $40-50 for enrollingsubscribers in our “VIP” tariff plan. We limit our credit exposure to dealersby controlling the cash flow from customers. If a new customer pays in cash,the dealer 

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remits the fullamount received to us within three days. If the customer chooses to pay by banktransfer or by credit card, the customer pays us directly, and we pay thedealer its commission after the end of the month.

Prior to 2006, in Russia, we paid the fullamount of commission when a dealer activated a subscriber’s contract. If suchsubscriber’s usage of our voice and non-voice services over the followingsix-month period amounted to less than the amount of the dealer’s commission,the dealer was required to reimburse the difference to us. Commencing January 1,2006, we began linking commissions payable to a dealer on a monthly basis tothe amount of revenues we receive. In the six-month period from the date asubscriber is activated by a dealer, such dealer receives the lesser of thefull commission amount or 50% of the revenues received from the subscriberduring the period. We believe that this method for paying commissions todealers provides dealers with greater incentives to renew subscriptions,reduces the risk of dealer fraud and improves our cash-flow management, asdealers are not credited after a subscriber is activated.

During 2005, approximately 85% of our newsubscribers enrolled through independent dealers in Russia and 94% in Ukraine,and we enrolled the remainder directly. We intend to continue expanding ourinternal distribution network, as well as our independent dealer distributionnetwork. Independent dealers have also begun servicing some aspects of oursubscribers’ accounts, such as the switching on and off of additional servicesand payment collection.

As the geographic range of our networkexpands, we expect to increase the number of distribution points, primarilythrough increasing the number of dealers under contract with us and creatingjoint ventures with local partners to act as our dealers.

**Competition**

**TheRussian wireless telecommunications market**

The Russian wireless telecommunicationsmarket is characterized by rapid growth in subscribers and revenues andincreasing consolidation among a few large national operators. As of December 31,2005, overall wireless penetration in Russia was 86.6%, or approximately125.8 million subscribers, according to AC&M-Consulting.

Demand for wireless communications servicesin Russia has grown rapidly over the last ten years due to rising disposableincomes, increased business activity and declining prices due to intensifiedcompetition among wireless communications providers. The Russian market hasachieved high levels of penetration in Moscow and St. Petersburg, with morethan 135 and 118 subscribers per 100 residents, respectively, at December 31,2005, according to AC&M-Consulting. Regional markets remained relativelyunder-penetrated, with an average of less than 78 subscribers per 100residents.

The followingtable sets forth key data on Russia’s wireless telecommunications market:
|                         | ** ** | **As of December 31,**                                      | ** ** |
|-------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **              | ** ** | **2001**                                                                   | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(Amounts in millions, except for percentages)** | ** ** |
| Subscribers(1)          |       |                                                                       | 8.0        |   |   | 18.0 |   | 36.2 |   | 74.4 |   | 125.8 |   |
| Subscriber  penetration |       |                                                                       | 4          | % |   | 12 | % | 25 | % | 51 | % | 87 | % |

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Source:AC&M-Consulting.

(1)                Based on registered subscribers (SIM cards only). There is nouniform definition of active subscribers in the Russian wireless market.

According to AC&M-Consulting and ourown data, we accounted for 45.1% and 44.6% of subscribers in Moscow, 32.2% and32.7% of subscribers in St. Petersburg and 35.7% and 35.2% of total Russiansubscribers as of December 31, 2004 and 2005, respectively.

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The competition has evolved in recent yearsto exist primarily between us, Vimpelcom and MegaFon, each of which haseffective national coverage in Russia. Competition today is based largely onlocal tariff prices and secondarily on network coverage and quality, the levelof customer service provided, roaming and international tariffs and the rangeof services offered. For a description of the risks we face from increasingcompetition, see “Item 3. Key Information—D. Risk Factors—Risks Relating to OurBusiness—We face increasing competition that may result in reduced operatingmargins and loss of market share, as well as different pricing, service ormarketing policies.”

The following table illustrates the number of wireless subscribers foreach network operator in Russia as of December 31, 2003, 2004 and 2005:
|                   | ** ** | **As of December 31,** | ** ** |
|-------------------|------------|---------------------------------------|------------|
| **Operator**      | ** ** | ** **                            | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **        | ** ** | **(Amounts in millions)**   | ** ** |
| MTS(1)            |       | 13.4                                  |       | 26.5 |   | 44.2 |   |
| Vimpelcom(1)      |       | 11.4                                  |       | 25.7 |   | 43.1 |   |
| MegaFon  group(1) |       | 6.3                                   |       | 13.6 |   | 22.8 |   |
| Others(2)         |       | 5.1                                   |       | 8.0 |   | 15.7 |   |
|                   |            |                                       |            |  |  |  |  |  |  |

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(1)                Subscriber information based on the relevant operator’s data.

(2)                Source:AC&M-Consulting.

***Vimpelcom***

Vimpelcom, which operates GSM 900/1800networks, is one of our primary competitors in Russia, and it is the secondlargest GSM wireless operator in Russia in terms of subscribers. We believethat Vimpelcom will continue to be our primary competitor for the foreseeablefuture.

According toVimpelcom, it had approximately 43.1 million subscribers in Russia at December 31,2005, including 9.3 million in the Moscow license area. At December 31,2005, according to AC&M-Consulting, Vimpelcom had a 40.8% market share inMoscow and a 34.3% market share of total wireless subscribers in Russia.

***MegaFon***

In addition to Vimpelcom, we also competewith MegaFon, which is the third largest operator in Russia in terms of subscribers.The MegaFon group holds GSM 900/1800 licenses to operate in all 88 regions ofthe Russian Federation.

According toMegaFon, it had a subscriber base of 22.8 million in Russia at December 31,2005, including 3.2 million subscribers in the Moscow license area. At December 31,2005, according to AC&M-Consulting, MegaFon had a 37.1% market share in St.Petersburg and an 18.1% market share of total wireless subscribers in Russia.

***Other Operators***

In addition to our principal competitors,Vimpelcom and MegaFon, we also compete with local GSM and D-AMPS operators inseveral Russian regions.

In certainregions of the Urals part of Russia, our primary competitor is Uralsvyazinform,which had approximately 3.8 million subscribers as of December 31, 2005.In certain regions of the Volga part of Russia, we compete with SMARTS, whichhad approximately 2.8 million customers as of December 31, 2005. Thepreceding subscriber numbers, in each case, are according toAC&M-Consulting.

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**TheUkrainian wireless telecommunications market**

Since 2003, the Ukrainian wirelesstelecommunications market has enjoyed rapid growth, in part, due to broadereconomic recovery in Ukraine, changes in ownership of the two major operatorsand the more recent introduction of calling-party pays billingarrangements. In 2005, overall wireless penetration in Ukraine increased from29.1% to 64.0%, or approximately 16.1 million subscribers, according tovarious press releases from Ukrainian mobile operators.

The following table shows the number of subscribers as of the datesindicated and the coverage area of UMC and our competitors in Ukraine:
| Operator        | ** ** | ** **                           | ** ** | **December 31,  2004** | ** ** | **December 31,  2005** | ** ** | **Coverage Area** | ** ** |
|-----------------|------------|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** **      | ** ** | **(amounts in thousands)** | ** ** | ** **                  | ** ** |
| Kyivstar        |       |                                 | 6,252      |                        |       |                        | 13,925     |                   |       | Nationwide |   |
| UMC             |       |                                 | 7,373      |                        |       |                        | 13,327     |                   |       | Nationwide |   |
| DCC/Astelit     |       |                                 | 85         |                        |       |                        | 2,390      |                   |       | Nationwide |   |
| URS/Vimpelcom   |       |                                 | 50         |                        |       |                        | 210        |                   |       | Major cities and towns |   |
| Golden  Telecom |       |                                 | 60         |                        |       |                        | 51         |                   |       | Kiev, Odessa |   |
| Others          |       |                                 | 50         |                        |       |                        | 31         |                   |       | Major cities |   |

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Source: Subscriber information based therelevant operator’s data.

In Ukraine, wecompete primarily with Kyivstar, a GSM operator with 13.9 millionsubscribers as of December 31, 2005. Kyivstar is owned by Telenor and AlfaGroup. Kyivstar offers wireless services using GSM 900 and GSM 1800 technologies.DCC holds a license to provide wireless cellular services using the D-AMPSstandard and, through its subsidiary Astelit, holds a GSM-1800 license.In addition, Turkcell has acquired a controlling interest in DCC. GoldenTelecom Ukraine, which is beneficially owned by Alfa Group, Telenor andRostelecom, offers wireless services using GSM 1800 technology.

**TheUzbekistan wireless telecommunications market**

The Uzbekistan wireless telecommunicationsmarket is characterized by low penetration rates. In 2005, overall wirelesspenetration in Uzbekistan increased from 2% to 4%, or approximately 510,000subscribers, according to Informa (UK).

The following table shows the number of subscribers as of the datesindicated and the coverage area of Uzdunrobita and our competitors inUzbekistan:
| Operator                          | ** ** | ** **                           | ** ** | **December 31,  2004** | ** ** | **December 31,  2005** | ** ** | **Coverage Area** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **(amounts in thousands)** | ** ** | ** **                  | ** ** |
| Uzdunrobita  (MTS)                |       |                                 | 310.0      |                        |       |                        | 580.3      |                   |       | Nationwide |   |
| Unitel  (Vimpelcom)               |       |                                 | 121.6      |                        |       |                        | 298.4      |                   |       | Nationwide |   |
| Coscom                            |       |                                 | 65.1       |                        |       |                        | 103.7      |                   |       | Nationwide |   |
| Others  (Uzmakom GSM, Buztel GSM) |       |                                 | 46.6       |                        |       |                        | 71.0       |                   |       | Major cities |   |

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Source: Subscriber information based therelevant operator’s data.

Uzdunrobita offers wireless services usingTDMA, GSM 900 and GSM 1800 technologies. In Uzbekistan, we compete primarilywith Unitel, a GSM operator owned by Vimpelcom with 298,370 subscribers as of December 31,2005. We also compete with Coscom, which provides wireless services inUzbekistan using GSM 900/1800 technology and is owned by MCT Corporation,Telenor and Rostelecom.

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**Tariffs**

We customize our marketing efforts and pricingpolicies in each region of Russia by considering such factors as average incomelevels, the competitive environment and subscriber needs in a particularregion, all of which vary from region to region. Consistent with our marketingstrategy, we have developed new tariff plans to appeal to a broader market.

We launched our “Jeans” brand tariff plans geared atmass-market subscribers on November 15, 2002, in Moscow and in 37 otherregions in Russia. “Jeans” tariffs were launched in Ukraine in August 2003.The “Jeans” brand is comprised of a set of prepaid tariffs that generallyinclude features such as no monthly subscription fee, per-second billing, freeincoming calls from MTS subscribers and, for certain tariff plans, advancepayment credit expiration dates. Our “Jeans” tariff subscribers in Russiareceive all incoming calls free of charge from other MTS subscribers and, inmany regions, from subscribers of other mobile operators. As of December 31,2005, Jeans subscribers accounted for 79% of our total subscribers and 88% and48% of our subscribers in Russia and Ukraine, respectively. In addition, weoffer a second set of prepaid tariffs in Ukraine marketed under the “SIM-SIM”brand. As of December 31, 2005, “SIM-SIM” subscribers accounted for 42% ofour subscribers in Ukraine.

In October 2005,we introduced additional monthly tariff plans to offer our subscribers agreater variety of value-added services and pricing options than the previoustariff structure. All of our monthly tariff plans combine different monthlynetwork access fees (with the exceptions of the “Jeans” tariff plans), perminute usage charges and value-added services in packages designed toappeal to different market segments. The tariff plans are divided into fourcategories—“Jeans,” “Profi,” “Exclusive” and “Corporate”—with each categorydesigned to target specific segments as follows:

·       *Jeans*: In addition to the description above, we have adoptedan easy-to-use system of choosing from up to five different “Jeans” tariffplans. After subscribers first acquire the basic “Jeans” plan, they may send anSMS message to choose from five tariff plans each with different per minutecall fees.

·       *Profi*: “Profi” tariff plans are geared toward heavy userswho use their mobile phones for personal and business communications. Theseplans feature monthly fees for a certain predetermined number of minutes andlow fees for subscribers who exceed this limit. “Profi” subscribers choosebetween a local and federal number with the local number being more expensive,and from a wide range of value-added services, including caller ID, or CLIP,conference calling, call transferring and call waiting/holding. Regularsubscribers of the “Profi” plans are provided an additional 15% discount ontheir local and mobile calls and a 15% increase of allotted minutes at no extracharge.

·       *Exclusive*: “Exclusive” tariff plans are designed for heavyusers who call primarily within the Moscow region. “Exclusive” subscribers areprovided an unlimited number of local minutes, an opportunity to pay throughour credit payment system and access to personal customer care service. Forthose “Exclusive” subscribers issued a local number, monthly fees are up to$212 and those using a federal number pay up to $118 per month. In addition,regular “Exclusive” subscribers receive a 15% discount.

·       *Corporate*: We offer four different tariff plans in eachregion targeted to meet the demands of our corporate clients. These plansfeature specialized customer care, payment through our credit system and volumeand tenure discounts. In addition, we provide customized pricing offers andtechnical solutions to our biggest clients.

Although we offer the same categories of tariff plansthroughout Russia, the prices of these plans differ from region to regiontaking into account such factors as the average income, competitive environmentand subscriber needs in a particular region. Generally speaking, our tariffplans are more expensive in the Moscow license area. We introduced a unifiedsystem of tariff plans to achieve such benefits as better perception of tariffplans and clarity, simplicity and transparency for prospective 

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subscribers throughoutRussia. In addition, we introduced additional tariff plans with differentconnection fees, per minute call charges and a wide range of value-addedservices.

By advertising on a national rather than regional orlocal level, we have been able to streamline and reduce our advertising andmarketing expenses through unified advertising campaigns throughout Russia.Furthermore, we are able to convey to consumers a more uniform perception ofour brand and services.

Our tariff plans offer a variety of pricing schemes.The following description of tariffs and charges are, in each case, exclusiveof VAT. As of December 31, 2005, the per-minute tariff for calls to Moscowfrom Moscow (including Jeans tariff plans) varied from $0.06 per minute to$0.23 per minute. The per minute prices in the regions outside of the Moscowlicense area (including Jeans tariff plans) ranged from $0.02 per minuteto $0.35 per minute; in St. Petersburg tariffs varied from $0.05 perminute to $0.12 per minute. Higher rates apply to domestic long distancecalls and we assessed a surcharge for all international calls that ranged from$1.29 per minute (Moscow) for calls to Europe to $1.99 per minute (Moscow) forcalls to Africa. Our value-added services, such as Caller ID and CallWaiting, are sometimes included in the plan at no additional charge and sometimescarry a charge of up to $2 per month, depending on the plan and the region.

We also offer unified tariff plans in all territoriesof Ukraine in which we operate, including private contract, business andprepaid plans. In addition, we developed new tariff plans for Ukraine thatfocus on the differing needs of subscribers in the various market segmentsduring 2005. These new plans are divided into three categories, each promotedunder its own name, and offer a wide variety of monthly paid contracts, includingpackages with unlimited traffic. For example, SIM-SIM tariffs comprise afamily of pre-paid plans offering universal tariffs noted for their simplicity,as well as special reduced tariffs for calls made within the UMC network,for calls made to preferred designated numbers and for heavy SMS users, amongothers. Jeans tariff plans also offer special reduced tariffs for calls madeand SMSs sent within the UMC network. UMC Business tariff plans are targetedfor corporate users offering discounted tariffs for calls made betweenintra-company users.

As of December 31,2005, the standard per minute prices in Ukraine varied from $0.15 per minute to$0.25 per minute. The standard per minute price for calls made within the UMCnetwork ranged from $0.09 per minute to $0.20 per minute. Higher rates appliedto international calls ranging from $0.53 per minute to $3.56 per minute duringpeak periods and from $0.20 per minute to $2.07 per minute during off-peak andnight periods.

**Customer Paymentsand Billing**

We enroll new subscribers, except for certaincorporate clients, in an advance-payment program, under which thesubscriber prepays a specific amount of money to use our services. As of December 31,2005, approximately 98.6% of our consolidated subscriber base was enrolled inthe advance-payment program and 1.4% used the credit system.

Our advance-payment system monitors eachsubscriber account and sends a seven-day advance warning on the subscriber’smobile telephone when the balance on the subscriber’s account decreases below acertain threshold, which is approximately the average consumption by thesubscriber for a ten-day period. Then the system sends a telephonic reminder orSMS twice in the following seven-day period and an additional reminder one dayprior to termination, including the current level of the subscriber’s remainingbalance and a recommendation as to the sum that should be advanced to us basedon the subscriber’s historical usage.

Under the credit payment system, customers are billedmonthly in arrears for their network access and usage. If the invoice is notpaid on time, the customer may be liable for a late payment charge of up to0.3% of the amount due for each day payment is past due. We limit the amount ofcredit extended to 

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customers based on thecustomer’s payment history, type of account and past usage. As of December 31,2005, subscribers using the credit system of payment had a maximum credit limitof $1,000. When the limit is reached, the subscriber receives an invoice, whichmust be paid within five days. If the subscriber fails to do so, we block thetelephone number until the invoice is settled. We actively manage oursubscriber base to migrate existing credit payment customers to the advance-paymentsystem. However, existing credit payment customers may continue to use theirold tariff plan as long as their accounts remain in good standing.

The migration of our “Jeans” subscribers onto a newbilling system was completed in 2005 for the large majority of the subscribers.We plan to migrate the remaining “Jeans” subscribers onto the new billingsystem by the end of 2006.

In 2005 and the first half of 2006, our tariffs inRussia were primarily quoted in currency units equivalent to U.S. dollars,except for some regions of Russia where tariffs are quoted in rubles. Invoicesquoted in U.S. dollar-equivalent units specify the amount owed in suchunits and require translation into rubles in order to make payments. We intendto move to ruble-denominated tariffs and invoicing in the future and, to thatend, we introduced a fixed exchange rate for converting U.S. dollar-denominatedtariffs and charges into Russian rubles in 2006. We offer our subscribersvarious ways to pay for our services, including by cash or credit card, wiretransfer, on account, prepaid cards and express-payment cards.

All tariffs for UMCsubscribers are quoted in hryvnias. We offer our subscribers in Ukraine variousways to pay for our services, including by cash or credit card, wire transfer,on account and prepaid cards.

**Customer Service**

We believe that to attract and retain customers, wemust provide a high level of service in the key areas of customer assistance,care and billing. In most markets in which we operate, we have a call centerthat provides customer service 24 hours a day, seven days a week. Customerservice representatives answer inquiries regarding disconnection due to lack ofpayment, handset operation, roaming capabilities, service coverage and billing.A special group of customer service representatives handles customer claims andassists customers who wish to change their services.

With the aim of improving the quality of our customerservice and optimizing our expenses, we began the reorganization of our callcenters into consolidated macro-regional contact centers in 2004. The aimof the project is to transform our call centers into effective channels forclient relationship management, or CRM, offering a full range of services andCRM functions.

In connection with this reorganization, we areestablishing Customer Retention departments in each of our macro-regionsto develop and implement customer retention programs with respect to all keycustomer segments and each of our primary service offerings. Our customerretention personnel will handle customer claims and suggestions, as well asfollow up with those customers who disconnected from our network to understandthe reasons for the disconnection and properly respond to the changing needs ofour customers.

We also have a number of Credit Control employees ineach region to manage bad debts and credit restrictions. In addition, wefurther improved our walk-in centers and combined offices for sales andcustomer service in the regions in 2005.

In addition, in 2005, wesuccessfully launched in Moscow the intellectual routing of calls designed toprovide our more valuable and loyal customers quicker access to customersupport services when calling us. We plan to adopt this advanced customerservice technology in each of the regions we operate during 2006.

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**Network Technology**

We believe that geographiccoverage, capacity and reliability of the network are key competitive factorsin the sale of mobile cellular telecommunications services. Our network isbased primarily on GSM 900 infrastructure, augmented by GSM 1800 equipment. Weuse GSM 1800 equipment in high-use areas, because 1800 MHz base stations aremore efficient in relieving capacity constraints in high traffic areas.Although there is no difference in quality between GSM 900 and GSM 1800services, the higher-frequency 1800 MHz signals do not propagate as faras 900 MHz signals. As a result, more 1800 MHz base stations are typicallyrequired to achieve the same geographic coverage. Accordingly, in regions wheregeographic coverage, rather than capacity, is a limiting factor, networks basedon GSM 900 infrastructure are typically superior to those based on GSM 1800,because they require fewer base stations to achieve coverage and, therefore,cost less. In most markets, including Russia and Ukraine, the most efficientapplication of GSM technology is to combine GSM 900 and GSM 1800 infrastructurein a unified network, which is commonly referred to as a dual-band GSM network.

**NetworkInfrastructure**

We use switching and other network equipment suppliedby Motorola, Siemens, Ericsson, Huawei, Alcatel and other major networkequipment manufacturers.

In the Moscow license area, we have allocatedfrequencies spanning 2  ́ 11.4 MHz ofspectrum in the GSM 900 frequency band and 2  ́24.6 MHz of spectrum in the GSM 1800 frequency band for operation of a dual GSM900/1800 network.

In St. Petersburg and the Leningrad region, we haveallocated frequencies spanning 2  ́9.6 MHz of spectrum in the GSM 900 frequency band (including 2  ́1.6 MHz in the E-GSM band) and 2  ́ 18.2 MHz ofspectrum in the GSM 1800 frequency band for operation of a dualGSM 900/1800 network.

We have frequencies allocated to us for the operationof GSM 900 and GSM 1800 frequency bands in all regions of Ukraine.The radio frequencies allocated to us for the operation of GSM 900 spanfrom 2  ́ 2.8 MHz ofspectrum in the Kiev and Zakarpattya regions to 2  ́5.2 MHz in Kiev city. We also have been allocated frequencies spanning from 2  ́16.0 MHz in the Tchernigov region to 2  ́26.4 MHz in the Dnepropetrovsk region for operation of GSM 1800 basestations. In addition, we have applied for an additional 137.6 MHz ofGSM 1800 frequency allocations for 19 major license areas in Ukraineand intend to apply for additional frequency allocations in the 1800 MHzband.

We believe that we havebeen allocated adequate spectrum in each of our license areas.

**GPRS and InternetAccess**

In many regions, we have upgraded our network toenable us to offer GPRS services, which permit our subscribers access to theInternet, WAP and MMS. As of December 31, 2005, GPRS services wereavailable to our subscribers in 78 regions in Russia, including majormetropolitan areas such as Moscow, St. Petersburg and Novosibirsk. We alsooffered GPRS services in all regions of Ukraine. In addition, we introducedinternational GPRS roaming to our subscribers in 2004, enabling them to usevarious GPRS-based services while traveling abroad.

In 2004, we entered into an exclusive strategicpartnership with NTT DoCoMo under which we launched the i-mode mobile internetplatform in all the macro-regions of Russia during 2005, except the Far East,where the i-mode platform was launched in June 2006. Through i-mode,subscribers are offered easy access to numerous internet sites with premiumcontent, email and other applications using specialized handsets developedespecially for i-mode users.

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We also entered into an agreement with Research InMotion in May 2005 to offer BlackBerry services to our subscribers inRussia. We plan to launch BlackBerry as soon as we receive approval from theFederal Service for Supervision in the Area of Communications. Blackberryservices will enable our subscribers to easily access e-mail, phone, textmessaging, Internet, organizer and corporate data applications from a single, integrateddevice. It will operate on our GSM/GPRS network in Russia with internationalroaming supported in the countries where we have GPRS roaming agreements.

In addition, we launched atrial program for our EDGE services in the Samara region in December 2004.EDGE is a high-speed, high-quality data transfer application capable oftransmitting streamline video and TV programs onto mobile phones. In 2005,we commercially launched EDGE services in the Moscow metropolitan area. We planto expand EDGE services in 2006 to cover the most developed markets where weoperate.

**Third-GenerationTechnology**

Third-generationnetworks, using UMTS technology, will allow subscribers to send video imagesand access the Internet using their handsets at transmission speeds of up to 2Mbps per second. We have conducted trials of third-generation networksutilizing rented network equipment. The 3G Association, an industry groupcharged with advising the Ministry of Information Technologies andCommunications of the Russian Federation on the procedure for allocating third-generationlicenses and regulating third-generation operations, has proposed thatwe, Vimpelcom and MegaFon each be issued a third-generation license, andthat a fourth license be issued to a fourth operator. Although the governmentwas expected to announce the license allocation procedure during 2005 and issuethe licenses during 2006, to date, no allocation procedures have beenannounced. We currently do not include the costs for the initial buildout ofour third-generation network in our capital expenditure plans and, atpresent, cannot estimate the expenditures that will be required.

**Base Station SiteProcurement and Maintenance**

The process of obtaining appropriate sites requiresthat our personnel coordinate, among other things, site-specific requirementsfor engineering and design, leasing of the required space, obtaining allnecessary governmental permits, construction of the facility and equipmentinstallation. In Russia, we use site development software supplied by LucentTechnologies to assess new sites so that the network design and sitedevelopment are coordinated. Our software in Russia and Ukraine can createdigital cellular coverage maps of our license areas, taking into account thepeculiarities of the urban landscape, including the reflection of radio wavesfrom buildings and moving automobiles. Used together, these software toolsenable us to plan base station sites without the need for numerous field tripsand on-site testing, saving us considerable time and money in our networkbuildout.

Base station site contracts are essentiallycooperation agreements that allow us to use space for our base stations andother network equipment. The terms of these agreements range from one to49 years, with the term of a majority of agreements being three tofive years. Under these agreements, we have the right to use premiseslocated in attics or on top floors of buildings for base stations and space onroofs for antennas. In areas where a suitable base station site is unavailable,we construct towers to accommodate base station antennae. We anticipate that wewill be able to continue to use our existing GSM 900 base station sitesand to co-locate GSM 1800 base stations at some of the same sites.

To provide quality serviceto subscribers, our maintenance department, staffed 24 hours per day,performs daily network integrity checks and responds to reported problems. Ourtechnicians inspect base stations and carry out preventative maintenance atleast once every six months.

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**InterconnectArrangements and Telephone Numbering Capacity**

Cellular operators must interconnect with local,inter-city and international telephony operators to obtain access to theirnetworks and, via these operators, to the networks of other operators aroundthe world. We have local interconnection agreements, including agreements forthe provision of telephone numbering capacity, with several telecommunicationsoperators in Moscow and in the other regions and in Ukraine, including thepublic switched telephone network operator in the city of Moscow, MGTS, as wellas MTU-Inform and Telmos, all of which are affiliated with Sistema, andUkrtelecom, UTEL, Golden Telecom and other public switched telephone networkoperators in Ukraine. See “Item 7. Major Shareholders and Related PartyTransactions—B. Related Party Transactions.” For use of 11-digit telephonenumbering capacity and the associated interconnection, we have agreements withRostelecom. Local interconnection typically entails payment of a one-timeconnection fee, a monthly fee per subscriber connected and a usage charge basedon minutes of traffic, or some combination thereof.

To provide our subscribers in Russia with domesticlong-distance services, we have interconnection agreements with Rostelecom andInterregional Transit Telecom, or MTT, and, to provide international services,with Rostelecom and Golden Telecom. MTU-Inform and Telmos also provide domesticlong-distance and international services through interconnection withRostelecom’s network. Most interconnection fees are based on usage by minuteand vary depending on the destination called.

Russian legislation requires that public switchedtelephone networks may not refuse to provide interconnection or discriminateagainst one operator in comparison to another; in practice, however, it hasbeen our experience that some regional network operators do discriminate amongmobile cellular operators by offering different interconnection rates todifferent mobile operators. See “Item 3. Key Information—D. Risk Factors—RisksRelating to Our Business—If we cannot interconnect cost-effectively with othertelecommunications operators, we may be unable to provide services atcompetitive prices and therefore lose market share and revenues.” Certaininterconnection fees are subject to government regulation, such as those set byRostelecom.

The Ministry of Information Technologies andCommunications has allocated special numbering codes for “federal” 11-digittelephone numbers on a non-geographical basis for all cellular operators. Webelieve that we have been allocated sufficient numbering capacity for thedevelopment of our network. However, a combination of regulatory, technologicaland financial factors has led to the limited availability of “local” 7-digittelephone numbering capacity in Moscow and the Moscow region. Moscow’s “495”code and the Moscow region’s “496” code have already reached numbering capacitylimits. To meet subscriber demand and provide for an adequate inventory ofnumbering capacity, we used to enter into contracts with local fixed lineproviders for allocation of numbering capacity to us. However, the regulatorrecently took the view that numbering capacity assigned to one operator couldnot be rented to other operators. Accordingly, we have entered into a newarrangement whereby fixed line operators make their numbers available to oursubscribers via agency contracts between the subscribers and us acting onbehalf of such fixed line operators. Our right to use numbering capacity rangesfrom five years to an unlimited period of time. As of December 31, 2005,we had numbering capacity (federal and local) for over 18.4 million subscribersin the Moscow license area. For a description of how we amortize theacquisition costs of numbering capacity, see Note 2 to our auditedconsolidated financial statements.

Interconnection and traffic transit between thenetworks of cellular operators in Russia is organized through the network ofMTT, one of the largest alternative operators in Russia, or through directchannels connecting the switches of the different cellular operators located inone city.

In Ukraine, mobileoperators are allocated numbering capacity by the NCRC. We believe that we havebeen allocated sufficient numbering capacity in Ukraine for the development ofour mobile network. However, the numbering capacity for fixed networkdevelopment (if we decide to utilize a local license granted to UMC) isinsufficient.

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**NetworkMonitoring Equipment**

We have operation and maintenance centersin Moscow, St. Petersburg, Nizhny Novgorod, Samara, Ekaterinburg, Omsk,Tomsk, Novosibirsk, Irkutsk, Kazan, Ufa, Krasnoyarsk, Chita, Blagoveshchensk,Vladivistok and Yuzhno-Sakhalinsk. We constantly control and monitor theperformance of our network, call completion rate and other major key technicalperformance indicators. We use monitoring systems to optimize our network andto locate and identify the cause of failures or problems, and also to analyzeour network performance and obtain network statistics. We have agreements withdifferent suppliers for technical support services that allow us to obtaintheir assistance in trouble shooting and correcting problems with our networkwithin the warranty period.

Our networks in Ukraine, Uzbekistan andTurkmenistan are monitored by our Kiev, Tashkent and Ashgabat operations andmaintenance centers, respectively. In addition to monitoring performance of thenetwork, our Kiev, Tashkent and Ashgabat operations and maintenance centersanalyze network quality parameters and provide reports and recommendations tomanagement.

**Handsets**

We and our dealers also offer an array ofmobile telephone accessories, with the average new subscriber spending between$5 to $50 on such accessories in addition to the cost of the handset.

Almost all of our handset sales consist ofdual-band GSM 900/GSM 1800 handsets. These dual-band handsets arecurrently in widespread use on networks in Western Europe and, because theysend and receive communications on both GSM 900 and GSM 1800frequencies, they can relieve possible congestion on our network and increasethe ability of our customers to roam. We also offer our subscribers tri-bandhandsets. These handsets, which function in the GSM 900, GSM 1800 and PCS-1900standards, provide users with greater automatic roaming possibilities inRussia, Europe, the United States and Canada. We generally do not offer handsetsubsidies in Russia but do offer them in Ukraine. For the year ended December 31,2005, we provided net handset subsidies of $57.2 million in Ukraine. Thesesubsidies are expected to be compensated within two years of a subscriber’senrollment though the subscriber’s usage of our services. However, in view ofthe experience and practice of mobile services providers in more maturemarkets, increased competition may compel us to more heavily subsidize handsetsin the future.

We have enteredinto arrangements with Sony Ericsson, Nokia, Motorola, Philips, Panasonic, Samsung,Siemens, Benefon, Alcatel and others to purchase handsets. We offerapproximately 80 GSM 900/GSM 1800 handset models, the majorityof which are manufactured by Sony Ericsson, Nokia, Siemens and Motorola. We arenot dependent on any particular supplier for handsets. The handsetmanufacturers provide training to our sales force, customer service personnel,dealers and engineering staff and cooperate with us on marketing and promotion.To ensure quality control and to maintain the MTS brand image, we encourage ourdealers to purchase handsets for use on our network directly from us. Typicaldual-band handsets range in cost from approximately $50 to $650.

**Regulationin the Russian Federation**

In theRussian Federation, the federal government regulates telecommunicationsservices. The principal law regulating telecommunications in the RussianFederation is the Federal Law on Communications, which provides, among otherelements, for the following:

·       licensingof telecommunications services;

·       requirementsfor obtaining a radio frequency allocation;

·       equipmentcertification;

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·       equalrights for individuals and legal entities, including foreign individuals andlegal entities, to offer telecommunications services;

·       faircompetition;

·       freedom ofpricing other than pricing by companies with monopoly power; and

·       liabilityfor violations of Russian legislation on telecommunications.

The new Federal Law on Communications cameinto force on January 1, 2004 and replaced the law of 1995 regulating thesame subject matter. The Federal Law on Communications creates a framework inwhich government authorities may enact specific regulations. Regulationsenacted under the legislative framework in place prior to enactment of theFederal Law on Communications continue to be applied to the extent they do notconflict with the Federal Law on Communications. The lack of interpretiveguidance from the regulatory authorities regarding the new regulations and theuncertainty surrounding their compatibility with the regulations still ineffect impedes our ability to assess effectively the impact of the newregulations under the Federal Law on Communications on our business.

The Federal Lawon Communications, which confers broad powers to the state to regulate thecommunications industry, including the allocation of frequencies, theestablishment of fees for frequency use and the allocation and revocation ofnumbering capacity, significantly modifies the system of government regulationof the provision of communications services in Russia. In particular, whileunder the previous law the Ministry of Communications issued licenses for theprovision of wireless communications services at its own discretion, under thenew law, licenses to provide communications services in territories where frequencyand numbering capacity are limited may be issued only on the basis of a tender.In addition, the new law provides for the establishment of a “universalservices reserve fund” to be funded by a levy imposed on all telecommunicationsservice providers, including us. See “Item 3. Key Information—D. RiskFactors—Risks Relating to the Russian Federation and Ukraine—Legal Risks—Theimplementation of the Federal Law on Communications imposed an additionalfinancial burden on us and may restrict our operations, which could materiallyadversely affect our financial condition and results of operations.” TheFederal Law on Communications also attempts to simplify the succession oflicenses to merged or otherwise reorganized companies by instituting a licensere-issuance procedure, whereas under the previous law, merged or reorganizedcompanies were required to apply to the Ministry of Communications for theissuance of a new license in such circumstances.

**RegulatoryAuthorities**

The Russian telecommunications industry isregulated by several governmental agencies. These agencies, whose functions arenot always clearly defined, form a complex, multi-tier system ofregulation that resulted, in part, from the implementation of the Federal Lawon Communications, as well as from the March 2004 large-scalerestructuring of the Russian government. The system of regulation is stillevolving and further changes are expected. See “Item 3. Key Information—D. RiskFactors—Risks Relating to the Russian Federation and Ukraine—Political andSocial Risks—Political and governmental instability could materially adverselyaffect our business, financial condition, results of operations and prospectsand the value of our ADSs.”

*The Ministry of InformationTechnologies and Communications* is thefederal executive body that develops and supervises the implementation ofgovernmental policy in the area of communications and coordinates and controlsthe activities of its subordinate agencies. The Ministry may issue regulationsin the area of communications if authorized to do so by federal legislation(including presidential and governmental decrees).

The following bodies, each of which issubordinate to the Ministry of Information Technologies and Communications,also regulate the telecommunications industry.

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*The Federal Service for Supervision in the Area ofCommunications*is a federal executive body that supervises andcontrols certain areas of communications and information technologies,including:

·       theissuance of licenses and permissions in the area of communications andinformation technologies;

·       theregistration of radio-electronic and high-frequency equipment;

·       thetechnical supervision of networks and network equipment throughout Russia;

·       themonitoring of compliance by network operators with applicable regulations,terms of their licenses and terms of the use of frequencies allocated to them;and

·       theenforcement of equipment certification requirements.

*The Federal Agency of Communications*is a federalexecutive body that implements governmental policy, manages state property andprovides public services in the area of communications, including:

·       theallocation of radio frequencies based on decisions taken by the State RadioFrequencies Commission and registration of such allocations;

·       theallocation of numerical resources;

·       thecertification of equipment for compliance with technical requirements;

·       theexamination of electromagnetic compatibility of equipment with existing civilradio-electronic equipment; and

·       theorganization of tenders with respect to licenses in the sphere ofcommunications.

*State Radio Frequencies Commission.*   TheState Radio Frequencies Commission is an inter-agency coordination bodyacting under the Ministry of Information Technologies and Communications whichis responsible for the regulation of radio frequency spectrum and develops along-term policy for frequency allocation in the Russian Federation.

*Otherregulatory authorities.*   In addition,the Federal Antimonopoly Service supervises competition regulations andenforces the Federal Law on the Natural Monopolies and the regulations enactedthereunder. The Federal Tariffs Service regulates certain tariffs in the sphereof telecommunications, including the tariffs on the local and DLD calls bysubscribers of PSTNs and installation and subscription fees. The FederalService for Supervision in the Area of Consumer Rights Protection and HumanWell-Being is responsible for the enforcement of sanitary regulations,including some authority over the location of telecommunications equipment, andsupervises the compliance of companies with the regulations relating to theprotection of consumer rights. The Federal Registration Service is responsiblefor registering certain telecommunications infrastructure that is consideredreal property in accordance with Government Decree No. 68 dated February 11,2005.

**Licensingof Telecommunications Services and Radio Frequency Allocation**

Telecommunications licenses are issuedbased on the Regulations on Licensing in the Field of Telecommunications in theRussian Federation, enacted in June 1994, as amended, and, with regard towireless telecommunications services, on the Approval of Regulations forHolding a Competitive Tender for Receipt of Licenses Associated with theProvision of Cellular Radiotelephone Services, enacted in June 1998. Underthese regulations, licenses for telecommunications services were issued andrenewed for periods ranging from three to fifteen years. Under the new law,effective January 1, 2004, licenses may be issued and renewed for periodsranging from three to twenty-five years. Several different licenses to conductdifferent communication services may be issued to one entity. Provided thelicensee has conducted 

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its activitiesin accordance with the applicable law and terms of the license, renewals may beobtained upon application to the Federal Service for Supervision in the Area ofCommunications. Officials of the Federal Service for Supervision in the Area ofCommunications have broad discretion with respect to both issuance and renewalprocedures.

Acompany must complete a multi-stage process before the commercial launchof its communications network. A company must:

·       receive alicense from the Federal Service for Supervision in the Area of Communicationsto provide communications services;

·       obtainapproval to use specific frequencies within the specified band from the StateRadio Frequencies Commission and the Federal Agency of Communications ifproviding wireless telecommunications services; and

·       obtainpermission from the Federal Service for Supervision in the Area ofCommunications for network operations. To receive this permission, a wirelesstelecommunications services provider must develop a frequency allocation andsite plan, which is then reviewed and certified by the Federal Service forSupervision in the Area of Communications for electromagnetic compatibility ofthe proposed cellular network with other radio equipment operating in thelicense area. The Federal Service for Supervision in the Area of Communicationshas discretion to modify this plan, if necessary, to ensure such compatibility.

Under the old Federal Law on Communicationsand related licensing regulations, the transfer of a license, includingassignment or pledge of a license as collateral, was prohibited except fortransfer of licenses for the provision of wireless telecommunications servicesawarded through a competitive tender. Effective January 1, 2004, theprohibitions on the transfer of licenses were relaxed and, in particular, incase of mergers, licenses may be re-issued upon application by a transferee asa new license holder following the transfer. Additionally, the Ministry ofCommunications has declared that agreements on the provision oftelecommunications services must be concluded and performed by the licenseholder.

If theterms of a license are not fulfilled or the service provider violatesapplicable legislation, the license may be suspended or terminated. Licensesmay be suspended for various reasons, including:

·       failure tocomply with Russian law or the terms and conditions of the license;

·       failure toprovide services for over three months from the start-of-service date set forthin the license; and

·       annulmentof a frequency allocation if it results in the inability to rendercommunications services.

Inaddition, licenses may be terminated for various reasons by the court,including:

·       failure toremedy in a timely manner a violation that led to the suspension of thelicense;

·       provisionof inaccurate information in documents on the basis of which a license wasissued; and

·       failure tofulfill obligations undertaken in the process of a tender or auction.

The license may also be terminated in anumber of cases, including liquidation of a license holder or failure to pay alicense fee on time. A suspension or termination of a license may be appealedin court.

Frequencies are allocated for a maximumterm of ten years, which may be extended upon the application of a frequencyuser. Under the Federal Law on Communications, frequency allocations may bechanged for purposes of state management, defense, security and protection oflegal order in the Russian Federation with the license holder to be compensatedfor related losses. Further, frequency allocations 

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may besuspended or terminated for a number of reasons, including failure to complywith the conditions on which frequency was allocated.

The following one-time license fees arepayable in respect of each region covered by the license: 15,000 rubles, forservices involving use of a frequency spectrum, lease of communication channelsrunning beyond one region of Russia as well as in number of other casesspecified by law; and 1,000 rubles in other cases. The license fee for alicense received through a tender or auction is determined by the terms of suchtender or auction.

In addition to licensing fees, a governmentdecree enacted on June 2, 1998 requires payment of fees for the use ofradio frequencies for cellular telephone services. The payment procedure wasestablished by a government decree enacted on August 6, 1998, whichrequires that all wireless telecommunications services operators pay an annualfee set by the State Radio Frequencies Commission and approved by the FederalAntimonopoly Service for the use of their frequency spectrums. Additionally, asprescribed in government decree No. 223 on Reorganization of the System ofState Surveillance over Telecommunications, dated April 26, 2004,operators must make monthly payments to fund supervisory services in thecommunications sphere. In 2004, this fee amounted to 0.3% of revenues generatedfrom the provision of communications services. The fee was abolished from 2005.Furthermore, the Federal Law on Communications provides for the establishmentof a “universal services reserve fund” for the purpose of supportingcommunications companies operating in less developed regions of Russia throughthe financing, construction and maintenance of telecommunications networks inlow-profit and unprofitable sectors. This reserve fund is aimed at eliminatingthe practice of cross-subsidies by compensating operators for certain mandatory,loss-making local services in rural and sparsely populated areas. The universalservice fund concept has been used in some developed countries and in EasternEurope. It is funded by a levy imposed on all communication services providers,including us. The Federal Law on Communications mandated the government todetermine the amount of the levy and the procedure for its collection. In April 2005,the government set, and we currently pay, this levy at 1.2% of the differencebetween our total revenues from telecommunications services and revenuesgenerated by interconnection and traffic transit services. However, in February 2006,the Russian Constitution Court ruled that the amount of the levy must bedetermined by a federal law (rather than by a government decree) and instructedthe legislature to adopt the necessary amendments to the Federal Law onCommunications by January 1, 2007. Until such amendments are adopted, thecurrent regulations remain valid and in effect. See “Item 3. KeyInformation—D. Risk Factors—Risks Relating to the Russian Federation andUkraine—Legal Risks—The implementation of the Federal Law on Communicationsimposed an additional financial burden on us and may restrict our operations,which could materially adversely affect our financial condition and results ofoperations.”

The Federal Lawon Communications empowers the Russian government to determine and annuallyreview the list of licensing requirements applicable to various communicationservices being licensed. The most recent list of licensing requirements wasenacted by Government Decree No. 87 dated February 18, 2005. Licensesalso generally contain a number of other detailed conditions, including a dateby which service must begin, technical standards and a schedule of the numberof subscribers and percentage coverage of the licensed territory that must beachieved by specified dates. We have either commenced service by the applicabledeadline or received an extension of the applicable deadline for all of ourlicenses.

**EquipmentCertification**

A government decree adopted on December 31,2004, sets forth the types of communications equipment that is subject tomandatory certification. Communications equipment must be certified, or itscompliance with the established requirements must be declared and proved in theinterconnected communications network of the Russian Federation, which includesall fixed line and wireless networks open to the public. All networks of ourtelecommunications subsidiaries must be certified. A government 

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decree onRegulation of Use of Equipment in the Interconnected TelecommunicationsNetwork, enacted on August 5, 1999 gives the Ministry of InformationTechnologies and Communications and the Federal Antimonopoly Service the rightto restrict the use of certain equipment, including equipment manufacturedoutside Russia, and to set the technical requirements for the equipment used inthe interconnected telecommunications network. The Federal Agency ofCommunications issues certificates of compliance with technical requirements toequipment suppliers based on the Agency’s internal review. In addition, aPresidential decree requires that licenses and equipment certifications beobtained from the Federal Security Service to design, produce, sell, use orimport encryption devices. Some commonly used digital cellular telephones aredesigned with encryption capabilities and must be certified by the FederalSecurity Service.

Further,certain high-frequency equipment, a list of which was approved by GovernmentResolution No. 539 of October 12, 2004, manufactured or used in theRussian Federation requires special permission from the Federal Service forSupervision in the Area of Communications. These permissions are specific tothe entity that receives them and do not allow the use of the equipment byother parties. Failure to receive such certification could result in themandatory cessation of the use of such equipment.

**Competition,Interconnection and Pricing**

TheFederal Law on Communications requires federal regulatory agencies to encouragecompetition in the provision of communication services and prohibits the abuseof a dominant position to limit competition. The Federal Law on Communicationsprovides that telecommunications tariffs may be regulated in cases provided forby legislation. Presidential Decree No. 221, enacted on February 28,1995, on Measures for Streamlining State Regulation of Prices (Tariffs) allowsfor regulation of tariffs and other commercial activities of telecommunicationscompanies that are “natural monopolies.” Government Decree No. 637, dated October 24,2005, authorized the Federal Tariffs Service to set the following tariffs forthe natural monopolies in the communications market:

·       provisionof access to a local telephone network;

·       permanentuse of a subscriber’s line; and

·       local,intra-zone and DLD calls.

Although these regulations apply only tofixed line operators, we are still subject to them when receiving telephonecalls from fixed lines.

In accordance with the Federal Law onNatural Monopolies, the Federal Tariffs Service maintains a Register of NaturalMonopolies whose tariffs are controlled and regulated by the state. Atelecommunications operator may be included in this register upon the decisionof the Federal Tariffs Service based on the Service’s analysis of the operator’sactivities and the market conditions. At present, none of our subsidiaries isincluded in the Register of Natural Monopolies.

The Federal Antimonopoly Service isauthorized by law to maintain a register of companies holding a market share inexcess of 35%. Companies entered in this register may become subject to certainrestrictions in conducting their business, including limitations in decisionsrelating to price formation, geographical expansion, associations andagreements with competitors. Acquisitions of assets or shares in or by otherentities involving such companies are subject to particular scrutiny by theFederal Antimonopoly Service. As of December 31, 2005, MTS OJSC and itssubsidiaries Tomsk Cellular Communications LLC, CJSC Siberian Cellular System-900and CJSC UDN-900 are categorized by the Federal Antimonopoly Service ascompanies with a market share exceeding 35%. See also “Item 3. KeyInformation—D. Risk Factors—Risks Relating to Our Business—If we are found tohave a dominant position in our markets, the government may regulate ourtariffs and restrict our operations.”

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The Federal Lawon Communications provides for a special regulation of PSTN operators occupyinga “substantial position,” *i.e.*, operatorswhich together with their affiliates have, in the Russian Federation generallyor in a geographically defined specific numerical zone, 25% or more ofinstalled capacity or capacity to carry out transmission of not less than 25%of traffic. In particular, the Federal Law on Communications and implementingrules adopted by Government Decrees No. 161, dated March 28,2005 and No. 627, dated October 19, 2005, both effective fromJanuary 1, 2006, provide for government regulation of interconnectiontariffs established by such operators. In addition, such operators will berequired to develop standard interconnection contracts and publish them as apublic offer for all operators who intend to use such interconnection services.Notwithstanding the above, fixed line operators not considered to occupy a“substantial position” and not included in the Register of Natural Monopolies,as well as mobile operators, are free to set their own tariffs.

InMarch 2006, the Federal Law on Communications was amended to incorporate aCPP scheme effective as of July 1, 2006. The impact of CPP on ouroperations will ultimately depend on the change in subscriber behavior and ourability to sign interconnection agreements with other mobile operators at arate not lower than that set by the regulator for fixed to mobile calltermination. Notwithstanding the above, we do not anticipate any significant negativeimpact on our operations as a result of the introduction of CPP.

**Regulation in Ukraine**

**Regulatory Authorities**

*The State Department on Communications andInformatization, or SDCI*(formerly the State Committee onCommunications and Informatization, or SCCI), regulated the telecommunicationsindustry through December 31, 2005 largely through the issuance ofregulations, establishment of requirements relating to the quality oftelecommunications services and technical requirements relating to telecommunicationsnetworks and facilities. The SDCI also oversaw the technical condition anddevelopment of the telecommunications industry, including the development ofstandards and technical rules and supervision of the GSM, D-AMPS, NMT andTDMA networks. The SDCI was established in September 2004 as a division ofthe Ministry of Transport and Communications of Ukraine, or MTCU. The MTCU wasestablished in July 2004 as a result of the merger of the Ministry ofTransport and the SCCI. The SDCI is headed by a director nominated by theMinister of Transport and Communications and appointed by the Cabinet ofMinisters of Ukraine. Following the establishment of the NCRC in January 2005,which, as described below, assumed most of the SDCI’s functions, the SDCIremains responsible mainly for establishing and overseeing technical policiesand standards.

*The National Commission for the Regulation ofCommunications, or NCRC*, established by the new Telecommunications Law described in “—Legislation”below, is an independent regulatory body consisting of seven members and achairperson. The members and chairperson of the NCRC are nominated by the PrimeMinister and appointed by the President of Ukraine for a five-year term. TheNCRC is responsible for issuing licenses for telecommunications servicescommencing January 1, 2005, as well as various other responsibilities ofthe SDCI from that date. The SDCI, on the other hand, remains responsiblemainly for establishing and overseeing technical policies and standards. Theappointment of the initial members of the NCRC in April 2005 by thePresident of Ukraine was challenged in court by the previous NCRC membersappointed in 2004. As a result, the NCRC was only able to commence operationsin October 2005. However, the case is still pending in Ukraine’s HigherAdministrative Court.

*The StateCenter for Radio Frequencies of Ukraine, or SCRF.* Whilelicenses for radio frequencies for wireless communications are issued by theNCRC, SCRF is the authority responsible for all technical issues related to theuse of radio frequency resources and, in such capacity, is also involved in theissuance of radio frequency licenses. In particular, the SCRF determinesfrequency availability and the technical aspects of frequency allocation, aswell as provides the NCRC with an expert opinion in relation to each 

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applicationfor radio frequency. The SCRF also monitors use of the frequencies and willcontinue monitoring compliance with the license terms and physically inspectingoperators and providers of telecommunications services until the establishmentof the State Inspection of Communications, as described below. The SCRF alsoindependently issues individual permissions for the use of radio-electronicand radio-emitting equipment, its development, import, sale and purchase.

*The State Inspection of Communications, or the SIC*, established bythe new Telecommunications Law, will be a division of the NCRC. The SIC will beresponsible for the general supervision of the telecommunications market andthe use of radio frequency resources. The SIC will also monitor compliance withlicense terms, physically inspect operators and providers of telecommunicationsservices and, together with the SCRF, review cases relating to administrativeviolations in the areas of telecommunications and radio frequencies.

**Legislation**

The principallegislation regulating the telecommunications industry consists of the Law onTelecommunications dated November 18, 2003, or the Telecommunications Law,and the Radio Frequencies Law dated June 1, 2000, or the Radio FrequenciesLaw. The Radio Frequencies Law was amended in its entirety in June 2004.

TheTelecommunications Law was implemented and the NCRC has begun regulating thetelecommunications area and issuing telecommunications licenses. At the sametime, certain regulations implementing the 1995 Communications Law (nowrepealed) and the Radio Frequencies Law prior to its amendment are still ineffect, as are certain regulations enacted prior to the 1995 Communications Lawand the Radio Frequencies Law. Telecommunications operators are required tocomply with the Telecommunications Law and the Radio Frequencies Law, as wellas with the older regulations to the extent that such regulations do notconflict with the Telecommunications Law or the 2004 amendments to the RadioFrequencies Law.

TheTelecommunications Law provides for, among other things, equal rights forindividuals and legal entities, including foreign entities, to offertelecommunications services, fair competition and freedom of pricing. TheTelecommunications Law also sets forth the legal, economic and organizationalframework for the operation of companies, associations and government bodiesforming part of the telecommunications networks. The licensing oftelecommunications services, the requirements for equipment certification andliability for violations of Ukrainian legislation on telecommunications arealso determined by this legislation. The Telecommunications Law also governsthe relations between the state and local governmental bodies,telecommunications operators and users of telecommunications services and radiofrequencies.

TheTelecommunications Law addresses new areas of telecommunications services inUkraine, including numbering requirements, tariff and settlement regulations,interconnection, public telecommunications services, market access rules andlicensing issuance and renewal. The Telecommunications Law also significantlyexpands the definition of the telecommunications services market, including inits scope Internet Protocol telecommunications, transmission of data andfacsimile communications.

TheTelecommunications Law also restructured the regulatory bodies governing thearea of telecommunications. It provided for the creation of the NCRC, which, asof January 1, 2005, is assigned many functions previously held by theSDCI. The NCRC is authorized, *inter alia*, toissue regulations for the telecommunications services, issue telecommunicationslicenses to operators and providers, issue frequency licenses, requestinformation from operators, providers and authorities, impose administrativepenalties and maintain the register of the operators and providers. The NCRC isalso authorized to conduct hearings and to resolve disputes among operatorsconcerning the interconnection of 

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telecommunicationsnetworks. The powers of the SDCI in the telecommunications area are nowrelegated primarily to that of technical standards overseer.

Foreigninvestments in Ukrainian telecommunications operators are not limited; however,in order to provide telecommunications services in Ukraine an entity must belocated on the territory of Ukraine and registered in accordance with Ukrainianlegislation.

The RadioFrequencies Law sets forth comprehensive rules regarding the allocation,assignment, interrelation and use of radio frequencies, the licensing of theusers of radio frequencies and other relevant issues. The 2004 amendments tothe Radio Frequencies Law introduced new procedures for issuance, re-executionand termination of frequency licenses and operation permits.

**Licensing of Telecommunications Servicesand Radio Frequency Allocation**

Ukrainianlegislation provides for two types of telecommunications licenses:telecommunications licenses and frequency licenses. Prior to January 1,2005, the SDCI issued telecommunications and frequency licenses based on theLaw on Licensing Certain Types of Business Activity dated June 1, 2000,the Telecommunications Law and the Radio Frequencies Law. Commencing January 1,2005, the NCRC has assumed responsibility for issuing telecommunicationslicenses and frequency licenses pursuant to the Telecommunications Law and the2004 amendments to the Radio Frequencies Law.

Telecommunications licenses are issued for the following specific typesof telecommunications services:

·       fixedtelephone (local, intercity, international) communication services;

·       mobile telecommunicationsservices;

·       technicalmaintenance and exploitation of telecommunications networks and the lease ofelectric communications channels; and

·       intercityand international telecommunications services.

Othertelecommunications services do not require licenses.

An operatorthat is granted a telecommunications license may not commence the provision ofwireless telecommunications services until it receives a frequency license. Theissuance of a frequency license is, in turn, subject to the availability ofradio frequencies in the respective regions of Ukraine. Frequency licenses areissued for specific bandwidths within certain frequency spectrums in specificregions. The GSM spectrum is presently considered to be the most commerciallyattractive for telecommunications operators. It is currently deemed to bevirtually impossible to obtain a license for GSM frequencies in major Ukrainiancities because most of the GSM radio frequencies in such cities are alreadylicensed to the existing GSM operators, including us.

Underapplicable legislation, licenses for telecommunications services may be issuedand renewed for periods of not less than five years, with the actual periodgenerally ranging from 10 to 15 years. Renewal of a license is made by anapplication submitted to the NCRC at least four months prior to the expirationof the license term. NCRC officials have broad discretion with respect to boththe issuance and the renewal of licenses. The Telecommunications Law furtherprovides that the NCRC must award licenses on a first come-first serve basiswithin 30 days from submission of an application. If resources are limitedor consumer interests so require, the NCRC may adopt a decision to limit thenumber of licenses. In this event, the law requires that such decision be madepublic along with the rationale and that the licenses be allocated through atender.

In accordancewith the Radio Frequencies Law, the NCRC issues a frequency licenseconcurrently with the issuance of the license for the type of telecommunicationsservices requiring use of radio frequency resources. A telecommunicationsoperator that has a respective telecommunications license may 

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applyfor licenses for additional radio frequency bands. Frequency licenses may notbe issued for a period shorter than the term of the relevant telecommunicationslicense.

Underapplicable legislation, a public tender or an auction for a radio frequencylicense must be held by the NCRC if demand for radio frequency resourcesexceeds available resources. Radio frequency licenses issued on the basis of apublic tender or an auction for the same type of radio technology must includeidentical conditions regarding the radio frequency bands and developmentperiod.

Applicablelegislation prohibits the transfer of a license by the licensee, including bymeans of assignment or pledge of a license as collateral, and agreementsregarding the provision of telecommunications services must be executed andperformed by the actual licensee.

Licensesgenerally contain a number of detailed conditions, including the date by whichservice must be commenced, the requirement to use only certified equipment, thetechnical standards which must be observed and the requirement to comply withall environmental regulations. Frequency licenses issued after January 1,2005 will also contain the date by which the radio frequency resources must befully utilized.

Telecommunicationsoperators are subject to strict environmental regulations, especially regardingelectromagnetic radiation; construction and technical maintenance of atelecommunications network must be carried out in accordance with localregulations applicable in particular regions of Ukraine. Telecommunicationsoperators must submit periodic reports to the NCRC on the amount and quality ofservices provided under the telecommunications license. We believe that we arein material compliance with the applicable laws and regulations related to ourUkrainian licenses.

Some licensesalso provide that services for persons entitled to certain social benefits mustbe provided at or below maximum tariffs established by Ukrainian legislation ineffect at that time.

If the terms of a license are not fulfilled or the service providerviolates legislation, the license may be suspended or terminated. Bothtelecommunications services licenses and radio frequency licenses may beterminated for various reasons, including:

·       failure tocomply with the terms and conditions of the license, including failure toprovide services within the period set forth in the license;

·       provisionof inaccurate information in the application or about the communicationsservices rendered to consumers;

·       refusal toprovide documents requested by the NCRC or the SIC;

·       failure toremedy in a timely manner the circumstances which resulted in a violation ofthe license terms;

·       unfaircompetition by the license holder in providing the licensed services;

·       repeatedviolation of the license terms;

·       transferor assignment of the license to a third party; and

·       othergrounds set forth by Ukrainian laws or international treaties.

Radio frequencylicenses may also be terminated for the following reasons:

·       failure tocommence using radio frequency resources within the time period specified inthe license;

·       terminationof use of radio frequency resources specified in the license for more than oneyear; and

·       failure touse radio frequency resources to the full extent within the time periodspecified in the license.

Decisions ofthe NCRC on termination of licenses may be appealed in court.

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**EquipmentCertification**

The Telecommunications Law requires thatall technical devices and equipment to be used in interconnected communicationsnetworks in Ukraine, including fixed line and wireless networks, must becertified. The Ministry of Transport and Communications of Ukraine sets thetechnical standards for equipment to be used in telecommunications networks inUkraine and issues the equipment compliance certificates. If the equipment aprospective operator intends to use is certified in Ukraine by either themanufacturer or the vendor, there is no need for the operator to go through theequipment certification process. However, if the equipment is not certified inUkraine or if it is certified by a third party that is unwilling or unable togive the operator its permission to utilize its certification, then theoperator will need to apply for the certification of the equipment in its ownname.

The RadioFrequencies Law provides that users of radio frequency resources must obtainpermits for the operation of radio-electronic and radio-emittingequipment, except for equipment used on a permit-free basis in accordance withthis law. In order to obtain such operation permit, a company is required tofile an application with the SCRF. The Radio Frequencies Law also requiresproducers and importers of radio-electronic and radio-emittingequipment to be used on the territory of Ukraine to register such equipmentwith the NCRC.

**Competition**

The Telecommunications Law provides thatone of the purposes of the licensing of telecommunications services is toencourage competition and de-monopolization in the telecommunications industry.

The AMC is the state administrative bodycharged with the administration of competition legislation and the protectionand regulation of economic competition in Ukraine, including economiccompetition among industry participants in the telecommunications sector.

Ukrainian antimonopoly legislationprohibits a company operating in Ukraine from using its dominant position inits market to gain an unfair or anti-competitive advantage in the provision ofits services or products. A legal entity is deemed to be in a dominant positionif such entity has no competitor in the market or is not subject to substantialcompetition due to restricted access or entry barriers for other businessentities. Moreover, Ukrainian antimonopoly legislation sets forth that acompany having more than 35% of the market share in a given product market maybe deemed to be in the dominant position on such market, unless it proves thatit is subject to substantial competition.

Atelecommunications operator which is found by the AMC to have a dominantposition in the market, in particular, may specifically be required to:

·       annuallysubmit to the NCRC irrevocable public offers regarding interconnection with theother operators’ telecommunications networks;

·       complywith the regulations of the NCRC regarding the technical, organizational andcommercial terms of interconnection with the other operators’ telecommunicationsnetworks;

·       complywith the calculation factors set by the NCRC for access to the operator’s ownnetwork;

·       notdiscriminate against other players in telecommunications market; and

·       undertaketo develop the “public telecommunications services” at the operator’s ownexpense if the NCRC so decides based on the insufficient supply of suchservices in certain regions.

Although UMC currently has over a 35%market share of the wireless communications market in Ukraine, it has not beendeclared a dominant market force by the AMC. In September 2003, the AMCbegan a review of the telecommunications services market for the purpose ofdetermining the status of 

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competition andthe existence of dominant market forces. In August 2004, the AMC notifiedUMC and its largest competitor, Kyivstar, that the preliminary results of itsreview of the wireless telecommunications industry indicated that each of UMCand Kyivstar qualified as having a dominant position in the market. The AMCoffered UMC and Kyivstar the opportunity to submit their objections to thesepreliminary findings and indicated that it would issue a decision following itsreview thereof. On December 21, 2004, the AMC announced its issuance of adecision in which it confirmed that neither UMC nor Kyivstar qualified ashaving a dominant position in the wireless communications market.

In addition, inNovember 2005, the AMC recommended that UMC and Kyivstar abolish theconnection fees both operators charge their subscribers. In April 2006,UMC responded by notifying the AMC that it would partially abolish theconnection fees it charges to those subscribers participating in its monthlytariff plans, but would not alter the connection fees charged to subscribers ofpre-paid tariff plans. As of the date of this annual report, the AMC is stillreviewing UMC’s response.

**Tariffs**

Telecommunicationstariffs are regulated by the NCRC for:

·       “publictelecommunications” services; and

·       access tothe telecommunications networks (use of electric communications channels) ofthe operator with the dominant position on the market.

The Telecommunications Law withdrew theauthority of the Cabinet of Ministers of Ukraine to regulate the prices fortelecommunications services.

On May 5, 2006, the NCRC establishedmaximum tariffs for both fixed-line public telecommunications services and foraccess to wireless networks from fixed-line networks. Such tariffs shall becomeeffective when the decision by the NCRC establishing the tariffs is registeredby the Ukrainian Ministry of Justice.

Although there are no additionalregulations limiting the rates at which tariffs may be set for wirelesstelecommunications services, the AMC, where competition laws are violated, canfind tariffs unfair and injurious to competition. In such cases, the AMC mayrequest the violating telecommunications operator to remedy the situation, inparticular, by amending its tariff schedule.

Subject to theabove, wireless operators are free to set tariffs at levels they considerappropriate.

**Interconnection**

As of January 1, 2005, interconnectionactivity is to be regulated by the NCRC. Operators may provide offers forinterconnection to the NCRC, and the NCRC is required to publish on an annualor regular basis a catalog of such offers. Operators with a dominant marketposition on the market are obligated to submit interconnection offers to theNCRC for each catalog.

Interconnection is made pursuant tointerconnection agreements between network operators as prescribed by theregulatory authorities. Such agreements are required under the law to containcertain provisions. An operator with a dominant market position cannot refusean offer to conclude an interconnection agreement with another operator, if theofferor has offered points of interconnection that were previously published bythe NCRC in the catalog of interconnection proposals.

The NCRC is authorized to conduct hearingsand to resolve disputes among operators concerning the interconnection oftelecommunications networks. The decision of NCRC is binding upon the partiesin the dispute but a party to the dispute may appeal such decision in court.

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**Seasonality**

Our results ofoperations are impacted by certain seasonal trends. Generally, revenue ishigher during the second and third quarter due to increased mobile phone use bysubscribers who travel in the summer from urban areas to more rural areas wherefixed line penetration is relatively low, as well as an increase in roamingrevenues and guest roaming revenues during these quarters. In the fourthquarter, operating income and average revenue per user tend to be low as theincrease in new subscribers tends to outpace the increase in phone usage.However, quarterly trends can be influenced by a number of factors, includingpromotions, and may not be consistent from year to year.

**C.****               Organizational Structure**

The table belowpresents our significant operating and holding entities and our ownershipinterests therein as of December 31, 2005. Our ownership interest andvoting power in each of the entities is identical. All of the entities, withthe exception of MTS Belarus, UMC, Uzdunrobita, BCTI and MTS Finance areorganized and operate under the laws of the Russian Federation. 
|                    | ** ** | **Accounting Method** | ** **   | **Ownership  Interest** | ** ** |
|--------------------|------------|----------------------------|--------------|-------------------------|------------|
| SCS-900(2)         |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| FECS-900(2)        |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Uraltel(2)         |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| MTS  Finance(1)    |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| BM  Telecom(2)     |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| MTS-Capital        |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| UMC                |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Sibchallenge(2)    |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| TSS(2)             |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Volgograd  Mobile  |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Astrakhan  Mobile  |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Mar  Mobile GSM    |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Primtelefon        |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| MSS                |       |                       | Consolidated |                    |       |   | 91.0 | % |   |
| ReCom              |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| TAIF  Telcom(2)    |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| MTS  Kostroma      |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Novitel            |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Uzdunrobita        |       |                       | Consolidated |                    |       |   | 74.0 | % |   |
| Sibintertelecom    |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Gorizont-RT(2)     |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Telesot  Alania    |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| MTS-Komi  Republic |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| MTS-Tver           |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| BCTI               |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Sweet-Com          |       |                       | Consolidated |                    |       |   | 74.9 | % |   |
| MTS Belarus        |       |                       | Equity       |                    |       |   | 49.0 | % |   |

----

(1)                Represents beneficial ownership interest.

(2)                Representswholly-owned entities merged with us on April 1, 2006.

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**D.**              Property,Plant and Equipment

We occupy premises in Moscow at 4Marksistskaya Street, 5/2 Vorontsovskaya Street,12/12 Pankratievskaya Street, 10 Teterinsky Pereulok, 32/1 BolshayaSemenovskaya Street and 7/22 Derbenevskaya Embankment, which we use foradministration, as well as operation of mobile switching centers. We also leasebuildings in Moscow for similar purposes, including marketing and sales andother service centers. We are currently considering an option to consolidateour premises into a single office building somewhere in the Moscow area inorder to decrease maintenance costs and increase operational efficiency. Wealso own office buildings in some of our regional license areas and in Ukraine,and we lease office space on an as-needed basis. Although we believe that ourproperties are adequate for our current needs, additional space is available tous if and when it is needed.

The primary elements of our network arebase stations, base station controllers, transcoders and mobile switchingcenters. GSM technology is based on an “open architecture,” which means thatequipment from one supplier can be combined with that of another supplier toexpand the network. Thus, there are no technical limitations to using equipmentfrom other suppliers. Several major suppliers currently offer GSM 900/1800mobile cellular equipment and the market for suppliers is competitive.

Of the 16,332 base stations comprising ournetwork in Russia as of December 31, 2005, 10,261 operated in the 900 MHzband and 6,071 operated in the 1800 MHz band. We also operated 480 base stationcontrollers and approximately 138 switches in Russia as of December 31,2005.

Of the 5,383 base stations comprising our networkin Ukraine as of December 31, 2005, 2,618 operated in the 900 MHz band and2,765 operated in the 1800 MHz band. We also operated 145 base stationcontrollers and 26 switches in Ukraine as of December 31, 2005.

Of the 640 base stations comprising ournetwork in Uzbekistan as of December 31, 2005, 260 operated in the 900 MHzband and 380 operated in the 1800 MHz band. We also operated 14 base stationcontrollers and 12 switches in Uzbekistan as of December 31, 2005.

Of the 47 base stations comprising ournetwork in Turkmenistan as of December 31, 2005, 43 operated in the 900MHz band and 4 operated in the 1800 MHz band. We also operated 3 base stationcontrollers and 2 switches in Turkmenistan as of December 31, 2005.

In addition,certain of our subsidiaries entered into capital lease agreements for networkequipment with Invest-Svyaz Holding, a wholly-owned subsidiary ofSistema. See “Item 7. Major Shareholders and Related Party Transactions—B.Related Party Transactions.”

**Item 4A.**                *Unresolved Staff Comments*

None.

**Item 5.**                        *Operating and Financial Review and Prospects*

*The following discussion of our financialcondition and results of operations should be read in conjunction with ourconsolidated financial statements, related notes and other information includedelsewhere in this document. In particular, we refer you to the risks discussedin “Item 3. Key Information—D. Risk Factors” for information regardinggovernmental, economic, fiscal, monetary or political policies or factors thatcould materially adversely affect our operations or your investment in ourshares and ADSs. In addition, this section contains forward-lookingstatements that involve risk and uncertainties. Our actual results may differmaterially from those discussed in forward-looking statements as a resultof various factors, including those described under “Item 3. Key Information—D.Risk Factors” and “Cautionary Statement Regarding Forward-LookingStatements.” Our reporting currency is the U.S. dollar and our consolidatedfinancial statements have been prepared in accordance with U.S. GAAP.*

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**Overview**

We are the largest mobile operator inRussia, Uzbekistan and Turkmenistan and the second largest in Ukraine in termsof subscribers and revenues. Revenues for the year ended December 31,2005, were $5,011.0 million, an increase of 28.9% from the year ended December 31,2004. Net income for the year ended December 31, 2005, was$1,126.4 million, up 14.0% from the year ended December 31, 2004. At December 31,2005, we had a subscriber base of 58.2 million (44.2 million in Russia,13.3 million in Ukraine, 0.6 million in Uzbekistan and 0.1 million inTurkmenistan).

Our revenues have increased through organicgrowth, as well as through acquisitions. During March to July 2003,we acquired 100% of UMC, a mobile operator in Ukraine, for approximately$378.3 million in cash and assumed debt of UMC in the amount of$62.0 million. UMC’s results of operations have been included in ourconsolidated financial statements beginning March 1, 2003. For the yearsended December 31, 2004 and 2005, UMC accounted for approximately 21.4%and 24.0%, respectively, of our net revenues. We acquired a 74% stake inUzdunrobita in August 2004, and Uzdunrobita’s results of operations havebeen included in our audited consolidated financial statements beginning July 2004.For the year ended December 31, 2005, Uzdunrobita had net revenues of$86.5 million. In two separatepurchases in June and November 2005, we acquired 100% of BCTI, amobile operator in Turkmenistan, for $46.7 million in cash. BCTI’s results ofoperations have been included in our consolidated financial statements since June 30,2005. We spent $667.2 million, $355.7 million and $178.9million in cash (net of cash acquired) in 2003, 2004 and 2005, respectively, toacquire businesses.

We require significant funds to support oursubscriber growth, primarily for increasing network capacity and developingnetworks in new license areas. Our cash outlays for capital expenditures(consisting of purchases of property, plant and equipment and intangibleassets) in 2003, 2004 and 2005 were $958.8 million, $1,358.9 millionand $2,181.3 million, respectively. We have financed our cash requirementsthrough our operating cash flows and borrowings. Net cash provided by operatingactivities in 2003, 2004 and 2005 was $966.0 million,$1,711.6 million and $1,797.4 million, respectively. Since 2002, we haveraised a total of $1.8 billion through six U.S. dollar-denominatedunsecured notes offerings in international capital markets. In July 2004,a syndicate of international banks made available to us an unsecured loanfacility in an aggregate amount of $500.0 million, which is repayable inthree years. In September 2004, this syndicated loan facility wasincreased to $600.0 million, of which $460.0 million remained outstandingas of December 31, 2005. In April 2006, we entered into a syndicatedloan facility with several international financial institutions, allowing us toborrow up to $1,330.0 million in two tranches of $630.0 million and $700.0million. As of December 31, 2005, we had indebtedness of approximately$2.9 billion, including capital lease obligations, and our interest expense forthe year ended December 31, 2005, was $132.5 million, net of amountscapitalized.

We hold a 49%equity investment in a mobile operator in Belarus, MTS Belarus, which had 2.1million subscribers as of December 31, 2005. MTS Belarus is an equityinvestment, and its results are not consolidated in our financial statements.The remaining stake in MTS Belarus is owned by a Belarus state-ownedenterprise.

**Segments**

Prior to January 1, 2005, we hadseveral operating segments corresponding to separate legal entities within ourgroup. For reporting purposes, we grouped them as follows: (1) ourcompany, Mobile TeleSystems OJSC, or MTS OJSC, which holds licenses for andoperates in the Moscow license area and a number of areas outside of Moscow; (2) oursubsidiary, Telecom XXI, which held licenses for and operates in St. Petersburgand a number of areas in northwest Russia; (3) our subsidiary, Kuban-GSM,which held licenses for and operates in the Krasnodar region of Russia (4) oursubsidiary, UMC, which holds licenses for and operates in Ukraine; and (5) severalother smaller subsidiaries, which hold licenses for and operate 

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in thedifferent regions of Russia and our subsidiary, Uzdunrobita, which holdslicenses for and operates in Uzbekistan, which we call “Other regions.”

Pursuant to a reorganization beginning in2004, we separated our operations by geographic region, or macro-regions,rather than by legal entity as described above. To accomplish thisrestructuring, we merged many of our majority-owned subsidiaries in order toconsolidate our administrative functions and improve management efficiency.Furthermore, in July 2005, we merged with eight of our wholly-ownedsubsidiaries in Russia, including Telecom XXI, Kuban-GSM, Udmurtia DigitalNetwork-900, or UDN-900, Dontelecom, MTS-Barnaul, MTS-NizhnyNovgorod, or MTS-NN, Telecom-900 and Amur Cellular Communication, or ACC.In March 2006, we continued with the restructuring by merging with anadditional nine of our wholly-owned subsidiaries in Russia: Gorizont RT, TAIFTelcom, MTS-RTK, Sibchallenge, Tomsk Cellular Communications, or TSS, BMTelekom, Far East Cellular Systems-900, or FECS—900, Siberian CellularSystems—900, or SCS-900, and Uraltel.

Eachmacro-region consists of between three and eight operational regions, excludingMoscow which is a sole operational macro-region, and our management regularlyreviews operational and financial information by macro-region. See Note 23to our audited consolidated financial statements for segment information.

**SubscriberData**

The following table shows our subscribers by country as of the datesindicated:  
|                               | ** ** | **At December 31,** | ** ** |
|-------------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(in thousands)**       | ** ** |
| **Subscribers**(1)            |       |                          |       |   |   |   |   |
| Russia,  including:           |       | 13,370                        |       | 26,540 |   | 44,219 |   |
| MTS OJSC                      |       | 6,529                         |       | 13,398 |   | 21,523 |   |
| Moscow license area           |       | 4,936                         |       | 7,516 |   | 10,188 |   |
| Telecom XXI                   |       | 1,666                         |       | 2,733 |   | 3,748 |   |
| Kuban-GSM                     |       | 1,396                         |       | 2,543 |   | 4,723 |   |
| Other Russian regions         |       | 3,779                         |       | 7,866 |   | 14,225 |   |
| Ukraine  (UMC)                |       | 3,350                         |       | 7,373 |   | 13,327 |   |
| Uzbekistan  (Uzdunrobita)     |       | —                        |       | 311 |   | 648 |   |
| Turkmenistan  (BCTI)          |       | —                        |       | — |   | 68 |   |
| Total consolidated            |       | 16,720                        |       | 34,224 |   | 58,194 |   |
| MTS Belarus  (unconsolidated) |       | 465                           |       | 1,214 |   | 2,134 |   |

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(1)                We define a subscriber as an individual or organization whoseaccount shows chargeable activity within 61 days (or 183 days in thecase of the “Jeans” and “SIM-SIM” brand tariffs) or whose account does not havea negative balance for more than this period. Prior to October 1, 2004,UMC used a 90-day period for such purposes with respect to its “Jeans”and “SIM-SIM” subscribers.

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The following table shows our subscribers by macro-regions as of thedates indicated:  
|                                    | ** ** | **At December 31,** | ** ** |
|------------------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | **2004**                      | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **(in thousands)**       | ** ** |
| **Subscribers by macro-region**(1) |       |                          |       |   |   |
| Moscow                             |       | 7,516                         |       | 10,188 |   |
| Ukraine                            |       | 7,373                         |       | 13,327 |   |
| North-West                         |       | 3,241                         |       | 4,544 |   |
| South                              |       | 3,174                         |       | 6,863 |   |
| Siberia                            |       | 2,091                         |       | 4,189 |   |
| Far  East                          |       | 1,227                         |       | 2,630 |   |
| Other                              |       | 9,601                         |       | 16,452 |   |
| Total consolidated                 |       | 34,224                        |       | 58,194 |   |
| MTS Belarus  (unconsolidated)      |       | 1,214                         |       | 2,134 |   |

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(1)                We define a subscriber as an individual or organization whoseaccount shows chargeable activity within 61 days (or 183 days in thecase of the “Jeans” and “SIM-SIM” brand tariffs) or whose account does not havea negative balance for more than this period. Prior to October 1, 2004,UMC used a 90-day period for such purposes with respect to its “Jeans”and “SIM-SIM” subscribers.

We had approximately 44.2 millionsubscribers in Russia at December 31, 2005, of which 10.2 millionwere in the Moscow license area that encompasses the City of Moscow and theMoscow region. According to AC&M-Consulting, approximately 18.0% of allmobile cellular subscribers in Russia reside in the Moscow license area, wherepenetration stood at approximately 134.5% as of December 31, 2005.Penetration in all of Russia was lower, at approximately 86.6%, according toAC&M-Consulting. Our subscribers in Russia outside of the Moscow licensearea totaled approximately 34.0 million as of December 31, 2005.According to AC&M-Consulting, as of December 31, 2005, we had aleading 35.2% market share of total mobile cellular subscribers in Russia. Ourmarket share in the Moscow license area was higher at 44.6% as of December 31,2005, according to AC&M-Consulting. We had approximately 13.3 millionsubscribers in Ukraine as of December 31, 2005, and, according toAC&M-Consulting, a 43.9% market share of total mobile cellular subscribersin Ukraine. In addition, we had approximately 0.6 million subscribers inUzbekistan, representing a 55.1% market share, according to our estimates.

We define our churn as the total number of subscribers who cease to bea subscriber during the period (whether involuntarily due to non-payment orvoluntarily, at such subscriber’s request), expressed as a percentage of theaverage number of our subscribers during that period. We view the subscriberchurn as a measure of market competition and customer dynamics. The followingtable shows our Russian and Ukrainian subscriber churn for the periodsindicated.
|                      | ** ** | **Year Ended December 31,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Subscriber Churn** |       |                                       |       |   |   |   |   |
| Russia               |       | 47.3                                       | %          | 27.5 | % | 20.7 | % |
| Ukraine              |       | 23.8                                       | %(1)       | 15.8 | %(2) | 21.8 | % |

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(1)                  Annualized based on the months of March throughDecember 2003.

(2)                The significant decrease in the 2004 churn rate in Ukraine islargely attributable to the change in our churn policy for “Jeans” and “SIM-SIM”subscribers in Ukraine. Under the previous churn policy, the 2004 churn ratewould have been 23%.

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The churn rate is highly dependent oncompetition in our license areas and those subscribers who migrate as a resultof such competition. The decrease in our churn rate in Russia during 2005occurred mainly due to successful marketing initiatives, focused on customerloyalty. The churn rate in Ukraine has increased significantly due to increasedcompetition with Kyivstar in 2005.

While our subscribers and revenues have been growing, our averagemonthly service revenue per subscriber has been decreasing. We calculate ouraverage monthly service revenue per subscriber by dividing our service revenuesfor a given period, including guest roaming fees, by the average number of oursubscribers during that period and dividing by the number of months in thatperiod. The following table shows our average monthly service revenue persubscriber and average monthly minutes of use per Russian and Ukrainiansubscriber for the periods indicated. 
|                                                    | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Average monthly service revenue per subscriber** |       |                                       |       |   |   |   |   |
| Russia                                             |       | $17                                        |       | $12 |   | $8 |   |
| Ukraine                                            |       | $15                                        | (1)        | $13 |   | $10 |   |
| Uzbekistan                                         |       | —                                     |       | — |   | $16 |   |
| **Average monthly minutes of use per subscriber**  |       |                                       |       |   |   |   |   |
| Russia                                             |       | 144                                        |       | 157 |   | 128 |   |
| Ukraine                                            |       | 97                                         | (1)        | 114 |   | 117 |   |
| Uzbekistan                                         |       | —                                     |       | — |   | 433 |   |

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(1)                Calculated based on the months of March through December 2003.

Average monthly service revenue persubscriber for Russia decreased from $17 for the year ended December 31,2003, to $12 for the year ended December 31, 2004, and to $8 for the yearended December 31, 2005. Average monthly minutes of use per subscriber hasdecreased in Russia due, in large part, to a change in the mix of high andlow-minute usage subscribers with more subscribers falling into the lattercategory. We expect average monthly service revenue per subscriber to stabilizetowards the end of 2006 and thereafter. See “Item 3. Key Information—D. RiskFactors—Risks Relating to Our Business—Increased competition and a more diversesubscriber base have resulted in decreasing average monthly service revenuesper subscriber, which may materially adversely affect our results ofoperations.”

The following table shows the mix between Jeans and non-Jeanssubscribers for Russia and Ukraine for the periods indicated. For a descriptionof our “Jeans” and “SIM-SIM” brands, see “Item 4. Information on Our Company—B.Business Overview—Tariffs.”  
|                            | ** ** | **At December 31,** | ** ** |
|----------------------------|------------|-------------------------------|------------|
| ** **                 | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Russia**                 |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Jeans                      |       |                          | 44         | % |   |   | 77 | % |   |   | 88 | % |   |
| Non-Jeans                  |       |                          | 56         | % |   |   | 23 | % |   |   | 12 | % |   |
| **Ukraine**                |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Jeans  (including SIM-SIM) |       |                          | 79         | % |   |   | 86 | % |   |   | 90 | % |   |
| Non-Jeans                  |       |                          | 21         | % |   |   | 14 | % |   |   | 10 | % |   |

 

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**Revenues**

Ourprincipal sources of revenue are:

·       service revenues, including usage fees, monthly subscription fees,roaming and value-added service fees, and connection fees; and

·       revenuesfrom sales of handsets and accessories.

We set our feesand prices with reference to the competitive environment and we expect pricecompetition to increase in the future. Our fees are not currently regulated byany organization or governmental authority in Russia, while in Ukraine therehave been cases where governmental authorities imposed restrictions on ourtariffs.

**ServiceRevenues and Connection Fees**

*Service revenues.*   Usage feesinclude amounts charged directly to our subscribers, both for their usage ofour network and for their usage of other operators’ GSM networks when roamingoutside of our service area. We generally bill our subscribers for all incomingand outgoing calls, except for incoming local calls originated by one of oursubscribers and received by another one of our subscribers. However, our “Jeans”tariff subscribers receive all incoming calls from certain other mobileproviders in the same region free of charge.

The charges for outgoing calls to othercellular operators and to the public service telephone network are usuallyhigher than charges for outgoing calls within our network. The usage feescharged for a call originating or terminating on our network depend on a numberof factors, including the subscriber’s tariff plan, call duration, the time ofday when the call was placed, call destination and whether the call wasincoming or outgoing. Usage fees as a percentage of total net revenues were71.7% in 2003, 70.5% in 2004 and 73.5% in 2005, respectively. The furtherdevelopment of our “Jeans” tariff, which has no monthly subscription fee, willsupport growth in the usage fees as a percentage of total revenues. Thepercentage of total net revenues represented by usage fees as compared tomonthly subscription fees will continue to be affected by changes in our tariffplans, as well as the relative product mix between usage fee-based tariff plansversus monthly subscription fee-based tariff plans.

Monthly subscription fees consist of fixedmonthly charges for network access and access to additional services. Monthlysubscription fees as a percentage of our total net revenues represented 17.9%in 2003, 12.7% in 2004 and 11.7% in 2005, respectively. The main reason for thedecline of the monthly subscription fees as a percentage of total net revenuesis a decrease in the share of subscribers with a monthly subscription fee inthe subscriber mix. Many of our monthly subscription fee-based tariff plansalso include a usage fee-based component for minutes used over a certain numberof pre-paid minutes. The percentage of total net revenues represented by usagefees as compared to monthly subscription fees will continue to be affected bythe factors discussed in the previous paragraph.

Roaming fees include amounts charged toother GSM operators for their subscribers, *i.e.*,guest roamers, utilizing our network while traveling in our service area. Webill other GSM operators for calls of guest roamers carried on our network.Roaming fees represented 6.0% of our total net revenues in 2003, 2.4% in 2004and 2.0% in 2005, respectively. We generally expect roaming fees to decline asa percentage of total net revenues as we expect the increase in our subscribersto continue to outpace the increase in guest roamers. In addition, roamingtariffs between mobile operators have a tendency to decrease relative to theincrease of total number of mobile users.

We offer our subscribers an array of value-addedservices, including SMS, call forwarding, call waiting, call barring, callidentification, voice mail, itemized billing and content-based services.For the years ended December 31, 2003, 2004 and 2005, monthly average SMSusage was 16, 17 and 13 text messages sent per 

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subscriber inRussia, respectively. These services have historically comprised approximately10% of total net revenues and are primarily reflected as usage fees, but wegenerally expect value-added services as a proportion of total netrevenues to increase due to the introduction of new value-added servicesand an increase in the usage of value-added services by our subscribers.We expect that revenue from value-added services will vary based uponpenetration rates, customer usage, pricing and advertising and promotionalprograms.

*Connection fees.*   Connectionfees consist of charges paid to us by subscribers for the initial connection toour network and sign-up for value-added services. We defer connectionfees and recognize them as revenues over the estimated average subscriber lifeas described in Note 2 to our audited consolidated financial statements.Connection fees represented 1.2% of our total net revenues in 2003, 1.2% in2004 and 0.9% in 2005, respectively. We expect connection fee revenues toremain at a low level as a percentage of total net revenues.

**Sales ofHandsets and Accessories**

We sell handsets and accessories directlyto subscribers in our sales offices and also to dealers for further resale. Weoffer subscribers primarily dual-band and tri-band handsets that operate in the900 and 1800 MHz bands and 900, 1800 and 1900 MHz bands, respectively. Revenuefrom the sale of handsets and accessories represented 3.2% of our total netrevenue in 2003, 2.2% in 2004 and 1.4% in 2005, respectively. Our average sellingprice of handsets has declined significantly in recent years, but remainedstable in the year ended December 31, 2005. We generally do not subsidizehandset sales in Russia, but in Ukraine, we subsidize handsets for contractsubscribers. See “—Expenses—Cost of Handsets and Accessories” below.

We expect thedemand for our handsets and accessories to continue to decrease due to theavailability of cheaper “grey” market handsets entering the market. Inaddition, many new subscribers already own handsets, either purchased on thegrey market or because they are churn clients from other operators. We expectas subscribers are added to our network and the price of handsets continues todecrease, our sales of handsets and accessories as a percentage of total net revenueswill decline.

**Expenses**

Ourprincipal expenses are:

·       cost ofservices, including interconnection, line rental and roaming expenses;

·       cost ofhandsets and accessories;

·       sales andmarketing expenses;

·       generaland administrative expenses, such as salaries, rent and other general andadministrative expenses;

·       provisionfor doubtful accounts;

·       depreciationof property, network equipment and amortization of telephone numberingcapacity, license costs and other intangible assets;

·       researchand development, patents and licenses, etc.;

·       interestexpenses; and

·       provisions for income taxes.

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**Cost ofServices**

*Interconnection and Line Rental.**  *Interconnectionand line rental charges include charges payable to other operators for accessto, and use of their networks, which are necessary in the course of providingservice to our subscribers as described under “Item 4. Information on OurCompany—B. Business Overview—Interconnect Arrangements and TelephoneNumbering Capacity.”

We expect unit interconnect costs payableby us to other operators will increase as our subscriber base and trafficvolumes increase. We expect the cost of leasing telecommunication lines to varybased on the number of base stations, base station controllers, the number andcapacity of leased lines utilized and competition among providers of leasedlines, as well as availability and usability of substitutes such as microwavelinks owned by us.

*RoamingExpenses.**  *Roaming expenses consist of amounts charged by other GSM operatorsunder agreements for roaming services provided to our subscribers while outsideour service area.

**Cost ofHandsets and Accessories**

This type of expense includes primarily thecost of handsets and accessories sold to dealers and subscribers, and the costof SIM cards provided to our customers. We have entered into supply agreementswith various producers and suppliers of handsets and accessories to satisfy ourrequirements at what we believe to be competitive prices. We expect the costper handset to decline due to our ability to work directly with suppliers tosecure volume discounts, technological advances and competitive pressures inthe market for handsets.

In Ukraine, we subsidize handsets forcontract subscribers. In the years ended December 31, 2003, 2004 and 2005,we provided net handset subsidies in Ukraine for a total cost of$34.9 million, $52.7 million and $57.2 million, respectively, whichare reported as a loss on sales of handsets. However, we do not subsidizehandset sales in Russia.

Generally, weprovide SIM cards to our customers free of charge. Cost of SIM cards usedamounted to $68.3 million in 2003, $80.6 million in 2004 and $122.7million in 2005, respectively. The growth in SIM cards expense in 2005 wasprimarily the result of an increase in subscribers and internal churn withinour subscriber base.

**Salesand Marketing Expenses**

Oursales and marketing expenses primarily consist of:

·       expensesfor advertising and promotion; and

·       dealercommissions on new connections and advances collected from subscribers.

Sales and marketing expenses reflect, amongother things, advertising, promotions and other costs associated with theexpansion of services in our license areas and are expected to increase assubscriber numbers and market competition increase. In addition, we expectthese costs to increase as we further develop our brand and introduce value-addedservices.

Commencing on January 1, 2006, in theMoscow license area, dealer commission contracts have been gradually migratedto a new payment scheme. Specifically, we have begun linking commissionspayable to a dealer on a monthly basis to the amount of revenues we receiveduring the six-month period from the date a subscriber is activated by suchdealer. In addition, we have established caps or a maximum commission amountfor our dealers. We believe that the new method for paying commissions todealers provides dealers with greater incentives to renew subscriptions,reduces the risk of dealer fraud and improves our cash-flow management.

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We measure subscriber acquisition costs, or SAC, to monitor thecost-effectiveness of our sales and marketing. We define SAC as total sales andmarketing expenses and handset subsidies for a given period. Sales andmarketing expenses include advertising expenses and commissions to dealers. SACper gross additional subscriber is calculated by dividing SAC during a givenperiod by the total number of gross subscribers added by us during the period.The following table shows SAC in Russia and Ukraine for the periods indicated:
|                                        | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Subscriber Acquisition Costs (SAC)** |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Russia                                 |       |                                       | $          | 26 |   |   |   | $ | 21 |   |   |   | $ | 19 |   |   |
| Ukraine                                |       |                                       | $          | 32 | (1) |   |   | $ | 19 |   |   |   | $ | 14 |   |   |

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(1)                Calculated based on the months of March through December 2003.

SAC continuedto decline in 2005 reflecting the lower cost of attracting mass-market subscribersand increased economies of scale.

**Generaland Administrative Expenses**

Ourgeneral and administrative expenses consist primarily of:

·       employeesalaries and bonuses;

·       socialcontributions payable to the state pension fund;

·       taxesother than income taxes, *e.g*., propertytaxes;

·       officemaintenance expenses;

·       networkrepair and maintenance; and

·       rental ofpremises.

Total generaland administrative expenses are expected to increase over time to reflect theincreasing costs and staff required to service our growing subscriber base, butwe expect they will decline on a per subscriber basis.

**Provisionfor Doubtful Accounts**

We generallyexpect our provision for doubtful accounts as a percentage of net revenues toremain stable or decline as a result of the continued use of our advancepayment system, whereby subscribers’ fees are debited from amounts paid bysubscribers into their accounts in advance of line usage. In the future, ourprovision for doubtful accounts may increase if we increase the availability oftariff plans under the credit payment system. See “Item 4. Information on OurCompany—B. Business Overview—Customer Payments and Billing.” However, ourexpense for provision for doubtful accounts for the year ended December 31,2005, totaled $50.4 million in comparison with $26.5 million ofprovision expense incurred in 2004 mainly due to an expansion of our subscriberbase into the mass-market low income segment consisting of subscribers withunstable income sources and less predictable consumer behavior. In addition,the billing systems in certain of our macro-regions experience delays betweenthe time that a subscriber’s balance reaches zero and the disconnection of suchsubscriber from our network causing an increase in our doubtful accounts.

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**Depreciationof Property, Network Equipment and Amortization of Intangibles**

We expectdepreciation expense, which is principally associated with the depreciation ofnetwork equipment, to continue to increase in line with our network developmentprogram and the buildout associated with our regional license areas.Correspondingly, we also expect amortization of telephone numbering capacity,license costs and other intangible assets to increase in line with ourdevelopment programs and the expansion of our subscriber base, includingsubscribers in our regional license areas. From January 1, 2002, we nolonger amortize goodwill.

**Researchand Development, Patents and Licenses, Etc.**

Our researchand development activities and amounts spent on such activities were notsignificant for the last three years and primarily included activities focusedon new telecommunication technologies and evaluation of new or improvedservices and systems. Expenditures on research and development are recognizedas expenses when they are incurred.

**InterestExpense**

We expectinterest expense to continue to increase, which is principally associated withexternal debt incurred to finance our network development program and thebuildout associated with our regional license areas.

**Provisionfor Income Taxes**

Taxation on income of Russian companies isregulated by a number of laws, government decrees and implementationinstructions. From January 1, 2002, the new Chapter 25 “Income Tax ofOrganizations” of the Tax Code became effective, which to some extentconsolidates and simplifies income tax regulations.

Theincome tax base for Russian companies is defined as income received from salesof goods, works and services and property rights and income from non-saleoperations, reduced by the amount of certain business expenses incurred in suchoperations. Prior to 2002, these expenses were computed according to severalspecial deductibility regulations. These regulations combined detailed guidanceas to what can be deducted for income tax purposes with specified limitationsand restrictions on deductibility. For example, there were ceilings ondeductibility of advertising or entertainment expenses. Deductions were limitedor denied for a number of items commonly seen as fully deductible under Westerntax systems, such as:

·       intereston loans;

·       advertisingand business travel expenses above a stated limit;

·       non-mandatoryinsurance expenses; and

·       trainingexpenses.

The newincome tax legislation significantly liberalized the deductibility rules forbusiness expenses. Therefore, starting January 1, 2002, the followingbusiness expenses are deductible:

·       intereston loans (with certain exceptions);

·       managementexpenses;

·       secondmentexpenses; and

·       trainingexpenses (with certain exceptions).

Interest paid on loans, including the loansfrom our subsidiary, Mobile TeleSystems Finance S.A., made to us in connectionwith our notes, is deductible to the extent the interest rate does not exceed15%. 

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Thedeductibility rules for advertising and business travel expenses were alsorevised and relaxed significantly.

The tax legislation that was in force priorto 2002 established certain benefits and concessions for companies engaged inthe production and service industries. Notably, taxable income could be reducedby amounts reinvested for specific purposes. However, the total reduction fromthis form of incentive together with certain other reductions could not exceed50% of the taxable income for the period. The most significant reinvestmentpurposes that benefited from these concessions were technical re-equipment,reconstruction, expansion and development of production facilities and theinstallation of new facilities. We used these concessions extensively in prioryears. The new income tax legislation does not provide for special taxconcessions related to investments in infrastructure.

Effective January 1, 2002, thestatutory income tax rate in Russia was established at 24%.

In 2003, the statutory income tax rate inUkraine was 30%. From January 1, 2004, the Ukrainian statutory income taxrate changed to 25% as a result of changes in legislation. As the result ofthis reduction, we recognized a net deferred tax expense of approximately$4.8 million in 2003.

Generally, taxdeclarations remain open and subject to inspection for a period of three yearsfollowing the tax year. We believe that we have adequately provided for taxliabilities in our consolidated financial statements; however, the risk remainsthat relevant authorities could take differing positions with regard tointerpretive issues and the effect could be significant.

**Acquisitions**

Our results of operations for the periodspresented are significantly affected by acquisitions. Results of operations ofacquired businesses are included in our audited consolidated financialstatements for the periods after their respective dates of acquisition.

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Below is the list of our major acquisitions during 2003, 2004 and 2005.
| Company           | ** ** | ** **                                                            | ** ** | **License area** | ** ** | **Date of  acquisition** | ** ** | **Stake  acquired** | ** ** | **Purchase  price*  (in millions)** | ** **     |
|-------------------|------------|-----------------------------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|---------------------|------------|------------------------------------------|----------------|
| **2003**          |       |                                                                  |       |                  |       |                          |       |                |       |                                     |           |   |   |
| UMC               |       | Ukraine                                                               |       | March 2003       |       |                          | 57.7       | %                   |       |                                     | $199.0         |   |   |
| UMC               |       | Ukraine                                                               |       | June 2003        |       |                          | 26.0       | %                   |       |                                     | 87.6           |   |   |
| UMC               |       | Ukraine                                                               |       | July 2003        |       |                          | 16.3       | %                   |       |                                     | 91.7           |   |   |
| TAIF  Telcom      |       | Tatarstan Republic and Volga region                                   |       | April 2003       |       |                          | 51.0       | %                   |       |                                     | 61.0           |   |   |
| TAIF  Telcom      |       | Tatarstan Republic and Volga region                                   |       | May 2003         |       |                          | 1.7        | %                   |       |                                     | 2.3            |   |   |
| Sibchallenge      |       | Krasnoyarsk region                                                    |       | August 2003      |       |                          | 100.0      | %                   |       |                                     | 45.5           |   |   |
| Vostok  Mobile BV |       | 50% stake in Primtelefon (several  regions in the Far East of Russia) |       | August 2003      |       |                          | 100.0      | %                   |       |                                     | 29.0           |   |   |
| Uraltel           |       | Ural region                                                           |       | August 2003      |       |                          | 46.7       | %                   |       |                                     | 35.7           |   |   |
| TSS               |       | Eastern Siberia                                                       |       | September 2003   |       |                          | 100.0      | %                   |       |                                     | 47.0           |   |   |
| Kuban-GSM         |       | Krasnodar region                                                      |       | September 2003   |       |                          | 47.3       | %                   |       |                                     | 107.0          |   |   |
|              |       |                                                                  |       |                  |       |                          |       |                | ** ** | ** **                               | **$705.8**     |   |   |
| **2004**          |       |                                                                  |       |                  |       |                          |       |                |       |                                     |           |   |   |
| SCS-900           |       | Several regions in the Siberian  part of Russia                       |       | March 2004       |       |                          | 11.0       | %                   |       |                                     | $8.5           |   |   |
| FECS-900          |       | Several regions in the Far East  of Russia                            |       | April 2004       |       |                          | 40.0       | %                   |       |                                     | 8.3            |   |   |
| MSS               |       | Eastern Siberia                                                       |       | April 2004       |       |                          | 7.5        | %                   |       |                                     | 2.2            |   |   |
| Primtelefon       |       | Several regions in the Far East  of Russia                            |       | June 2004        |       |                          | 50.0       | %                   |       |                                     | 31.0           |   |   |
| UDN-900           |       | Udmurtiya Republic                                                    |       | August 2004      |       |                          | 49.0       | %                   |       |                                     | 6.4            |   |   |
| Volgograd  Mobile |       | Volga region                                                          |       | August 2004      |       |                          | 50.0       | %                   |       |                                     | 2.9            |   |   |
| Astrakhan  Mobile |       | Volga region                                                          |       | August 2004      |       |                          | 50.0       | %                   |       |                                     | 1.1            |   |   |
| Uzdunrobita       |       | Uzbekistan                                                            |       | July 2004        |       |                          | 74.0       | %                   |       |                                     | 126.4          |   |   |
| TAIF  Telcom      |       | Tatarstan Republic                                                    |       | October 2004     |       |                          | 47.3       | %                   |       |                                     | 63.0           |   |   |
| Sibintertelecom   |       | Two regions in the Far East of Russia                                 |       | November 2004    |       |                          | 93.5       | %                   |       |                                     | 37.4           |   |   |
| Telesot  Alania   |       | Severnaya Osetia-Alania Republic                                      |       | December 2004    |       |                          | 52.5       | %                   |       |                                     | 6.2            |   |   |
| Gorizont-RT       |       | Republic of Sakha (Yakutia)                                           |       | December 2004    |       |                          | 76.0       | %                   |       |                                     | 53.2           |   |   |
|              |       |                                                                  |       |                  |       |                          |       |                | ** ** | ** **                               | **$341.2**     |   |   |
| **2005**          |       |                                                                  |       |                  |       |                          |       |                |       |                                     |           |   |   |
| Sweet-Com         |       | Moscow                                                                |       | February 2005    |       |                          | 74.9       | %                   |       |                                     | $2.0           |   |   |
| Gorizont-RT       |       | Republic of Sakha (Yakutia)                                           |       | June 2005        |       |                          | 24.0       | %                   |       |                                     | 13.5           |   |   |
| BCTI              |       | Turkmenistan                                                          |       | June 2005        |       |                          | 51.0       | %                   |       |                                     | 28.2           |   |   |
| BCTI              |       | Turkmenistan                                                          |       | November 2005    |       |                          | 49.0       | %                   |       |                                     | 18.5           |   |   |
| Sibintertelecom   |       | Two regions in the Far East of Russia                                 |       | December 2005    |       |                          | 6.5        | %                   |       |                                     | 2.8            |   |   |
| ReCom             |       | Six regions in the European part  of Russia                           |       | December 2005    |       |                          | 46.1       | %                   |       |                                     | 110.0          |   |   |
| Telesot  Alania   |       | Severnaya Osetia-Alania Republic                                      |       | December 2005    |       |                          | 47.5       | %                   |       |                                     | 32.6           |   |   |
|              |       |                                                                  |       |                  |       |                          |       |                | ** ** | ** **                               | **$****207.6** |   |   |

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*                    Excluding acquisition-related costs and debt assumed.

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**Otherinvestments**

In December 2005, we acquired a 51.0%stake in Tarino Limited (“Tarino”) for $150.0 million in cash. Tarino was at that time the indirectowner, through its wholly-owned subsidiaries, of Bitel, a Kyrgyzcompany holding a GSM 900/1800 license for the entire territoryof Kyrgyzstan.

Concurrently with the purchase ofa 51.0% stake, we entered into a put and call option agreement with the shareholder of Tarino to acquire the remaining 49.0% interest inTarino. The call option is exercisable by us from November 22, 2005 to November 17,2006, and the put option is exercisable by the seller from November 18,2006 to December 8, 2006. The call and put option price is $170.0 million.The put and call option were recorded at fair value, which approximated $nil atDecember 31, 2005, in the consolidated balance sheet.

After a decision of the Kyrgyz Supreme Courton December 15, 2005, Bitel’s offices were seized and, as a result, wecould not regain operational control over Bitel’s operations in 2005.Accordingly, we accounted for our 51.0% investment in Bitel at cost as at December 31,2005.

For a detaileddiscussion of investments in Bitel, see “Item 8.A.7. Litigation” andNote 20 to our audited consolidated financial statements.

**Resultsof Operations by Macro-Region**

Based on the restructuring of our group commenced in 2004, we currentlyreport our financial information by macro-region. See “Item 5. Operating and Financial Review and Prospects—Segments” foradditional information regarding the reorganization. As of December 31,2005, we reported our financial information based on six macro-regions,including Moscow, Ukraine, North-West, South, Siberia and Far East. We haverestated the corresponding items of segment information for 2004, but havedetermined that it is impracticable to do so for 2003.
|                                                                                                                                                | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                                                                                                                                     | ** ** | **(in thousands)**                    | ** ** |
| **Revenues by macro-region**                                                                                                                   |       |                                       |       |   |   |
| Moscow                                                                                                                                         |       | $1,693,685                                 |       | $1,867,435 |   |
| Ukraine                                                                                                                                        |       | 832,313                                    |       | 1,201,827 |   |
| North-West                                                                                                                                     |       | 347,881                                    |       | 384,743 |   |
| South                                                                                                                                          |       | 260,173                                    |       | 347,819 |   |
| Siberia                                                                                                                                        |       | 225,188                                    |       | 296,353 |   |
| Far East                                                                                                                                       |       | 110,562                                    |       | 282,925 |   |
| Other                                                                                                                                          |       | 810,855                                    |       | 1,054,871 |   |
| Eliminations(1)                                                                                                                                |       | (393,663                                   | )          | (424,955 | ) |
| Revenues as reported                                                                                                                           |       | $3,886,994                                 |       | $5,011,018 |   |
| **Costs of services, exclusive of depreciation and amortization shown  separately below by macro-region and cost of handsets and accessories** |       |                                       |       |   |   |
| Moscow                                                                                                                                         |       | $510,565                                   |       | $540,160 |   |
| Ukraine                                                                                                                                        |       | 221,226                                    |       | 343,990 |   |
| North-West                                                                                                                                     |       | 53,325                                     |       | 56,072 |   |
| South                                                                                                                                          |       | 34,113                                     |       | 60,308 |   |
| Siberia                                                                                                                                        |       | 48,750                                     |       | 67,895 |   |
| Far East                                                                                                                                       |       | 26,237                                     |       | 72,748 |   |
| Other                                                                                                                                          |       | 171,702                                    |       | 241,426 |   |
| Eliminations(1)                                                                                                                                |       | (366,231                                   | )          | (395,126 | ) |
| Cost of services and cost of handsets and  accessories as reported                                                                             |       | $699,687                                   |       | $987,473 |   |

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| **Sundry operating expenses by macro-region**(2)   |   |       |   |       |   |
|----------------------------------------------------|--------|------------|--------|------------|--------|
| Moscow                                             |   | $233,414   |   | $281,275   |   |
| Ukraine                                            |   | 88,937     |   | 143,099    |   |
| North-West                                         |   | 53,786     |   | 71,165     |   |
| South                                              |   | 46,906     |   | 58,220     |   |
| Siberia                                            |   | 45,540     |   | 63,164     |   |
| Far East                                           |   | 23,489     |   | 67,384     |   |
| Other                                              |   | 149,158    |   | 199,554    |   |
| Eliminations(1)                                    |   | (9,698     | )      | (7,552     | )      |
| Sundry operating expenses as reported              |   | $631,532   |   | $876,309   |   |
| **Sales and marketing  expenses by macro-region**  |   |       |   |       |   |
| Moscow                                             |   | $169,098   |   | $191,047   |   |
| Ukraine                                            |   | 79,355     |   | 129,651    |   |
| North-West                                         |   | 49,943     |   | 39,865     |   |
| South                                              |   | 30,196     |   | 56,955     |   |
| Siberia                                            |   | 19,913     |   | 39,072     |   |
| Far East                                           |   | 7,408      |   | 21,507     |   |
| Other                                              |   | 114,641    |   | 141,328    |   |
| Eliminations(1)                                    |   | (9,571     | )      | (11,333    | )      |
| Sales and marketing expenses as reported           |   | $460,983   |   | $608,092   |   |
| **Depreciation and  amortization by macro-region** |   |       |   |       |   |
| Moscow                                             |   | $194,873   |   | $224,653   |   |
| Ukraine                                            |   | 124,935    |   | 153,795    |   |
| North-West                                         |   | 64,036     |   | 86,244     |   |
| South                                              |   | 81,749     |   | 91,407     |   |
| Siberia                                            |   | 39,548     |   | 54,846     |   |
| Far East                                           |   | 15,572     |   | 42,776     |   |
| Other                                              |   | 158,333    |   | 257,944    |   |
| Eliminations(1)                                    |   | (3,317     | )      | (4,552     | )      |
| Depreciation and amortization as reported          |   | $675,729   |   | $907,113   |   |
| **Operating Income by  macro-region**              |   |       |   |       |   |
| Moscow                                             |   | $585,735   |   | $630,300   |   |
| Ukraine                                            |   | 317,860    |   | 431,292    |   |
| North-West                                         |   | 126,791    |   | 131,397    |   |
| South                                              |   | 67,209     |   | 80,929     |   |
| Siberia                                            |   | 71,437     |   | 71,376     |   |
| Far East                                           |   | 37,856     |   | 78,510     |   |
| Other                                              |   | 217,021    |   | 213,861    |   |
| Eliminations(1)                                    |   | (4,846     | )      | (5,634     | )      |
| Operating income as reported                       |   | $1,419,063 |   | $1,632,031 |   |

----

(1)                Represents the elimination of intercompany sales, sundry operatingexpenses, sales and marketing expenses and the related operating income,primarily for intercompany roaming arrangements and management and marketingsupport provided by MTS OJSC to regional companies, as well as of otherintercompany transactions.

(2)                For the purposes of this analysis “Sundry operating expenses”consist of general and administrative expenses, provision for doubtful accountsand other operating expenses (includingcharges incurred in connection with the “universal services reserve fund”).

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**Year Ended December 31,2005 compared to Year Ended December 31, 2004 by macro-region**

***Revenues and cost of services and cost of handsets andaccessories***

*Consolidated revenues*for the year ended December 31, 2005increased by $1,124.0 million, or 28.9%, to $5,011.0 million from$3,887.0 million for the year ended December 31, 2004. This increasewas primarily due to the significant growth in our subscriber base from 34.2million as of December 31, 2004 to 58.2 million as of December 31,2005. The growth was mainly attributable to our sales and marketing efforts andthe expansion of our network, as well as improving general economic conditionsand income levels in Russia and Ukraine. A portion of revenue growth was alsodue to the acquisition of BCTI in June 2005, which contributed $33.4million to our revenues for the year ended December 31, 2005, as well asthe full consolidation in 2005 of Uzdunrobita, which we acquired in July 2004.The increase in revenues from subscriber growth was partially offset by a decreasein tariffs in Moscow and other highly competitive license areas, an increase inmass-market subscribers in our subscriber mix and our continued expansion intothe regions of Russia outside of the Moscow license area where tariffs arelower. As a result, average monthly service revenue per subscriber in Russiadecreased by 33% from $12 per subscriber for the year ended December 31,2004 to $8 for the year ended December 31, 2005.

For the year ended December 31, 2005, servicerevenues and connection fees increased by $1,142.0 million, or 30.1%, to$4,942.3 million compared to $3,800.3 million for the year ended December 31,2004 due to the growth in the number of our subscribers, as explained above.Revenues from the sales of handsets and accessories decreased by$18.0 million, or 20.8%, to $68.7 million for the year ended December 31,2005 compared to the year ended December 31, 2004, due to a reduction inthe number of handsets sold while the average selling price for handsetsremained at the same level.

*Consolidated cost ofservices and cost of handsets and accessories*for the year ended December 31, 2005 increasedby 41.1% to $987.5 million from $699.7 million for the year ended December 31,2004. The increase in costs was primarily attributable to subscriber growth andrelated growth in traffic related expenses. For the year ended December 31,2005, interconnection and line rental expenses grew to $598.3 million from$352.6 million for the year ended December 31, 2004 and roamingexpenses grew to $134.5 million from $128.5 million. For the yearended December 31, 2005, cost of handsets and accessories sold, includingSIM cards provided to customers, grew to $254.6 million from$218.6 million for the year ended December 31, 2004.

*Consolidated gross margin*was $4,023.5 million, or 80.3% ofconsolidated revenues for the year ended December 31, 2005, compared to$3,187.3 million, or 82.0% of consolidated revenues for the year ended December 31,2004. The decrease in our consolidated gross margin percentage is due toincreased interconnection and line rental charges as a result of furtherexpansion of our network and increased rental charges payable to otheroperators for access to their networks in 2005 and, to some extent, theincreased costs associated with SIM and Jeans cards used by new subscribers.

*Moscow revenues*for the year ended December 31, 2005increased by 10.3% to $1,867.4 million from $1,693.7 million for theyear ended December 31, 2004. Our subscriber base in the Moscow license area increased by 35.6% from 7.5 millionas of December 31, 2004 to 10.2 million as of December 31, 2005.The effect on revenues due to the increase in our subscriber base was partiallyoffset by a decrease in tariffs in the Moscow license area and an increase in mass-marketsubscribers in our subscriber mix.

*Moscow cost of services andcost of handsets and accessories*for the year ended December 31, 2005 increased by 5.8% to$540.2 million from $510.6 million for the year ended December 31,2004. The growth occurred mainly as a result of a $39.4 million increase ininterconnection charges and line rental expenses driven by an increase in thenumber of leased lines, which were partially offset by a $9.1 million decreasein roaming expenses. Cost of handsets and accessories decreased to$229.7 million, or 12.3% of 

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*segmentrevenues, for the year ended December 31, 2005 from $230.4 million,or 13.6% of segment revenues, for the year ended December 31, 2004.*

*Moscow gross*margin increased by 12.2% to $1,327.3 million in theyear ended December 31, 2005 from $1,183.1 million in the year ended December 31,2004. Moscow’s gross margin percentage increased to 71.1% in theyear ended December 31, 2005 from 69.9% in the year ended December 31,2004. The main reasons for the increase in the gross margin by 1.2% wereeconomies of scale and increased roaming margins.

*Ukraine revenues*increased by 44.4% to $1,201.8 million inthe year ended December 31, 2005 from $832.3 million in the yearended December 31, 2004. The main reason for the growth in sales revenueswas an increase in UMC’s subscriber base from 7.4 million as of December 31,2004 to 13.3 million as of December 31, 2005, which was partially offsetby a decrease in tariffs in Ukraine and an increase in mass-market subscribersin the subscriber mix.

*Ukraine cost of servicesand cost of handsets and accessories*for the years ended December 31, 2005 and 2004 were$344.0 million and $221.2 million, respectively. The growth occurredprimarily due to an increase of $105.9 million in interconnection and linerental expenses and a $12.2 million increase in cost of SIM and Jeanscards. Interconnection and line rental expenses increased to$218.7 million, or 18.2% of segment revenues, in the year ended December 31,2005 from $112.8 million, or 13.6% of segment revenues, in the year ended December 31,2004 mainly due to an increase in the number of leased lines and overall growthin traffic on the network. Cost of handsets and accessories increased to$100.4 million, or 8.4% of segment revenues, in the year ended December 31,2005 from $87.6 million, or 10.5% of segment revenues, in the year ended December 31,2004 mainly due to an increase in cost for SIM cards used by new subscribers.

*Ukraine gross margin*for the year ended December 31, 2005 grewto $857.8 million from $611.1 million for the year ended December 31,2004. As a percentage of total revenues, gross margin decreased to 71.4% in theyear ended December 31, 2005, from 73.4% in the year ended December 31,2004. This decrease in gross margin was mainly due to increased interconnectionand line rental expenses.

*North-West revenues*for the year ended December 31, 2005increased by 10.6% to $384.7 million from $347.9 million for the yearended December 31, 2004. Our subscriber base in the North-West licenseareas increased by 40.6% from 3.2 million as of December 31, 2004 to4.5 million as of December 31, 2005. The growth in subscribers inpercentage terms is higher than the growth in revenues mainly because the newlyacquired subscribers have lower average monthly service revenue per subscribercompared to subscribers already connected to our network. In addition, theroaming revenues for the North-West macro-region declined slightly when ourbranches ceased charging for roaming expenses starting July 1, 2005 whenTelecom XXI merged with us.

*North-West cost of servicesand cost of handsets and accessories* for the year ended December 31, 2005 increased by 5.3% to$56.1 million from $53.3 million for the year ended December 31,2004. Interconnection and line rental expenses increased to $29.8 million,or 7.8% of segment revenues, in the year ended December 31, 2005 from$19.1 million, or 5.5% of segment revenues, in the year ended December 31,2004 mainly due to an increase of the number of leased lines in use and overallgrowth in traffic on the network. Roaming expenses decreased to$14.5 million, or 3.8% of segment revenues, for the year ended December 31,2005 from $18.9 million, or 5.4% of segment revenues, for the year ended December 31,2004 mainly due to the fact that roaming expenses were not charged by ourbranches for calls to the North-West macro-region starting July 1, 2005when Telecom XXI merged with us.

*North-West gross margin*increased by 11.6% to $328.6 million in theyear ended December 31, 2005 from $294.6 million in the year ended December 31,2004. North-West gross margin percentage increased to 85.4% during the yearended December 31, 2005, as compared to 84.7% during year ended 

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*December 31,2004. The increase in gross margin was primarily the result of an increase inroaming margins.*

*South revenues*for the year ended December 31, 2005increased by 33.7% to $347.8 million from $260.2 million for the yearended December 31, 2004. Our subscriber base in the South license areaincreased by 115.6% from 3.2 million as of December 31, 2004 to6.9 million as of December 31, 2005. The growth in subscribers inpercentage terms is higher than the growth in revenues mainly because the newlyacquired subscribers have lower average monthly service revenue per subscribercompared to subscribers already connected to our network.

*South cost of services andcost of handsets and accessories*for the year ended December 31, 2005 increased by 76.8% to$60.3 million from $34.1 million for the year ended December 31,2004. This was primarily due to a $14.9 million increase ininterconnection and line rental expenses to $33.4 million, or 9.6% ofsegment revenues, in the year ended December 31, 2005 from$18.5 million, or 7.1% of segment revenues, in the year ended December 31,2004. This increase is mainly due to an increase in the number of base stationsin use and overall growth in traffic on the network. Cost of handsets andaccessories increased to $18.5 million, or 5.3% of segment revenues, inthe year ended December 31, 2005 from $6.6 million, or 2.5% ofsegment revenues, in the year ended December 31, 2004 mainly due to anincrease in the cost for SIM cards used by new subscribers.

*South gross margin*increased by 27.2% to $287.5 million inthe year ended December 31, 2005 from $226.1 million in the yearended December 31, 2004. South’s gross margin percentage decreased to82.7% in the year ended December 31, 2005 from 86.9% in the year ended December 31,2004 primarily as the result of an increase in the cost for SIM cards used bynew subscribers.

*Siberia revenues*for the year ended December 31, 2005increased by 31.6% to $296.4 million from $225.2 million for the yearended December 31, 2004. Our subscriber base in the Siberia license area increased by 100.0% from2.1 million as of December 31, 2004 to 4.2 million as of December 31,2005. The growth in subscribers in percentage terms is higher than the growthin revenues mainly because the newly acquired subscribers have lower average monthlyservice revenue per subscriber compared to subscribers already connected to ournetwork.

*Siberia cost of servicesand cost of handsets and accessories*for the year ended December 31, 2005 increased by 39.1% to$67.9 million from $48.8 million for the year ended December 31,2004. This increase was primarily due to an $11.9 million increase ininterconnection and line rental expenses to $33.1 million, or 11.2% ofsegment revenues, in the year ended December 31, 2005 from$21.2 million, or 9.4% of segment revenues, in the year ended December 31,2004. The increase in such expenses was due to the growth in the number ofleased lines in use and overall growth in traffic on the network. Cost ofhandsets and accessories increased to $17.6 million, or 5.9% of segmentrevenues, in the year ended December 31, 2005 from $16.5 million, or7.3% of segment revenues, in the year ended December 31, 2004 mainly dueto an increase in the cost for SIM cards used by new subscribers.

*Siberia gross margin*increased by 29.5% to $228.5 million inthe year ended December 31, 2005 from $176.4 million in the yearended December 31, 2004. Siberia’s gross margin percentage decreased to77.1% in the year ended December 31, 2005 from 78.3% in the year ended December 31,2004 primarily as the result of an increase in the interconnection and linerental costs.

*Far East revenues*for the year ended December 31, 2005increased by 155.8% to $282.9 million from $110.6 million for theyear ended December 31, 2004. Our subscriber base in the Far East license area increased by 116.7% from1.2 million as of December 31, 2004 to 2.6 million as of December 31,2005. The increase in revenues was mainly due to growth in the subscriber base,but was also partially attributable to the full consolidation in 2005 of thesubsidiaries acquired in December 31, 2004: Sibintertelecom andGorizont-RT. Sibintertelecom and Gorizont-RT contributed $40.0 million and$35.2 million to the 

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*revenuesof Far East in the year ended December 31, 2005, respectively. In addition,Far East consolidated for the full 2005 financial year Primtelefon’s revenuesin the amount of $126.6 million, compared to $42.9 million in revenues for thesix months we consolidated Primtelefon’s results in 2004.*

*Far East cost of servicesand cost of handsets and accessories*for the year ended December 31, 2005 increased by 177.5% to$72.7 million from $26.2 million for the year ended December 31,2004. Sibintertelecom and Gorizont-RT contributed together $13.0 million to theincrease, while Primtelefon’s cost of services and cost of sales of handsetsand accessories increased to $36.0 million for the year ended December 31,2005 from $9.1 million for the six months we consolidated Primtelefon’s resultsin 2004. The organic growth in costs was in line with the increased revenue ofFar East.

*Far East gross margin*increased by 149.1% to $210.2 million inthe year ended December 31, 2005 from $84.4 million in the year endedDecember 31, 2004. Far East’s gross margin percentage decreased to 74.3%in the year ended December 31, 2005 from 76.3% in the year ended December 31,2004 primarily as the result of an increase in the number of leased lines inuse and overall growth in traffic on the network concurrently with a generaldecrease in tariffs.

*Other regions revenues*for the year ended December 31, 2005increased by 30.1% to $1,054.9 million from $810.9 million for theyear ended December 31, 2004. Our subscriber base in these regionsincreased by 71.4% from 9.6 million as of December 31, 2004 to16.5 million as of December 31, 2005, which is the result of ourexpansion into the regions both through organic growth and acquisitions. As of December 31,2005, we had commenced commercial operations in 82 regions of Russia, comparedto 77 as of December 31, 2004. The increase in revenues was mainly due togrowth in the subscriber base, but was also partially attributable to the $32.0million in revenues contributed by BCTI, a subsidiary acquired in June 2005.In addition, we acquired a controlling stake in Uzdunrobita in July 2004and, as a result, consolidated its revenues in the amount of $26.8 million forfive months in 2004, as compared to $86.5 million for the year ended December 31,2005.

*Other regions cost ofservices and cost of handsets and accessories*for the year ended December 31, 2005 increasedby 40.6% to $241.4 million from $171.7 million for the year ended December 31,2004. The growth occurred primarily due to a $44.0 million increase ininterconnection and line rental expenses and a $19.2 million increase inroaming expenses. Interconnection and line rental expenses increased to$105.8 million, or 10.0% of segment revenues, in the year ended December 31,2005 from $61.8 million, or 7.6% of segment revenues, in the year ended December 31,2004 mainly due to an increase in the number of base stations in use andoverall growth in traffic on the network. Roaming expenses increased to$49.0 million, or 4.6% of segment revenues, in the year ended December 31,2005 from $29.8 million, or 3.7% of segment revenues, in the year ended December 31,2004 mainly due to an increase in the subscriber base in the regions.

*Other regions gross margin*increased by $174.3 million, or 27.3%, from $639.2 million inthe year ended December 31, 2004 to $813.5 million in the year ended December 31,2005, primarily due to an increase in the number of subscribers andacquisitions of new subsidiaries discussed above. Our gross margin percentagefor the other regions segment decreased to 77.1% in the year ended December 31,2005 from 78.8% in the year ended December 31, 2004, which can beexplained by the same factors discussed above with respect to the decrease inthe consolidated gross margin.

***Sundry operating expenses***

*Consolidated sundryoperating expenses*for theyear ended December 31, 2005 increased by 38.8% to $876.3 millionfrom $631.5 million for the year ended December 31, 2004. Theincrease in sundry operating expenses was largely attributable to a generalincrease in expenses caused by subscriber growth. In addition, the fullconsolidation in 2005 of subsidiaries acquired in the second half of 2004, aswell as the consolidation of the operating results of BCTI for six months in2005 contributed $31.1 million to 

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*consolidatedsundry operating expenses for the year ended December 31, 2005. In theyear ended December 31, 2005, salary expenses and related socialcontributions increased by $79.2 million due to an increase in personnel.Provision for doubtful accounts increased by $23.9 million in the year ended December 31,2005 due to an overall increase in service revenues. In addition, our operatingexpenses increased to $67.2 million for the year ended December 31, 2005from $29.8 million for the same time period in 2004. This increase was due tothe fact that the Federal Law on Communications created a “universal servicesreserve fund” to be funded by a levy imposed on all telecommunications serviceproviders, including us. Accordingly, in May 2005, we started paying 1.2%of the difference between our total revenues from telecommunications servicesand revenues generated by interconnection and traffic transit services, whichamounted to $30.3 million in 2005. Generally, sundry operating expenses as apercentage of net revenues increased to 17.5% for the year ended December 31,2005 from 16.2% in the year ended December 31, 2004.*

*Moscow sundry operatingexpenses*for the year ended December 31,2005 increased by 20.5% to $281.3 million from $233.4 million for theyear ended December 31, 2004. Sundry operating expenses as a percentage ofsegment revenues increased to 15.1% for the year ended December 31, 2005from 13.8% for the year ended December 31, 2004. The major reasons forthis growth were the introduction of the “universal services reserve fund”discussed above, resulting in a $15.3 million increase in Moscow’s otheroperating expenses, an increase in salaries, bonuses and related socialcontributions for additional personnel of $6.9 million and an increase inthe provision for doubtful accounts by $5.2 million in line with an increase inservice revenues.

*Ukraine sundry operatingexpenses*for the year ended December 31,2005 were $143.1 million, or 11.9% of segment revenues, while for the yearended December 31, 2004, these expenses were $88.9 million, or 10.7%of segment revenues. The increase in such expenses in absolute terms during2005 was the result of an overall increase in UMC’s activity. The main reasonfor the increase in sundry operating expenses as a percentage of segmentrevenues was related to a $13.3 million increase in salary expenses and relatedsocial contributions, as well as an increase in rent and maintenance expensesby $13.7 million in 2005, as compared to 2004.

*North-West sundry operatingexpenses*for the year ended December 31,2005 increased by 32.3% to $71.2 million from $53.8 million for theyear ended December 31, 2004. The most significant increases were in theareas of salaries and related social contributions for additional personnel of$4.4 million, bad debt expenses of $2.9 million and an obsolescenceexpense provision of $1.5 million. Sundry operating expenses as apercentage of segment revenues increased to 18.5% for the year ended December 31,2005, as compared to 15.5% for the year ended December 31, 2004. The mainreason for this increase was due to overall growth in North-West, as well ascharges incurred in connection with the “universal services reserve fund,”which created an increase in other operating expenses in the amount of $3.8million for the year ended December 31, 2005.

*South sundry operatingexpenses*for the year ended December 31,2005 increased by 24.1% to $58.2 million from $46.9 million for theyear ended December 31, 2004. The most significant increases were in theareas of salaries and related social contributions for additional personnel of$6.1 million and bad debt expenses of $3.1 million. Sundry operatingexpenses as a percentage of segment revenues decreased to 16.7% for the yearended December 31, 2005, as compared to 18.0% for the year ended December 31,2004. The main reason for this decrease was a reduction in repair andmaintenance expenses from $12.6 million, or 4.8% of segment revenues, for theyear ended December 31, 2005, to $6.5 million, or 1.9% of segmentrevenues, for the year ended December 31, 2004.

*Siberia sundry operatingexpenses*for the year ended December 31,2005 increased by 38.9% to $63.2 million from $45.5 million for theyear ended December 31, 2004. The most significant increases were in theareas of salaries and related social contributions for additional personnel of$6.2 million, bad 

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*debtexpenses of $2.2 million, rent expenses of $2.8 million and otheroperating expenses of $2.4 million. The increases were primarily the result ofthe general expansion of our network in the region. Sundry operating expensesas a percentage of segment revenues increased to 21.3% for the year ended December 31,2005, as compared to 20.2% for the year ended December 31, 2004. The mainreason for this increase was increased rent expenses and the introduction ofcharges in connection with the “universal services reserve fund” in May 2005.*

*Far East sundry operatingexpenses*for the year ended December 31,2005 increased by 186.8% to $67.4 million from $23.5 million for theyear ended December 31, 2004. The most significant increases were in theareas of salaries and related social contributions for additional personnel of$18.2 million, general and administrative expenses of $6.9 million,rent expenses of $5.3 million and bad debt expenses of $3.0 million.The increases were primarily the result of the full consolidation in 2005 ofsubsidiaries acquired in December 2004: Gorizont-RT and Sibintertelecom.These subsidiaries contributed together $16.6 million to Far East’s operatingexpenses in the year ended December 31, 2005. In addition, sundryoperating expenses increased by $9.3 million as a result of the fullconsolidation in 2005 of Primtelefon. Sundry operating expenses as a percentageof segment revenues increased to 23.8% for the year ended December 31, 2005,as compared to 21.2% for the year ended December 31, 2004.

*Other regions sundry operating expenses*for the year ended December 31, 2005 increasedby 33.8% to $199.6 million from $149.2 million for the year ended December 31,2004. The most significant increases were in the areas of salaries and relatedsocial contributions for additional personnel of $24.1 million andadministrative and rent expenses of $13.8 million for additional officesand expanded operations. Sundry operating expenses as a percentage of segmentrevenues slightly increased to 18.9% for the year ended December 31, 2005,as compared to 18.4% for the year ended December 31, 2004 mainly due tothe introduction in May 2005 of a “universal services reserve fund,” inaccordance with the Federal Law on Communications.

***Sales and marketing expenses***

*Consolidated sales andmarketing expenses*for theyear ended December 31, 2005 increased by 31.9% to $608.1 million from$461.0 million for the year ended December 31, 2004. The increase insales and marketing expenses was largely related to our strategy to develop oursubscriber base through organic growth. The components of growth in sales andmarketing expenses were an increase of $57.5 million in commissions todealers and an increase of $89.6 million in advertising and promotionexpenses. The increase in commissions to dealers was primarily due to anincrease in the volume of sales through dealers. The increase in advertisingand promotion expenses related to increased overall marketing efforts andrelatively higher costs of television commercials. Sales and marketing expensesas a percentage of net revenues increased to 12.1% for the year ended December 31,2005 from 11.9% for the year ended December 31, 2004.

*Moscow sales and marketingexpenses*for the year ended December 31,2005 increased by 13.0% to $191.0 million from $169.1 million for theyear ended December 31, 2004. Sales and marketing expenses as a percentageof segment revenues increased to 10.2% for the year ended December 31,2005 from 10.0% for the year ended December 31, 2004. Moscow hastraditionally incurred consolidated costs of national TV advertising campaigns,which have experienced significant inflation in the last few years. We do notallocate a portion of these advertising costs to the macro-regions despite thefact that these regions benefit from our national advertising.

*Ukraine sales and marketingexpenses*for the year ended December 31,2005 were $129.7 million, or 10.8% of segment revenues, and$79.4 million, or 9.5% of segment revenues, for the year ended December 31,2004. Absolute growth in these expenses for the year ended December 31,2005 occurred mainly as the result of overall growth in UMC’s activity. Theincrease in sales and marketing expenses as a 

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*percentageof segment revenues was caused by an increase in advertising and promotionexpenses from 3.6% to 4.8% of segment revenues due to extensive advertisingcampaigns organized in 2005. Dealers’ commissions remained at 6.0% of segmentrevenues for the years ended December 31, 2005 and 2004.*

*North-West sales andmarketing expenses*for theyear ended December 31, 2005 decreased by 20.0% to $39.9 million from$49.9 million for the year ended December 31, 2004, as a result of adecrease in dealer commission rates in the first quarter of 2005 primarily inSt. Petersburg. Sales and marketing expenses as a percentage of segmentrevenues decreased to 10.4% for the year ended December 31, 2005 from14.3% for the year ended December 31, 2004. The main reason for this decreasewas due to the fact that dealer commission rates were historically higher inNorth-West and as competition increased among dealers, we were able to adjustdealers’ commissions to the lower prevailing market rates. The decrease waspartially offset by the increase in the number of new subscribers obtainedthrough dealers.

*South sales and marketingexpenses*for the year ended December 31,2005 increased by 88.7% to $57.0 million from $30.2 million for theyear ended December 31, 2004 due to an increase in dealers’ commissions asthe result of a general increase in sales volume through dealers. Sales andmarketing expenses as a percentage of segment revenues increased to 16.4% forthe year ended December 31, 2005 from 11.6% for the year ended December 31,2004. The main reason for this growth was an increase in dealers’ commissionsas a percentage of segment revenues to 13.2% for the year ended December 31,2005 from 9.8% for the year ended December 31, 2004.

*Siberia sales and marketingexpenses*for the year ended December 31,2005 increased by 96.5% to $39.1 million from $19.9 million for theyear ended December 31, 2004, mainly as a result of further expansion inthe regions. Sales and marketing expenses as a percentage of segment revenuesincreased to 13.2% for the year ended December 31, 2005 from 8.8% for theyear ended December 31, 2004. The main reason for this growth was anincrease of dealers’ commissions as a percentage of segment revenues to 9.2%for the year ended December 31, 2005 from 5.6% for the year ended December 31,2004. Dealers’ commissions increased as a result of a general increase in salesvolume through dealers.

*Far East sales andmarketing expenses*for theyear ended December 31, 2005 increased by 190.5% to $21.5 millionfrom $7.4 million for the year ended December 31, 2004, mainly as aresult of the full consolidation in 2005 of subsidiaries acquired in December 2004:Gorizont-RT and Sibintertelecom. These subsidiaries contributed together $6.1million to the increase in sales and marketing expenses. Sales and marketingexpenses as a percentage of segment revenues increased to 7.6% for the yearended December 31, 2005 from 6.7% for the year ended December 31,2004. The main reason for this growth was a general increase in sales volumethrough dealers.

*Other regions sales andmarketing expenses*for theyear ended December 31, 2005 increased by 23.3% to $141.3 millionfrom $114.6 million for the year ended December 31, 2004, as a resultof the expansion of our regional operations. The main reasons for this increasewere the growth in advertising expenses (in order to promote our services inthe regions and continue our regional expansion) and dealers’ commissionscaused by increases in our subscriber base. Sales and marketing expenses as apercentage of segment revenues decreased to 13.4% for the year ended December 31,2005 from 14.1% for the year ended December 31, 2004.

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***Depreciation and amortization expenses***

*Consolidateddepreciation and amortization* of property, network equipment, telephone numberingcapacity, license costs and other intangible assets for the year ended December 31,2005 increased by 34.2% to $907.1 million from $675.7 million for theyear ended December 31, 2004. Depreciation and amortization expenses as apercentage of net revenues increased to 18.1% for the year ended December 31,2005 from 17.4% for the year ended December 31, 2004. The increase was attributableto the increased asset base resulting from our continuing expansion of ournetwork and acquisition of regional operators in and outside Russia.

*Moscowdepreciation and amortization* for the year ended December 31, 2005 increasedby 15.3% to $224.7 million from $194.9 million for the year ended December 31,2004. Depreciation and amortization expenses as a percentage of segmentrevenues increased to 12.0% for the year ended December 31, 2005 from11.5% for the year ended December 31, 2004 mainly due to significantinvestments in our intangible assets due to the implementation of a new billingsystem and the accelerated amortization of the previous one.

*Ukrainedepreciation and amortization* for the year ended December 31, 2005 was $153.8million, or 12.8% of segment revenues, and $124.9 million, or 15.0% ofsegment revenues, for the year ended December 31, 2004. Absolute growth indepreciation and amortization expense was mainly due to the continued buildoutof UMC’s network in Ukraine. The decrease in depreciation and amortizationexpense as a percentage of segment revenues was mainly due to the effect ofeconomies of scale.

*North-Westdepreciation and amortization* for the year ended December 31, 2005 increasedby 34.7% to $86.2 million from $64.0 million for the year ended December 31,2004 and increased as a percentage of segment revenues to 22.4% from 18.4%.This increase was mainly the result of significant investments in our networkand implementation of a new billing system that caused additional amortizationcharges, as well as the accelerated amortization of the previous billingsystem.

*Southdepreciation and amortization*for the year ended December 31, 2005increased by 11.9% to $91.4 million from $81.7 million for the yearended December 31, 2004 and decreased as a percentage of segment revenuesto 26.3% from 31.4% mainly due to an economies of scale effect.

*Siberiadepreciation and amortization* for the year ended December 31, 2005 increasedby 38.7% to $54.8 million from $39.5 million for the year ended December 31,2004 and increased as a percentage of segment revenues to 18.5% from 17.5%mainly due to the continued buildout of our network in Siberia and theimplementation of a new billing system.

*Far Eastdepreciation and amortization* for the year ended December 31, 2005 increasedby 174.4% to $42.8 million from $15.6 million for the year ended December 31,2004 mainly due to the full consolidation in 2005 of subsidiaries acquired in December 2004:Gorizont-RT and Sibintertelecom. These subsidiaries together contributed $17.0million to depreciation and amortization expenses of the Far East. In addition,the growth in depreciation and amortization expenses was the result of the fullconsolidation in 2005 of Primtelefon, which results were included in theconsolidated financial statements starting June 2004, as well assignificant investments in the network. As a percentage of segment revenues,depreciation and amortization increased to 15.1% for the year ended December 31,2005 compared to 14.1% for the year ended December 31, 2004, primarily dueto the continued buildout of the network.

*Other regions depreciation and amortization* for the year ended December 31, 2005increased by 62.9% to $257.9 million from $158.3 million for the yearended December 31, 2004 and increased as a percentage of segment revenuesto 24.4% from 19.5%. The increase in the depreciation and amortization expensewas driven primarily by two factors: the continued buildout of our network inthe regions and the implementation of a new billing system.

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***Operating Income***

*Consolidatedoperating income*for the year ended December 31, 2005 increased by 15.0% to$1,632.0 million, including $431.3 million of UMC’s results afterintercompany elimination, for the year ending December 31, 2005, from$1,419.1 million for the year ended December 31, 2004, of which$317.9 million was contributed by UMC. Operating income as a percentage ofnet revenues decreased to 32.6% for the year ended December 31, 2005compared to 36.5% for the year ended December 31, 2004, mainly due to thefollowing factors: increased interconnection and line rental expenses,additional depreciation and amortization expenses discussed above and a levyimposed in connection with the “universal services reserve fund” established inaccordance with the Federal Law on Communications commencing in May 2005.

*Moscow operatingincome* for theyear ended December 31, 2005 increased by 7.6% to $630.3 million from$585.7 million for the year ended December 31, 2004 and decreased asa percentage of segment revenues to 33.8% for the year ended December 31,2005, from 34.6% for the year ended December 31, 2004, mainly due tocharges incurred in connection with the “universal services reserve fund”commencing in May 2005.

*Ukraine operatingincome* for theyear ended December 31, 2005 was $431.3 million, or 35.9% of segmentrevenues, and $317.9 million, or 38.2% of segment revenues, for the yearended December 31, 2004. Absolute growth in operating income was primarilythe result of overall growth in UMC’s subscriber base and the continuedbuildout of its network. A decrease in operating income as a percentage ofsegment revenues occurred mainly due to increased interconnection and linerental expenses, as well as an increase in advertising and marketing expenses.

*North-Westoperating income*for the year ended December 31, 2005 increased by 3.6% to$131.4 million, or 34.2% of segment revenues, from $126.8 million, or36.4% of segment revenues, for the year ended December 31, 2004. The mainreasons for the slight decrease in operating income as a percentage of segmentrevenues were an increase in interconnection and line rental costs, growth indepreciation expense incurred and charges imposed in connection with the “universalservices reserve fund,” which were partially offset by a decrease in dealers’commissions.

*South operatingincome* for theyear ended December 31, 2005 increased to $80.9 million, or 23.3% ofsegment revenues, from $67.2 million, or 25.8% of segment revenues, forthe year ended December 31, 2004. The main reasons for the decrease ofoperating income as a percentage of segment revenues were the increase ininterconnection and line rental costs and the growth in sales and marketingexpenses.

*Siberiaoperating income*for the year ended December 31, 2005 and 2004 was stable in the amount of$71.4 million. Operating income as a percentage of segment revenues forthe year ended December 31, 2005 decreased to 24.1% of segment revenuesfrom 31.7% for the year ended December 31, 2004. This decrease was theresult of increased dealer commissions, growth in depreciation expense andincreased interconnection and line rental expenses.

*Far Eastoperating income*for the year ended December 31, 2005 increased to $78.5 million from$37.9 million for the year ended December 31, 2004, mainly due to thefull consolidation in 2005 of subsidiaries acquired in December 2004:Gorizont-RT and Sibintertelecom. Operating income as a percentage of segmentrevenues for the year ended December 31, 2005 decreased to 27.7% ofsegment revenues from 34.3% for the year ended December 31, 2004. The mainreasons for the decrease of operating income as a percentage of segmentrevenues were increases in dealer commissions, growth in depreciation expenseincurred and increased payroll and social contribution expenses.

*Other regions operating* income for the year ended December 31, 2005decreased by 1.4% to $213.9 million, or 20.3% of segment revenues, from$217.0 million, or 26.8% of segment revenues, for the year ended December 31,2004. The main reasons for the decrease in operating income as a percentage of 

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*segment revenues were the additional amortization expenseincurred as a result of the implementation of a new billing system and a levyimposed on us in connection with the “universal services reserve fund.”*

**Resultsof Operations by Legal Entities**

For comparison purposes, the following table sets forth selectedfinancial information by legal entities, which was how we reported our segmentinformation in prior years. As part of our restructuring, many of oursubsidiaries merged with us and, therefore, going forward, we will report ourfinancial data by macro-regions only.
|                                                                                                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                                                                        | ** ** | **(in thousands)**                    | ** ** |
| **Revenues by legal entities**                                                                                                                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| MTS OJSC                                                                                                                                          |       | $1,471,198                                 |       | $2,129,544 |   | $2,360,542 |   |
| UMC                                                                                                                                               |       | 394,038                                    |       | 832,313 |   | 1,201,827 |   |
| Telecom XXI                                                                                                                                       |       | 210,460                                    |       | 297,194 |   | 382,897 |   |
| Kuban-GSM                                                                                                                                         |       | 168,401                                    |       | 225,350 |   | 270,157 |   |
| Other                                                                                                                                             |       | 432,770                                    |       | 796,256 |   | 1,220,550 |   |
| Eliminations(1)                                                                                                                                   |       | (130,669                                   | )          | (393,663 | ) | (424,955 | ) |
| Revenues as  reported                                                                                                                             |       | $2,546,198                                 |       | $3,886,994 |   | $5,011,018 |   |
| **Costs of services,  exclusive of depreciation and amortization shown separately below by legal  entities and cost of handsets and accessories** |       |                                       |       |   |   |   |   |
| MTS OJSC                                                                                                                                          |       | $315,021                                   |       | $585,092 |   | $643,947 |   |
| UMC                                                                                                                                               |       | 94,959                                     |       | 221,226 |   | 343,990 |   |
| Telecom XXI                                                                                                                                       |       | 33,348                                     |       | 46,917 |   | 55,739 |   |
| Kuban-GSM                                                                                                                                         |       | 20,870                                     |       | 22,963 |   | 35,516 |   |
| Other                                                                                                                                             |       | 120,895                                    |       | 189,720 |   | 304,165 |   |
| Eliminations(1)                                                                                                                                   |       | (110,914                                   | )          | (366,231 | ) | (395,884 | ) |
| Cost of  services and cost of handsets and accessories as reported                                                                                |       | $474,179                                   |       | $699,687 |   | $987,473 |   |
| **Sundry operating  expenses by legal entities****(2)**                                                                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| MTS OJSC                                                                                                                                          |       | $241,069                                   |       | $327,113 |   | $426,386 |   |
| UMC                                                                                                                                               |       | 50,192                                     |       | 88,937 |   | 143,100 |   |
| Telecom XXI                                                                                                                                       |       | 28,071                                     |       | 45,832 |   | 70,128 |   |
| Kuban-GSM                                                                                                                                         |       | 25,385                                     |       | 37,091 |   | 33,492 |   |
| Other                                                                                                                                             |       | 62,689                                     |       | 142,257 |   | 215,452 |   |
| Eliminations(1)                                                                                                                                   |       | (684                                       | )          | (9,698 | ) | (12,249 | ) |
| Sundry  operating expenses as reported                                                                                                            |       | $406,722                                   |       | $631,532 |   | $876,309 |   |
| **Sales and marketing  expenses by legal entities**                                                                                               |       |                                       |       |   |   |   |   |
| MTS OJSC                                                                                                                                          |       | $187,325                                   |       | $240,146 |   | $285,902 |   |
| UMC                                                                                                                                               |       | 50,791                                     |       | 79,355 |   | 129,651 |   |
| Telecom XXI                                                                                                                                       |       | 31,627                                     |       | 42,244 |   | 39,573 |   |
| Kuban-GSM                                                                                                                                         |       | 15,249                                     |       | 22,534 |   | 33,318 |   |
| Other                                                                                                                                             |       | 43,423                                     |       | 86,275 |   | 130,981 |   |
| Eliminations(1)                                                                                                                                   |       | (1,632                                     | )          | (9,571 | ) | (11,333 | ) |
| Sales and  marketing expenses as reported                                                                                                         |       | $326,783                                   |       | $460,983 |   | $608,092 |   |

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| **Depreciation and amortization by legal entities** |   |     |   |       |   |       |   |
|-----------------------------------------------------|--------|----------|--------|------------|--------|------------|--------|
| MTS  OJSC                                           |   | $199,946 |   | $253,485   |   | $331,642   |   |
| UMC                                                 |   | 66,392   |   | 124,935    |   | 153,795    |   |
| Telecom  XXI                                        |   | 36,782   |   | 57,265     |   | 86,138     |   |
| Kuban-GSM                                           |   | 32,299   |   | 68,140     |   | 67,927     |   |
| Other                                               |   | 82,185   |   | 175,221    |   | 272,163    |   |
| Eliminations(1)                                     |   | (1,688   | )      | (3,317     | )      | (4,552     | )      |
| Depreciation  and amortization as reported          |   | $415,916 |   | $675,729   |   | $907,113   |   |
| **Operating Income by  legal entities**             |   |     |   |       |   |       |   |
| MTS OJSC                                            |   | $527,837 |   | $728,101   |   | $672,666   |   |
| UMC                                                 |   | 131,704  |   | 317,860    |   | 431,292    |   |
| Telecom XXI                                         |   | 80,632   |   | 104,936    |   | 131,318    |   |
| Kuban-GSM                                           |   | 74,599   |   | 74,622     |   | 99,904     |   |
| Other                                               |   | 123,577  |   | 198,390    |   | 302,485    |   |
| Eliminations(1)                                     |   | (15,751  | )      | (4,846     | )      | (5,634     | )      |
| Operating  income as reported                       |   | $922,598 |   | $1,419,063 |   | $1,632,031 |   |

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(1)                Represents the elimination of intercompany sales, sundry operatingexpenses, sales and marketing expenses and the related operating income,primarily for intercompany roaming arrangements and management and marketingsupport provided by MTS OJSC to regional companies, as well as of other intercompanytransactions.

(2)                Forthe purposes of this analysis, “Sundry operating expenses” consist of generaland administrative expenses, provision for doubtful accounts and otheroperating expenses (including charges incurred in connection with the “universalservices reserve fund”).

**YearEnded December 31, 2005 compared to Year Ended December 31, 2004 bylegal entities**

***Revenues and cost of services and cost ofhandsets and accessories***

*Consolidatedrevenues*for the year ended December 31, 2005 increasedby $1,124.0 million, or 28.9%, to $5,011.0 million from$3,887.0 million for the year ended December 31, 2004. This increasewas primarily due to the significant growth in our subscriber base from 34.2million as of December 31, 2004 to 58.2 million as of December 31,2005. The growth was mainly attributable to our sales and marketing efforts andthe expansion of our network, as well as improving general economic conditionsand income levels in Russia and Ukraine. A portion of revenue growth was alsodue to the acquisition of BCTI in June 2005, which contributed $33.4million to our revenues for the year ended December 31, 2005, as well asthe full consolidation in 2005 of Uzdunrobita, which we acquired inJuly 2004. The increase in revenues from subscriber growth was partiallyoffset by a decrease in tariffs in Moscow and other highly competitive licenseareas, an increase in mass-market subscribers in our subscriber mix and ourcontinued expansion into the regions of Russia outside of the Moscow licensearea where tariffs are lower. As a result, average monthly service revenue persubscriber in Russia decreased by 33% from $12 per subscriber for the yearended December 31, 2004 to $8 for the year ended December 31, 2005.

For the year ended December 31, 2005,service revenues and connection fees increased by $1,142.0 million, or30.1%, to $4,942.3 million compared to $3,800.3 million for the year endedDecember 31, 2004 due to the growth in the number of our subscribers, asexplained above. Revenues from the sales of handsets and accessories decreasedby $18.0 million, or 20.8%, to $68.7 million for the 

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year endedDecember 31, 2005 compared to the year ended December 31, 2004, dueto a reduction in the number of handsets sold while the average selling priceof handsets remained at the same level.

*Consolidatedcost of services and cost of handsets and accessories*for the yearended December 31, 2005 increased by 41.1% to $987.5 million from$699.7 million for the year ended December 31, 2004. The increase incosts was primarily attributable to subscriber growth and related growth intraffic related expenses. For the year ended December 31, 2005,interconnection and line rental expenses grew to $598.3 million from$352.6 million for the year ended December 31, 2004 and roamingexpenses grew to $134.5 million from $128.5 million. For the yearended December 31, 2005, cost of handsets and accessories sold, includingSIM cards provided to customers, grew to $254.6 million from$218.6 million for the year ended December 31, 2004.

*Consolidatedgross margin*was $4,023.5 million, or 80.3% of consolidatedrevenues for the year ended December 31, 2005, compared to$3,187.3 million, or 82.0% of consolidated revenues for the year endedDecember 31, 2004. The decrease in our consolidated gross marginpercentage is due to increased interconnection and line rental charges as aresult of the further expansion of our network and increased rental chargespayable to other operators for access to their networks in 2005 and, to someextent, the increased costs associated with SIM and Jeans cards used by newsubscribers.

*MTS OJSCrevenues*for the year ended December 31, 2005 increasedby 10.8% to $2,360.5 million from $2,129.5 million for the year endedDecember 31, 2004. Our subscriber base in the MTS OJSC license areasincreased by 35.6% from 7.5 million as of December 31, 2004 to 10.2million as of December 31, 2005. The effect on revenues of the increase inour subscriber base was partially offset by a decrease in tariffs in the Moscowlicense area and an increase of mass-market subscribers in our subscriber mix.

*MTS OJSC cost ofservices and cost of handsets and accessories*for the yearended December 31, 2005 increased by 10.0% to $643.9 million from$585.1 million for the year ended December 31, 2004. The growthoccurred mainly as the result of a $63.6 million increase in interconnectionand line rental expenses to $201.5 million, or 8.5% of segment revenues, forthe year ended December 31, 2005 from $134.7 million, or 6.5% of segmentrevenues, for the year ended December 31, 2004. This was primarily drivenby the growth in traffic volume, as well as an increase in the number of leasedlines and increased costs of value-added services. Roaming expenses increasedto $176.7 million, or 7.5% of segment revenues, for the year endedDecember 31, 2005 from $172.3 million, or 8.1% of segment revenues,for the year ended December 31, 2004. Cost of handsets and accessoriesdecreased to $265.7 million, or 11.3% of segment revenues, for the yearended December 31, 2005 from $274.9 million, or 12.9% of segmentrevenues, for the year ended December 31, 2004.

*MTS OJSC grossmargin*increased by 11.1% to $1,716.6 million in theyear ended December 31, 2005 from $1,544.4 million in the year endedDecember 31, 2004. MTS OJSC’s gross margin percentage increased to 72.7%in the year ended December 31, 2005 from 72.5% in the year endedDecember 31, 2004.

*UMC revenues*increased by44.4% to $1,201.8 million in the year ended December 31, 2005 from$832.3 million in the year ended December 31, 2004. The main reasonfor the growth in sales revenues was an increase in UMC’s subscriber base from7.4 million as of December 31, 2004 to 13.3 million as ofDecember 31, 2005, which was partially offset by a decrease in tariffs inUkraine and an increase of mass-market subscribers in the subscriber mix.

*UMC cost ofservices and cost of handsets and accessories*for the yearsended December 31, 2005 and 2004 were $344.0 million and$221.2 million, respectively. The growth occurred primarily due to anincrease of $105.9 million in interconnection and line rental expenses and a$12.2 million increase in cost of SIM and Jeans cards. Interconnection andline rental expenses increased to $218.7 million, or 18.2% of 

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*segmentrevenues, in the year ended December 31, 2005 from $112.8 million, or13.6% of segment revenues, in the year ended December 31, 2004 mainly dueto an increase in the number of leased lines and overall growth in traffic onthe network. Cost of handsets and accessories increased to $100.4 million,or 8.4% of segment revenues, in the year ended December 31, 2005 from$87.6 million, or 10.5% of segment revenues, in the year endedDecember 31, 2004 mainly due to an increase in cost for SIM cards used bynew subscribers.*

*UMC gross margin*for the yearended December 31, 2005 grew to $857.8 million from$611.1 million for the year ended December 31, 2004. As a percentageof total revenues, gross margin decreased to 71.4% in the year endedDecember 31, 2005, from 73.4% in the year ended December 31, 2004.This decrease in gross margin was mainly due to increased interconnection andline rental expenses.

*Telecom XXIrevenues*for the year ended December 31, 2005 increasedby 28.8% to $382.9 million from $297.2 million for the year endedDecember 31, 2004. Our subscriber base in the Telecom XXI license areasincreased by 37.0% from 2.7 million as of December 31, 2004 to 3.7million as of December 31, 2005. The growth in subscribers in percentageterms is higher than the growth in revenues mainly because the newly acquiredsubscribers have lower average monthly service revenue per subscriber comparedto subscribers already connected to our network.

*Telecom XXI costof services and cost of handsets and accessories*for the yearended December 31, 2005 increased by 18.8% to $55.7 million from$46.9 million for the year ended December 31, 2004. Interconnectionand line rental expenses increased to $29.8 million, or 7.8% of segmentrevenues, in the year ended December 31, 2005 from $15.2 million, or5.1% of segment revenues, in the year ended December 31, 2004 mainly dueto an increase of the number of base stations in use and overall growth intraffic on the network. Roaming expenses decreased to $14.5 million, or3.8% of segment revenues, for the year ended December 31, 2005 from$18.9 million, or 6.4% of segment revenues, for the year endedDecember 31, 2004 mainly due to the fact that roaming expenses were notcharged by our branches for calls to the North-West macro-region startingJuly 1, 2005 when Telecom XXI merged with us.

*Telecom XXIgross margin*increased by 30.7% to $327.2 million in the yearended December 31, 2005 from $250.3 million in the year endedDecember 31, 2004. Telecom XXI gross margin percentage increased to 85.5%during the year ended December 31, 2005, as compared to 84.2% during theyear ended December 31, 2004. The increase in the gross margin was mainlythe result of increased roaming margins.

*Kuban-GSMrevenues*for the year ended December 31, 2005 increasedby 19.9% to $270.2 million from $225.4 million for the year endedDecember 31, 2004. Our subscriber base in the Kuban-GSM license areaincreased by 88.0% from 2.5 million as of December 31, 2004 to4.7 million as of December 31, 2005. The growth in subscribers in percentageterms is higher than the growth in revenues mainly because the newly acquiredsubscribers have lower average monthly service revenue per subscriber comparedto subscribers already connected to our network.

*Kuban-GSM costof services and cost of handsets and accessories*for the yearended December 31, 2005 increased by 54.3% to $35.5 million from$23.0 million for the year ended December 31, 2004. This wasprimarily driven by an increase in interconnection and line rental expenses,cost of handsets and accessories and SIM cards. Interconnection and line rentalexpenses increased by $6.4 million to $20.6 million, or 7.6% of segmentrevenues, in the year ended December 31, 2005 from $14.2 million, or6.3% of segment revenues, in the year ended December 31, 2004. Thisincrease is mainly due to an increase in the number of leased lines and overallgrowth in traffic on the network. Cost of handsets and accessories increased to$11.6 million, or 4.3% of segment revenues, in the year ended December 31,2005 from $4.4 million, or 2.0% of segment revenues, in the year endedDecember 31, 2004 mainly due to an increase in cost for SIM cards used bynew subscribers.

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*Kuban-GSM grossmargin*increasedby 16.0% to $234.7 million in theyear ended December 31, 2005 from $202.4 million in the year endedDecember 31, 2004. Kuban-GSM’s gross margin percentage decreased to86.9% in the year ended December 31, 2005 from 89.8% in the year endedDecember 31, 2004 primarily as the result of an increase in cost for SIMcards used by new subscribers.

*Other regionsrevenues*for the year ended December 31, 2005 increasedby 53.3% to $1,220.6 million from $796.3 million for the year endedDecember 31, 2004. Our subscriber base in these regions increased by 79.7%from 7.9 million as of December 31, 2004 to 14.2 million as ofDecember 31, 2005, which is the result of our expansion into the regionsmainly through organic growth. As of December 31, 2005, we had commencedcommercial operations in 82 regions of Russia, compared to 77 as ofDecember 31, 2004. The growth in subscribers in percentage terms is higherthan revenue growth mainly due to the fact that newly acquired subscribers havelower average monthly service revenue per subscriber compared to subscribersalready connected to our network. The increase in revenues was mainly due togrowth in the subscriber base, but was also partially attributable to the fullconsolidation in 2005 of subsidiaries acquired in December 2004:Sibintertelecom and Gorizont-RT. Sibintertelecom and Gorizont-RT contributed$40.0 million and $32.5 million to other regions revenue, respectively, in theyear ended December 31, 2005. Another reason for the increase in otherregions revenue was the full consolidation in 2005 of our subsidiaries,Primtelefon and Uzdunrobita, acquired in June and July 2004,respectively.

*Other regionscost of services and cost of handsets and accessories*for the yearended December 31, 2005 increased by 60.4% to $304.2 million from$189.7 million for the year ended December 31, 2004. The growthoccurred primarily due to a $62.4 million increase in interconnection and linerental expenses and a $26.2 million increase in cost of handsets andaccessories. In addition, Sibintertelecom and Gorizont-RT together contributed$13.0 million to the increase of the costs, while cost of services and of salesof handsets and accessories in Primtelefon increased to $36.0 million for theyear ended December 31, 2005 from $9.1 million for the six months weconsolidated Primtelefon’s results in 2004. Interconnection and line rentalexpenses increased to $139.0 million, or 11.4% of segment revenues, in theyear ended December 31, 2005 from $76.6 million, or 9.6% of segmentrevenues, in the year ended December 31, 2004 mainly due to an increase inthe number of base stations in use and overall growth in traffic on thenetwork. Cost of handsets and accessories increased to $89.8 million, or7.4% of segment revenues, in the year ended December 31, 2005 from$63.6 million, or 8.0% of segment revenues, in the year endedDecember 31, 2004 mainly due to an increase in cost for SIM cards used bynew subscribers.

*Other regions gross margin*increased by$309.8 million, or 51.1%, from $606.6 million in the year endedDecember 31, 2004 to $916.4 million in the year endedDecember 31, 2005, primarily due to an increase in the number ofsubscribers. Our gross margin percentage for the other regions segmentdecreased to 75.1% in the year ended December 31, 2005 from 76.2% in theyear ended December 31, 2004, which can be explained by the same factorsdiscussed above with respect to the decrease in the consolidated gross marginpercentage.

***Sundry operating expenses***

*Consolidatedsundry operating expenses*for the year ended December 31, 2005increased by 38.8% to $876.3 million from $631.5 million for the yearended December 31, 2004. The increase in sundry operating expenses waslargely attributable to a general increase in expenses caused by subscribergrowth. In addition, the full consolidation in 2005 of subsidiaries acquired inthe second half of 2004, as well as the consolidation of the operating resultsof BCTI for six months in 2005 contributed $31.1 million to consolidated sundryoperating expenses for the year ended December 31, 2005. In the year endedDecember 31, 2005, salary expenses and related social contributionsincreased by $79.2 million due to an increase in personnel. Provision fordoubtful accounts increased by $23.9 million in the year endedDecember 31, 2005 due to an overall increase in service revenues. Inaddition, the operating expenses increased to $67.2 million for the year endedDecember 31, 2005 from $29.8 million for the same time 

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*periodin 2004. This increase was due to the fact that the Federal Law onCommunications created a “universal services reserve fund” to be funded by alevy imposed on all telecommunications service providers, including us.Accordingly, in May 2005, we started paying 1.2% of the difference betweenour total revenues from telecommunications services and revenues generated byinterconnection and traffic transit services, which amounted to $30.3 millionin 2005. Generally, sundry operating expenses as a percentage of net revenuesincreased to 17.5% for the year ended December 31, 2005 from 16.2% in theyear ended December 31, 2004.*

*MTS OJSC sundryoperating expenses*for the year ended December 31, 2005 increasedby 30.4% to $426.4 million from $327.1 million for the year endedDecember 31, 2004. The major reason for this growth was an increase insalaries, bonuses and related social contributions for additional personnel of$33.0 million, and implementation of the “universal services reserve fund”charge in the amount of $18.0 million. Sundry operating expenses as apercentage of segment revenues increased to 18.1% for the year endedDecember 31, 2005 from 15.4% for the year ended December 31, 2004.This increase was mainly attributable to our overall volume of operations andan increase in the bad debt provision expense from $12.4 million for 2004,or 0.6% of segment revenues, to $25.7 million for 2005, or 1.1% of segmentrevenues.

*UMC sundryoperating expenses*for the year ended December 31, 2005 were$143.1 million, or 11.9% of segment revenues, while for the year endedDecember 31, 2004, these expenses were $88.9 million, or 10.7% ofsegment revenues. The increase in such expenses in absolute terms during 2005was the result of an overall increase in UMC’s activity. The main reason forthe increase in sundry operating expenses as a percentage of segment revenueswas related to a $13.3 million increase in salary expenses and related socialcontributions, as well as an increase in rent and maintenance expenses by $13.7million in 2005, as compared to 2004.

*Telecom XXIsundry operating expenses*for the year ended December 31, 2005increased by 53.1% to $70.1 million from $45.8 million for the yearended December 31, 2004. The most significant increases were in the areasof salaries and related social contributions for additional personnel of $7.4million, bad debt expense of $2.9 million and an obsolescence expense provisionof $1.5 million. Sundry operating expenses as a percentage of segment revenuesincreased to 18.3% for the year ended December 31, 2005, as compared to15.4% for the year ended December 31, 2004. In addition, charges imposedin connection with the “universal services reserve fund” increased TelecomXXI’s sundry operating expenses by $3.1 million.

*Kuban-GSM sundryoperating expenses*for the year ended December 31, 2005 decreasedby 9.7% to $33.5 million from $37.1 million for the year endedDecember 31, 2004. Sundry operating expenses as a percentage of segmentrevenues decreased to 12.4% for the year ended December 31, 2005, ascompared to 16.5% for the year ended December 31, 2004. The most significantdecrease was in the area of repair and maintenance of $5.8 million, or 2.7% asa percentage of segment revenues.

*Other regions sundry operating expenses*for the yearended December 31, 2005 increased by 48.1% to $210.8 million from$142.3 million for the year ended December 31, 2004. The increaseswere primarily the result of the full consolidation in 2005 of subsidiariesacquired in December 2004: Gorizont-RT and Sibintertelecom. Thesesubsidiaries contributed together $16.6 million to other region’s operatingexpenses in the year ended December 31, 2005. In addition, the fullconsolidation in 2005 of Primtelefon and Uzdunrobita increased other regionssundry operating expenses by $19.0 million. The most significant increases werein the areas of salaries and related social contributions for additionalpersonnel of $25.9 million and rent expenses of $10.8 million foradditional offices and expanded operations. Sundry operating expenses as apercentage of segment revenues remained stable at 17.3% and 17.9% for the yearsended December 31, 2005 and 2004, respectively.

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***Sales and marketing expenses***

*Consolidated sales andmarketing expenses*for the year ended December 31, 2005 increasedby 31.9% to $608.1 million from $461.0 million for the year endedDecember 31, 2004. The increase in sales and marketing expenses was largelyrelated to our strategy to develop our subscriber base through organic growth.The components of growth in sales and marketing expenses were an increase of$57.5 million in commissions to dealers and an increase of $89.6 million inadvertising and promotion expenses. The increase in commissions to dealers wasprimarily due to an increase in the volume of sales through dealers. Theincrease in advertising and promotion expenses related to increased overallmarketing efforts and relatively higher costs of television commercials. Salesand marketing expenses as a percentage of net revenues increased to 12.1% forthe year ended December 31, 2005 from 11.9% for the year endedDecember 31, 2004.

*MTS OJSC sales andmarketing expenses*for the year ended December 31, 2005 increasedby 19.1% to $285.9 million from $240.1 million for the year endedDecember 31, 2004. Sales and marketing expenses as a percentage of segmentrevenues increased to 12.1% for the year ended December 31, 2005 from11.3% for the year ended December 31, 2004. MTS OJSC has traditionallyincurred consolidated costs of national TV advertising campaigns, which haveexperienced significant inflation in the last few years. MTS does not allocatea portion of these advertising costs to Telecom XXI, Kuban-GSM and otherregions segments even though sales in these regions benefit from this nationaladvertising.

*UMC sales and marketingexpenses*for the year ended December 31, 2005 were$129.7 million, or 10.8% of segment revenues, and $79.4 million, or9.5% of segment revenues, for the year ended December 31, 2004. Absolutegrowth in these expenses for the year ended December 31, 2005 occurredmainly as the result of overall growth in UMC’s activity. The increase in salesand marketing expenses as a percentage of segment revenues was caused by anincrease in advertising and promotion expenses from 3.6% to 4.8% of segmentrevenues due to extensive advertising campaigns organized in 2005. Dealers’commissions remained at 6.0% of segment revenues for the years endedDecember 31, 2005 and 2004.

*Telecom XXI sales andmarketing expenses*for the year ended December 31, 2005 decreasedby 6.2% to $39.6 million from $42.2 million for the year endedDecember 31, 2004, as a result of a decrease in dealers’ commissions by$7.0 million. Sales and marketing expenses as a percentage of segment revenuesdecreased to 10.3% for the year ended December 31, 2005 from 14.2% for theyear ended December 31, 2004. The main reason for this decrease was adecrease in dealer commission rates in 2005.

*Kuban-GSM sales andmarketing expenses*for the year ended December 31, 2005 increasedby 48.0% to $33.3 million, or 12.3% of segment revenues, from$22.5 million, or 10.0% of segment revenues, for the year endedDecember 31, 2004, as a result of an increase in dealers’ commissions as apercentage of segment revenues to 10.5% for the year ended December 31,2005 from 8.7% for the same period in 2004 due to a general increase in salesvolume through dealers.

*Other regionssales and marketing expenses*for the year ended December 31, 2005increased by 51.8% to $131.0 million from $86.3 million for the yearended December 31, 2004, as a result of our expansion of regionaloperations and the effect of acquisitions related thereto. The main reasons forthis increase were the growth in advertising expenses (in order to promote ourservices in the regions and continue our regional expansion) and dealers’commissions caused by increases in our subscriber base. Sales and marketingexpenses as a percentage of segment revenues remained stable at 10.7% and 10.8%for the years ended December 31, 2005 and 2004.

***Depreciation and amortization expenses***

*Consolidated depreciationand amortization*of property, network equipment, telephone numberingcapacity, license costs and other intangible assets for the year endedDecember 31, 2005 increased by 34.2% to $907.1 million from$675.7 million for the year ended December 31, 2004. Depreciation andamortization expenses as a percentage of net revenues increased to 18.1% forthe year ended 

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*December 31, 2005 from 17.4% for the year endedDecember 31, 2004. The increase was attributable to an increased assetbase resulting from the continuing expansion of our network and acquisition ofregional operators in and outside Russia.*

*MTS OJSC depreciation andamortization*for the year ended December 31, 2005 increasedby 30.8% to $331.6 million from $253.5 million for the year endedDecember 31, 2004, and increased as a percentage of segment revenues to14.0% for the year ended December 31, 2005 from 11.9% for the year endedDecember 31, 2004 mainly due to the continued buildout of our network inthe regions and significant investments in our intangible assets due to theimplementation of a new billing system and the accelerated amortization of theprevious one.

*UMC depreciation andamortization*for the year ended December 31, 2005 was $153.8million, or 12.8% of segment revenues, and $124.9 million, or 15.0% of segmentrevenues, for the year ended December 31, 2004. Absolute growth indepreciation and amortization expense was mainly due to the continued buildoutof UMC’s network in Ukraine. The decrease in depreciation and amortizationexpense as a percentage of segment revenues was mainly due to the effect ofeconomies of scale.

*Telecom XXI depreciationand amortization*for the year ended December 31, 2005 increasedby 50.3% to $86.1 million from $57.3 million for the year endedDecember 31, 2004 and increased as a percentage of segment revenues to22.5% from 19.3%. This increase was mainly the result of significantinvestments in our network and the implementation of a new billing system thatcaused additional amortization charges, as well as the accelerated amortizationof the previous billing system.

*Kuban-GSM depreciation andamortization*remained stable at $67.9 million and$68.1 million for the years ended December 31, 2005 and 2004,respectively, and decreased as a percentage of segment revenues to 25.1% from30.2% due to the economies of scale effect and the intra-group transfer ofproperty, plant and equipment.

*Other regionsdepreciation and amortization*for the year ended December 31, 2005increased by 55.4% to $272.2 million from $175.2 million for the yearended December 31, 2004 and increased as a percentage of segment revenuesto 22.3% from 22.0%. The increase in the depreciation and amortization expensewas driven primarily by three factors: the continued buildout of our network inthe regions, implementation of a new billing system and assets acquired throughacquisitions.

***Operating Income***

*Consolidated operatingincome*for the year ended December 31, 2005 increasedby 15.0% to $1,632.0 million, including $431.3 million of UMC’sresults after intercompany elimination, for the year ending December 31,2005, from $1,419.1 million for the year ended December 31, 2004, ofwhich $317.9 million was contributed by UMC. Operating income as apercentage of net revenues decreased to 32.6% for the year endedDecember 31, 2005 compared to 36.5% for the year ended December 31,2004, mainly due to the following factors: increased interconnection and linerental expenses, additional depreciation and amortization expenses discussedabove and a levy imposed in connection with the “universal services reservefund” established in accordance with the Federal Law on Communicationscommencing in May 2005.

*MTS OJSC operating income*for the yearended December 31, 2005 decreased by 7.6% to $672.7 million from$728.1 million for the year ended December 31, 2004 and decreased asa percentage of segment revenues at 28.5% for the year ended December 31,2005, as compared to 34.2% for the year ended December 31, 2004. Thisdecrease was mainly caused by increased salaries and related socialcontributions, increased advertising and depreciation and amortizationexpenses.

*UMC operating income*for the yearended December 31, 2005 was $431.3 million, or 35.9% of segmentrevenues, and $317.9 million, or 38.2% of segment revenues, for the year endedDecember 31, 2004. Absolute growth in operating income was primarily theresult of overall growth in UMC’s subscriber base 

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*and the continued buildout of its network. A decreasein operating income as a percentage of segment revenues occurred mainly due toincreased interconnection and line rental expenses, as well as an increase inadvertising and marketing expenses.*

*Telecom XXI operatingincome*for the year ended December 31, 2005 increasedby 25.2% to $131.3 million, or 34.3% of segment revenues, from$104.9 million, or 35.3% of segment revenues, for the year ended December 31,2004. The main reasons for the decrease in operating income as a percentage ofsegment revenues were an increase in interconnection and line rental costs,growth in depreciation expense incurred and charges imposed in connection withthe “universal services reserve fund,” which were partially offset by adecrease in dealers’ commissions.

*Kuban-GSM operating income*for the yearended December 31, 2005 increased to $99.9 million, or 37.0% ofsegment revenues, from $74.6 million, or 33.1% of segment revenues, forthe year ended December 31, 2004. The main reason for the increase ofoperating income as a percentage of segment revenues was due to the decrease inrepair and maintenance expenses in 2005, as compared to 2004.

*Other regionsoperating income*for the year ended December 31, 2005 increasedby 53.4% in the aggregate to $302.5 million from $198.4 million forthe year ended December 31, 2004 due to an overall increase in operationsand the effect of acquisitions. The other regions operating income, however,remained stable at 24.9% for the years ended December 31, 2005 and 2004.

***Currency exchange and transaction gain***

*Consolidatedcurrency exchange and transaction gain*for the year ended December 31, 2005was $10.3 million, compared to $6.5 million for the year endedDecember 31, 2004. We conduct our operations primarily within the RussianFederation, Ukraine, Uzbekistan and Turkmenistan. We are subject to currencyfluctuations, including U.S. dollar versus ruble/hryvnia/som/manat and U.S.dollar versus euro. See “Item 3. Key Information—D. Risk Factors—Risks Relatingto Our Financial Condition—Continued or increased limitations on the conversionof rubles to foreign currency in Russia could increase our costs when makingpayments in foreign currency to suppliers and creditors and could cause us todefault on our obligations to them,” and “Item 11. Quantitative and QualitativeDisclosures about Market Risk—Foreign Currency Risk.”

***Interest expense***

*Consolidatedinterest expense*for the year ended December 31, 2005 increasedby 22.7% to $132.5 million from $108.0 million for the year endedDecember 31, 2004, primarily as the result of additional interest expenseincurred in conjunction with additional debt assumed in 2005.

***Equity in net income of associates***

*Consolidatedequity in net income of associates*for the year ended December 31, 2005 increasedto a gain of $42.4 million, compared to a gain of $24.1 million for the yearended December 31, 2004 primarily due to the increase in net income ofassociates and the significant growth in profit of MTS Belarus.

***Other expenses (income), net***

*Consolidatedother expenses (income)*for the year ended December 31, 2005decreased to a loss of $13.2 million, as compared to a gain of $9.3 million forthe year ended December 31, 2004. The main reason for this change relatesto the conversion losses in BCTI in the amount of $6.7 million for the yearended December 31, 2005 and an Uzdunrobita put/call option fair valueaccounting of a $5.2 million gain in the year ended December 31, 2004.

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***Provision for income taxes***

*Consolidatedprovision for income taxes* for the year ended December 31, 2005 increased by 15.8% to $410.6million from $354.7 million for the year ended December 31, 2004. Theeffective tax rate increased to 26.3% in the year ended December 31, 2005from 25.8% in the year ended December 31 2004 mainly as a result of anincrease in foreign currency exchange gains taxable for purposes of ourstatutory accounts and an increase in our non-deductible expenses.

***Minority interest***

*Minorityinterest*for the year ended December 31, 2005 decreasedby $3.4 million to $26.9 million from $30.3 million for the year endedDecember 31, 2004 as a result of purchases of additional stakes fromminority shareholders in regional companies, the major ones being ReCom,Telesot Alania, Uraltel and Sibintertelecom.

***Net income***

*Net income*for the yearended December 31, 2005 increased by $138.5 million, or 14.0%, to $1,126.4million, compared to $987.9 million for the year ended December 31,2004, due to overall growth in our operations and the factors discussed above.Net income as a percentage of revenues was 22.5% in the year endedDecember 31, 2005 and 25.4% in the year ended December 31, 2004. Themain reason for the decrease in net income as a percentage of revenues was therelative increase as a percentage of revenues in costs of services anddepreciation expenses.

In accordance with certain provisions ofthe license agreement with the government of Turkmenistan, we share net profitderived from the operations of the BCTI branch located in Turkmenistan. Theamount of shared net profit is calculated based on the financial statementsprepared in accordance with local GAAP subject to certain adjustments. Weshared 49% of the net profit since the date of acquisition throughDecember 21, 2005, and 20% of the net profit commencing December 21,2005.

**Year EndedDecember 31, 2004 compared to Year Ended December 31, 2003**

***Revenues and cost of services and cost of handsets and accessories***

*Consolidated revenues*for the yearended December 31, 2004 increased by $1,340.8 million, or 52.7%, to$3,887.0 million from $2,546.2 million for the year endedDecember 31, 2003. This increase was primarily due to the significantgrowth in our subscriber base from 16.72 million as of December 31,2003 to 34.22 million as of December 31, 2004. As ofDecember 31, 2003, UMC had 3.35 million subscribers, which grew to7.37 million subscribers as of December 31, 2004. A portion of thegrowth in the subscriber base was due to acquisitions during the year endedDecember 31, 2004, including the two most significant acquisitions ofUzdunrobita with 0.31 million subscribers and Primtelefon with0.2 million subscribers. The growth was also attributable to our sales andmarketing efforts and the expansion of our network, as well as improvinggeneral economic conditions and income levels in Russia and Ukraine. Theincrease in revenues from subscriber growth was partially offset by a decreasein tariffs in the Moscow and other highly competitive license areas, anincrease of mass-market subscribers in our subscriber mix and our continuedexpansion into the regions of Russia outside of the Moscow license area wheretariffs are lower. As a result, average monthly service revenue per subscriberin Russia decreased by 29.4% from $17 per subscriber for the year endedDecember 31, 2003 to $12 for the year ended December 31, 2004.

For the year ended December 31, 2004, service revenues andconnection fees increased by $1,335.2 million, or 54.2%, to$3,800.3 million compared to $2,465.1 million for the year endedDecember 31, 2003 due to the growth in the number of our subscribers, asexplained above. Revenues from the sales of handsets and accessories increasedby $5.6 million, or 6.9%, for the year ended December 31, 2004compared to the year ended December 31, 2003, due to growth in handsetssale activity. This growth was partially offset by a decline in the averageselling price of handsets.

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*Consolidated cost ofservices and cost of handsets and accessories*for the yearended December 31, 2004 increased by 47.6% to $699.7 million from$474.2 million for the year ended December 31, 2003. The increase incosts was primarily attributable to subscriber growth and related growth intraffic related expenses and cost of handsets and accessories sold. For theyear ended December 31, 2004, interconnection and line rental expensesgrew to $352.6 million from $187.3 million for the year endedDecember 31, 2003 and roaming expenses grew to $128.5 million from$113.8 million, respectively. For the year ended December 31, 2004,cost of handsets and accessories sold, including SIM cards provided tocustomers, grew to $218.6 million from $173.1 million for the yearended December 31, 2003.

*Consolidated gross margin*was$3,187.3 million, or 82.0% of consolidated revenues for the year endedDecember 31, 2004, compared to $2,072.0 million, or 81.4% ofconsolidated revenues for the year ended December 31, 2003. This slightincrease in our consolidated gross margin percentage is due to lowerinterconnection and line rental charges payable to other operators for accessto their networks relative to our increasing revenues because, as we haveexpanded our network, more calls are placed and completed solely within our network,thereby avoiding the need to pay such charges to other operators while stillfully earning the related revenues from such calls. We also believe that thisincrease can be explained, in part, by lower costs of leasing telecommunicationlines relative to our increasing revenues as we buildout our own fiber-opticsnetwork in our license areas.

*MTS OJSC revenues*for the yearended December 31, 2004 increased by 44.7% to $2,129.5 million from$1,471.2 million for the year ended December 31, 2003. Our subscriberbase in the MTS OJSC license areas increased by 106.2% from 6.5 million asof December 31, 2003 to 13.4 million as of December 31, 2004.The effect on revenues of the increase in our subscriber base was partiallyoffset by a decrease in the average selling prices of handsets and accessories,a decrease in tariffs in the Moscow license area and an increase of mass-marketsubscribers share in our subscriber mix.

*MTS OJSC cost of servicesand cost of handsets and accessories*for the year ended December 31, 2004increased by 85.7% to $585.1 million from $315.0 million for the yearended December 31, 2003. The growth occurred as a result of$45.6 million and $172.7 million increases in roaming expenses andcost of handsets and accessories, respectively. This was primarily driven by anincrease in the number of subscribers and related growth in roaming traffic andcost of handsets and accessories sold (including SIM cards). Roaming expensesincreased to $172.3 million, or 8.1% of segment revenues, for the year endedDecember 31, 2004 from $126.7 million, or 8.6% of segment revenues,for the year ended December 31, 2003. Cost of handsets and accessoriesincreased to $274.9 million, or 12.9% of segment revenues, for the yearended December 31, 2004 from $102.2 million, or 6.9% of segmentrevenues, for the year ended December 31, 2003.

*MTS OJSC gross margin*increased by33.6% to $1,544.4 million in the year ended December 31, 2004 from$1,156.2 million in the year ended December 31, 2003. MTS OJSC’sgross margin percentage decreased to 72.5% in the year ended December 31,2004 from 78.6% in the year ended December 31, 2003. The main reason forthe decrease in the gross margin by 6.1% was the significant growth in sales ofequipment and handsets from MTS OJSC to subsidiaries. MTS OJSC charges minimalmark-up, ranging from 3% to 10%, on these sales. The effect of thesetransactions is eliminated in the consolidated financial statements.

*UMC revenues*for the yearended December 31, 2004 were $832.3 million, while for the year endedDecember 31, 2003, $394.0 million of UMC’s revenues were consolidated(representing revenues from the date of our acquisition of UMC inMarch 2003 to December 31, 2003). Growth in sales revenues occurredmainly due to an increase in UMC’s subscriber base from 3.4 million as ofDecember 31, 2003 to 7.4 million as of December 31, 2004.

*UMC cost of services andcost of handsets and accessories*for the year ended December 31, 2004and for the period from March 1, 2003 to December 31, 2003 were $221.2 millionand $95.0 million, respectively. The growth occurred primarily due to anincrease of $84.0 million in interconnection and line rental expenses anda $33.9 million increase in cost of handsets and accessories.Interconnection and line rental 

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*expenses increased to $112.8 million, or 13.6%of segment revenues, in the year ended December 31, 2004 from$28.8 million, or 7.3% of segment revenues, in the year endedDecember 31, 2003 mainly due to an increase in the number of base stationsin use and overall growth in traffic on the network. Cost of handsets andaccessories increased to $87.6 million, or 10.5% of segment revenues, inthe year ended December 31, 2004 from $53.8 million, or 13.7% ofsegment revenues, in the year ended December 31, 2003 mainly due to growthin sales of handsets and accessories and an increase in cost for SIM cards usedby new subscribers.*

*UMC gross margin*for the yearended December 31, 2004 grew to $611.1 million from$299.0 million for the period from March 1, 2003 to December 31,2003. As a percentage of total revenues, gross margin decreased to 73.4% in theyear ended December 31, 2004, from 75.9% in the same period in 2003. Thisdecrease in gross margin was mainly due to the introduction inSeptember 2003 of the CPP scheme. Under this scheme, starting fromSeptember 2003, UMC pays termination fees to other mobile operators forcalls initiated by its subscribers. During the year ended December 31,2004, this scheme had a full effect on financial results, while during the sameperiod in 2003, only the months of September through December wereincluded.

*Telecom XXI revenues*for the yearended December 31, 2004 increased by 41.2% to $297.2 million from$210.5 million for the year ended December 31, 2003. Our subscriberbase in the Telecom XXI license areas increased by 58.8% from 1.7 millionas of December 31, 2003 to 2.7 million as of December 31, 2004.The growth in subscribers in percentage terms is higher than the growth inrevenues mainly because the newly acquired subscribers have lower averagemonthly service revenue per subscriber compared to subscribers alreadyconnected to our network. This trend is typical when we seek to expand oursubscriber base in a competitive environment.

*Telecom XXI cost ofservices and cost of handsets and accessories*for the yearended December 31, 2004 increased by 40.8% to $46.9 million from$33.3 million for the year ended December 31, 2003. This wasprimarily due to a $6.4 million increase in roaming expenses.Interconnection and line rental expenses increased to $15.2 million, or5.1% of segment revenues, in the year ended December 31, 2004 from$14.0 million, or 6.7% of segment revenues, in the year endedDecember 31, 2003 mainly due to an increase of the number of base stationsin use and overall growth in traffic on the network. Roaming expenses increasedto $18.9 million, or 6.4% of segment revenues, for the year endedDecember 31, 2004 from $12.5 million, or 5.9% of segment revenues,for the year ended December 31, 2003 mainly due to subscriber growth andrelated traffic expenses.

*Telecom XXI gross margin*increased by41.3% to $250.3 million in the year ended December 31, 2004 from$177.2 million in the year ended December 31, 2003. Telecom XXI grossmargin percentage remained stable at 84.2% during the year endedDecember 31, 2004, as compared to the 84.2% during year endedDecember 31, 2003.

*Kuban-GSM revenues*for the yearended December 31, 2004 increased by 33.8% to $225.4 million from$168.4 million for the year ended December 31, 2003. Our subscriberbase in the Kuban-GSM license area increased by 78.6% from 1.4 million asof December 31, 2003 to 2.5 million as of December 31, 2004. Thegrowth in subscribers in percentage terms is higher than the growth in revenuesmainly because the newly acquired subscribers have lower average monthlyservice revenue per subscriber compared to subscribers already connected to ournetwork. This trend is typical when expanding s subscriber base in acompetitive environment.

*Kuban-GSM cost of servicesand cost of handsets and accessories*for the year ended December 31, 2004increased by 10.0% to $23.0 million from $20.9 million for the yearended December 31, 2003. This was primarily due to a $4.4 millionincrease in interconnection and line rental expenses to $14.2 million, or6.3% of segment revenues, in the year ended December 31, 2004 from$9.8 million, or 5.8% of segment revenues, in the year endedDecember 31, 2003. This increase is mainly due to an increase in thenumber of base stations in use and overall growth in traffic on the network.

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*Kuban-GSM gross margin*increased by37.2% to $202.4 million in the year ended December 31, 2004 from$147.5 million in the year ended December 31, 2003. Kuban-GSM’sgross margin percentage increased to 89.8% in the year ended December 31,2004 from 87.6% in the year ended December 31, 2003 primarily as theresult of continued expansion of the network in 2004 and the related economiesof scale effect.

*Other regions revenues*for the yearended December 31, 2004 increased by 84.0% to $796.3 million from$432.8 million for the year ended December 31, 2003. Our subscriberbase in these regions increased by 107.9% from 3.8 million as ofDecember 31, 2003 to 7.9 million as of December 31, 2004, whichis the result of our expansion into the regions both through organic growth andacquisitions. As of December 31, 2004, we had commenced commercialoperations in 77 regions of Russia, compared to 60 as of December 31,2003. The growth in subscribers in percentage terms is higher than revenuegrowth mainly due to the fact that newly acquired subscribers have loweraverage monthly service revenue per subscriber compared to subscribers alreadyconnected to our network. This is a usual trend for expanding subscribers’ basein the competitive environment.

*Other regions cost ofservices and cost of handsets and accessories*for the yearended December 31, 2004 increased by 56.9% to $189.7 million from$120.9 million for the year ended December 31, 2003. The growthoccurred primarily due to a $37.1 million increase in interconnection andline rental expenses and a $27.6 million increase in cost of handsets andaccessories. Interconnection and line rental expenses increased to$76.6 million, or 9.6% of segment revenues, in the year ended December 31,2004 from $39.5 million, or 9.1% of segment revenues, in the year endedDecember 31, 2003 mainly due to an increase in the number of base stationsin use and overall growth in traffic on the network. Cost of handsets andaccessories increased to $63.6 million, or 8.0% of segment revenues, inthe year ended December 31, 2004 from $36.0 million, or 8.3% ofsegment revenues, in the year ended December 31, 2003 mainly due to agrowth in sales of handsets and accessories and an increase in cost for SIMcards used by new subscribers.

*Other regionsgross margin*increased by $294.7 million, or 94.5%, from$311.9 million in the year ended December 31, 2003 to$606.6 million in the year ended December 31, 2004, primarily due tothe increase in the number of subscribers. Our gross margin percentage for theother regions segment increased to 76.2% in the year ended December 31,2004 from 72.1% in the year ended December 31, 2003, which can beexplained by the same factors discussed above with respect to the increase inthe consolidated gross margin.

***Sundry operating expenses***

*Consolidated sundryoperating expenses*for the year ended December 31, 2004 increasedby 55.3% to $631.5 million from $406.7 million for the year endedDecember 31, 2003. The increase in sundry operating expenses was largelyattributable to a general increase in expenses caused by subscriber growth andthe consolidation of a full year of UMC’s operations, which togethercontributed $88.9 million to consolidated sundry operating expenses for theyear ended December 31, 2004 after intercompany elimination. For the yearended December 31, 2003, only 10 months of UMC’s operations wereconsolidated, contributing $50.2 million to sundry operating expenses inthat period. In the year ended December 31, 2004, salary expenses andrelated social contributions increased by $100.2 million due to anincrease in personnel. In addition, network repair and maintenance expensesincreased by $42.1 million in the year ended December 31, 2004 due tothe expansion and aging of our network, as compared to the same period in 2003.Generally, sundry operating expenses as a percentage of net revenues slightlyincreased to 16.2% for the year ended December 31, 2004 from 16.0% in theyear ended December 31, 2003.

*MTS OJSC sundry operatingexpenses*for the year ended December 31, 2004 increasedby 35.7% to $327.1 million from $241.1 million for the year endedDecember 31, 2003. The major reason for this growth was an increase insalaries, bonuses and related social contributions for additional personnel of 

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*$56.5 million. Sundry operating expenses as apercentage of segment revenues decreased to 15.4% for the year endedDecember 31, 2004 from 16.4% for the year ended December 31, 2003.This decrease was mainly attributable to economies of scale with respect to anincrease in our overall volume of operations and a reduction in the bad debtprovision expense from $28.6 million for 2003, or 1.9% of segmentrevenues, to $12.4 million for 2004, or 0.6% of segment revenues. The higherexpense in 2003 was related to the dealer and subscriber fraud discovered inMarch 2003, as discussed above.*

*UMC sundry operatingexpenses*for the year ended December 31, 2004 were$88.9 million, or 10.7% of segment revenues, while for the year ended December 31,2003, these expenses were $50.2 million, or 12.7% of segment revenues. Theincrease in such expenses in absolute terms during 2004 was the result of anoverall increase in UMC’s activity. The main reason for the decrease in sundryoperating expenses as a percentage of segment revenues was the economies ofscale we achieved related mainly to rent and maintenance expenses.

*Telecom XXI sundryoperating expenses*for the year ended December 31, 2004 increasedby 63.0% to $45.8 million from $28.1 million for the year endedDecember 31, 2003. The most significant increases were in the areas ofsalaries and related social contributions for additional personnel of$4.9 million, repair and maintenance of $3.3 million and billing andprocessing expenses of $3.5 million. The increases were primarily theresult of the general expansion of our network in the region. Sundry operatingexpenses as a percentage of segment revenues increased to 15.4% for the yearended December 31, 2004, as compared to 13.3% for the year endedDecember 31, 2003. The main reason for this increase was one-off repairexpenses incurred during the year ended December 31, 2004.

*Kuban-GSM sundry operatingexpenses*for the year ended December 31, 2004 increasedby 46.1% to $37.1 million from $25.4 million for the year endedDecember 31, 2003. The most significant increases were in the areas ofsalaries and related social contributions for additional personnel of$3.6 million and repair and maintenance of $8.2 million. Theincreases were primarily the result of the general expansion of our network inthe region. Sundry operating expenses as a percentage of segment revenuesslightly increased to 16.5% for the year ended December 31, 2004, ascompared to 15.1% for the year ended December 31, 2003.

*Other regionssundry operating expenses*for the year ended December 31, 2004increased by 127.0% to $142.3 million from $62.7 million for the yearended December 31, 2003. The most significant increases were in the areasof salaries and related social contributions for additional personnel of$27.3 million and administrative expenses of $11.4 million foradditional offices and expanded operations. Sundry operating expenses as apercentage of segment revenues increased to 17.9% for the year endedDecember 31, 2004, as compared to 14.5% for the year endedDecember 31, 2003 mainly due to start-up expenses in connection with ourcontinuing expansion into the regions.

***Sales and marketing expenses***

*Consolidated sales andmarketing expenses*for the year ended December 31, 2004 increasedby 41.1% to $461.0 million from $326.8 million for the year endedDecember 31, 2003. The increase in sales and marketing expenses waslargely related to our strategy to develop our subscriber base through organicgrowth. The components of growth in sales and marketing expenses were anincrease of $77.2 million in commissions to dealers and an increase of$57.0 million in advertising and promotion expenses. The increase incommissions to dealers was primarily due to an increase in the volume of salesthrough dealers. The increase in advertising and promotion expenses related toincreased overall marketing efforts and relatively higher costs of televisioncommercials. Sales and marketing expenses as a percentage of net revenuesdecreased to 11.9% for the year ended December 31, 2004 from 12.8% for theyear ended December 31, 2003. The main reason for this decrease was theintroduction in Russia of the new dealer commission scheme in 2004 describedabove, which resulted in a decrease in dealers’ commissions as a percentage ofrevenues from 8.8% to 7.8%.

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*MTS OJSC sales andmarketing expenses*for the year ended December 31, 2004 increasedby 28.2% to $240.1 million from $187.3 million for the year endedDecember 31, 2003. Sales and marketing expenses as a percentage of segmentrevenues decreased to 11.3% for the year ended December 31, 2004 from12.7% for the year ended December 31, 2003. MTS OJSC has traditionallyincurred consolidated costs of national TV advertising campaigns, which have experiencedsignificant inflation in the last few years. MTS does not allocate a portion ofthese advertising costs to Telecom XXI, Kuban-GSM and other regions segmentseven though sales in these regions benefit from this national advertising. Themain reason for the decrease in sales and marketing expenses as a percentage ofsegment revenues was the introduction of the new dealer commission scheme in2004, which resulted in a decrease in dealers’ commissions as a percentage ofrevenues from 8.5% to 6.9%.

*UMC sales and marketingexpenses*for the year ended December 31, 2004 were$79.4 million, or 9.5% of segment revenues, while for the year endedDecember 31, 2003, these expenses were $50.8 million, or 12.9% ofsegment revenues. Absolute growth in these expenses for the year endedDecember 31, 2004 occurred due to overall growth in UMC’s activity. Thedecrease in sales and marketing expenses as a percentage of segment revenueswas caused by two factors: a decrease in advertising and promotion expenses from4.6% to 3.6% of segment revenues due to extensive advertising campaignsorganized in the third quarter of 2003 related to the Jeans tariff launch and adecrease in dealers’ commissions from 8.3% to 5.9% of segment revenues due to achange in the commission scheme in December 2003 (commission is calculatedbased on revenue received from subscribers contracted by the dealer).

*Telecom XXI sales andmarketing expenses*for the year ended December 31, 2004 increasedby 33.5% to $42.2 million from $31.6 million for the year endedDecember 31, 2003, as a result of the expansion of the operations intoregions other than St. Petersburg and an increase in dealers’ commissions dueto general growth in sales volume through dealers. Sales and marketing expensesas a percentage of segment revenues decreased to 14.2% for the year endedDecember 31, 2004 from 15.0% for the year ended December 31, 2003.The main reason for this decrease was a decrease of dealers’ commissions as apercentage of segment revenues from 11.5% to 11.0% for the year endedDecember 31, 2003 and 2004, respectively, which was primarily due to theintroduction in the third quarter of 2003 of our Jeans tariff in the region,which became popular and has lower commission fees than our contract tariff plans.

*Kuban-GSM sales andmarketing expenses*for the year ended December 31, 2004 increasedby 48.0% to $22.5 million from $15.2 million for the year endedDecember 31, 2003, as a result of an increase in dealers’ commissions dueto a general increase in sales volume through dealers. Sales and marketingexpenses as a percentage of segment revenues increased to 10.0% for the yearended December 31, 2004 from 9.0% for the year ended December 31,2003. The main reason for this growth was an increase of dealers’ commissionsas a percentage of segment revenues to 8.7% for the year endedDecember 31, 2004 from 8.0% for the year ended December 31, 2003.

*Other regionssales and marketing expenses*for the year ended December 31, 2004increased by 98.8% to $86.3 million from $43.4 million for the yearended December 31, 2003, as a result of our expansion of the regionaloperations. Sales and marketing expenses as a percentage of segment revenuesincreased to 10.8% for the year ended December 31, 2004 from 10.0% for theyear ended December 31, 2003. The main reasons for this increase were thegrowth in advertising expenses (in order to promote our services in the regionsand continue our regional expansion) and dealers’ commissions caused byincreases in our subscriber base.

***Depreciation and amortization expenses***

*Consolidated depreciationand amortization*of property, network equipment, telephone numberingcapacity, license costs and other intangible assets for the year endedDecember 31, 2004 increased by 62.5% to $675.7 million from$415.9 million for the year ended December 31, 2003. Depreciation andamortization expenses as a percentage of net revenues slightly increased to17.4% for the year ended December 31, 2004 from 16.3% for the year endedDecember 31, 2003. This increase was mainly due to a 

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*change of accounting policy with respect to thedepreciation period for the cost of leasehold improvements related to basestation sites that went into effect in 2004. The depreciation period wasaccelerated and as a result, an additional depreciation expense ofapproximately $27.7 million was recognized in 2004, but not in priorperiods.*

*MTS OJSC depreciation andamortization*for the year ended December 31, 2004 increasedby 26.8% to $253.5 million from $199.9 million for the year endedDecember 31, 2003, but declined as a percentage of segment revenues to11.9% for the year ended December 31, 2004 from 13.6% for the year endedDecember 31, 2003 mainly due to expansion of our subscriber base in ourexisting network, which was partially offset by the effect of accelerateddepreciation.

*UMC depreciation andamortization*for the year ended December 31, 2004 was$124.9 million, or 15.0% of segment revenues, while for the year endedDecember 31, 2003 depreciation and amortization was $66.4 million, or16.9% of segment revenues. Absolute growth in depreciation and amortizationexpense was mainly due to the continued buildout of UMC’s network in Ukraine.The decrease in depreciation and amortization expense as a percentage ofsegment revenues was mainly due to the effect of economies of scale, which waspartly offset by the effect of accelerated depreciation.

*Telecom XXI depreciationand amortization*for the year ended December 31, 2004 increasedby 55.7% to $57.3 million from $36.8 million for the year endedDecember 31, 2003 and slightly increased as a percentage of segmentrevenues to 19.3% from 17.5%. This increase was mainly the result of theacceleration of the depreciation period for leasehold improvements on the basestation sites.

*Kuban-GSM depreciation andamortization*for the year ended December 31, 2004 increasedby 110.8% to $68.1 million from $32.3 million for the year endedDecember 31, 2003 and increased as a percentage of segment revenues to30.2% from 19.2% mainly due to significant investments in our network and anadditional depreciation expense recognized in 2004 for leasehold improvements.

*Other regionsdepreciation and amortization*for the year ended December 31, 2004increased by 113.1% to $175.2 million from $82.2 million for the yearended December 31, 2003 and increased as a percentage of segment revenuesto 22.0% from 19.0%. The increase in the depreciation and amortization expensewas driven primarily by two factors: the continued buildout of our network inthe regions and assets acquired through acquisitions.

***Operating Income***

*Consolidated operatingincome*for the year ended December 31, 2004 increasedby 53.8% to $1,419.1 million, including $317.9 million of UMC’sresults after intercompany elimination for the year ending December 31,2004 from $922.6 million for the year ended December 31, 2003, ofwhich $131.7 million was contributed by UMC. Operating income as apercentage of net revenues was relatively stable at 36.5% for the year endedDecember 31, 2004 and 36.2% for the year ended December 31, 2003.

*MTS OJSC operating income*for the yearended December 31, 2004 increased by 37.9% to $728.1 million from$527.8 million for the year ended December 31, 2003 and remainedrelatively stable as a percentage of segment revenues at 34.2% for the yearended December 31, 2004, as compared to 35.9% for the year endedDecember 31, 2003.

*UMC operating income*for the yearended December 31, 2004 was $317.9 million, or 38.2% of segmentrevenues, while for the year ended December 31, 2003 operating income was$131.7 million, or 33.4% of segment revenues. Absolute growth in operatingincome primarily was the result of the overall growth in UMC’s subscriber baseand the continued buildout of its network. In addition, for the year ended December 31,2003, only 10 months of UMC’s operations were consolidated into ourresults, as we did not acquire a controlling stake in UMC untilMarch 2003. Growth in operating income as a percentage of segment revenuesoccurred mainly due to a decrease in expenses realized through economies ofscale and the growth in UMC’s subscriber base.

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*Telecom XXIoperating income*for the year ended December 31, 2004 increasedby 30.1% to $104.9 million, or 35.3% of segment revenues, from$80.6 million, or 38.3% of segment revenues, for the year ended December 31,2003. The main reason for the decrease in operating income as a percentage ofsegment revenues was the additional depreciation expense incurred as a resultof accelerated depreciation for leasehold improvements.

*Kuban-GSMoperating income*for the year ended December 31, 2004 remainedstable at $74.6 million, or 33.1% of segment revenues, and$74.6 million, or 44.3% of segment revenues, for the year ended December 31,2003. The main reason for the decrease of operating income as a percentage ofsegment revenues was the additional depreciation expense incurred as a resultof accelerated depreciation for leasehold improvements.

*Other regions operating income*for the yearended December 31, 2004 increased by 60.5% to $198.4 million, or24.9% of segment revenues, from $123.6 million, or 28.6% of segmentrevenues, for the year ended December 31, 2003. The main reason for thedecrease in operating income as a percentage of segment revenues was theadditional depreciation expense incurred as a result of accelerateddepreciation for leasehold improvements.

***Currency exchange and transaction gain***

*Consolidated currency exchange and transaction gain*for the yearended December 31, 2004 was $6.5 million, compared to$0.7 million for the year ended December 31, 2003. We conduct ouroperations primarily within the Russian Federation and Ukraine. We are subjectto currency fluctuations, including U.S. dollar versus ruble/hryvnia and U.S.dollar versus euro. See “Item 3. Key Information—D. Risk Factors—Risks Relatingto Our Financial Condition—Continued or increased limitations on the conversionof rubles to foreign currency in Russia could increase our costs when makingpayments in foreign currency to suppliers and creditors and could cause us todefault on our obligations to them.” and “Item 11. Quantitative and QualitativeDisclosures about Market Risk—Foreign Currency Risk.”

***Interest expense***

*Consolidated interest expense*for the yearended December 31, 2004 increased by 1.3% to $108.0 million from$106.6 million for the year ended December 31, 2003, primarily as theresult of additional interest expense incurred in conjunction with our$300.0 million notes issued in August 2003 and $400.0 millionnotes issued in October 2003.

***Other income***

*Consolidated other expenses (income)*for the yearended December 31, 2004 increased to a gain of $33.5 million from aloss of $3.4 million incurred for the year ended December 31, 2003.The main reason for this change relates to the significant growth inprofitability of MTS Belarus. During the year ended December 31, 2003,$1.5 million of MTS Belarus’ loss was included in our results, while forthe year ended December 31, 2004, $23.2 million of income wasincluded in our results.

***Provision for income taxes***

*Consolidated provision for income taxes*for the yearended December 31, 2004 increased by 46.3% to $354.7 million from$242.5 million for the year ended December 31, 2003. The effectivetax rate decreased to 25.8% in the year ended December 31, 2004 from 29.2%in the year ended December 31 2003 mainly as a result of an increase in deductibleforeign currency exchange losses for purposes of our statutory accounts and adecrease in the statutory tax rate in Ukraine from 30% in 2003 to 25% in 2004.

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***Minority interest***

*Minority interest*for the yearended December 31, 2004 decreased by $41.4 million to$30.3 million from $71.7 million for the year ended December 31,2003 as a result of purchases of additional stakes from minority shareholdersin regional companies, the major ones being FECS-900, Uraltel, TAIFTelcom and SCS-900.

***Net income***

*Net income*for the year ended December 31, 2004increased by $470.7 million, or 91.0%, to $987.9 million, compared to$517.2 million for the year ended December 31, 2003, due to overallgrowth in our operations and the factors discussed above. Net income as apercentage of revenues was 25.4% in the year ended December 31, 2004 and20.3% in the year ended December 31, 2003. The main reasons for theincrease in net income as a percentage of revenues were the relative decreaseas a percentage of revenues in sales and marketing expenses and costs ofservices, handsets and accessories and an increase in the profitability of MTSBelarus.

**Liquidityand Capital Resources**

In July 2000,we completed our initial public offering of American Depositary Shares on theNew York Stock Exchange. The proceeds from the offering, net of underwritingdiscount, were $349 million. Since that time, we have accessed theinternational capital markets through the sale of unsecured notes six times inan aggregate principal amount of $1.8 billion. In July 2004, asyndicate of international banks made available to us an unsecured loanfacility in an aggregate amount of $500.0 million, which is payable inthree years. In September 2004, this syndicated loan facility wasincreased to $600.0 million, of which $460.0 million remained outstandingas of December 31, 2005 but was paid off in 2006. During 2005, we enteredinto a number of loan agreements for a total amount of $430.5 million in orderto finance purchases of telecommunications equipment from Motorola, Ericsson,Alcatel and Siemens. In addition, in November 2005, we entered into a$150.0 million credit facility with ING Bank B.V., and, in December 2005,UMC entered into a loan facility agreement in the amount of $200.0 million. Asof December 31, 2005, we had indebtedness of approximately $2,850.6million, of which $5.7 million was capital lease obligations. See Note 11to our audited consolidated financial statements for a description of ourindebtedness. On April 21, 2006, we entered into a syndicated loanfacility with several international financial institutions, including: The Bank of Tokyo-Mitsubishi UFJ, Ltd.,Bayerische Landesbank, HSBC Bank plc, ING Bank N.V., Raiffeisen BankOesterreich AG, Sumitomo Mitsui Banking Corporation Europe Limited. Thefacility allows us to borrow up to $1,330.0 million and is available in twotranches of $630.0 million and $700.0 million. We expect to use the proceedsfor general corporate purposes, including acquisitions and refinancing ofexisting indebtedness.

**CapitalRequirements**

We needcapital to finance the following:

·       capitalexpenditures, consisting of purchases of property, plant and equipment andintangible assets;

·       acquisitions;

·       repaymentof debt;

·       changes inworking capital; and

·       generalcorporate activities, including dividends.

We anticipate that capital expenditures,acquisitions, repayment of long-term debt and dividends will represent the mostsignificant uses of funds for several years to come.

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Our cash outlays for capital expendituresin 2003, 2004 and 2005 were $958.8 million, $1,358.9 million and$2,181.3 million, respectively. We expect to continue to finance most ofour capital expenditure needs through our operating cash flows, and to theextent required, to incur additional indebtedness through borrowings oradditional capital raising activities. Historically, a significant portion ofour capital expenditures have been related to the installation and buildout ofour GSM network and expansion into new license areas. We expect that capitalexpenditures will remain a large portion of our cash outflows in connectionwith the continued installation and buildout of our network. We expect ourcapital expenditures in 2006 to be approximately $1,800 million. Theseinvestments are required to support the growth in our subscriber base (*i.e.,* to improve network capacity) and todevelop our network in the new regions for which we received licenses. Ouractual capital expenditures may vary significantly from our estimates.

In addition to capital expenditures, wespent $667.2 million, $355.7 million and $178.9 million in 2003,2004 and 2005, respectively, to acquire businesses. We may continue to expandour business through acquisitions. Our cash requirement relating to potentialacquisitions can vary significantly based on market opportunities.

We expect to refinance our existing debtwhen it becomes due. Our outstanding notes are due between the years of 2008and 2012, and our current debt comprises a $280.0 million syndicated loan, a$200.0 million loan facility owed by UMC and a $150.0 million bank loan enteredinto with ING Bank B.V. The syndicated loan facility agreement signed in April 2006allows us to borrow up to $1,330.0million and is available in two tranches. Under the first tranche, we havedrawn a total amount of $630.0 million in May and June 2006. Weexpect to use the proceeds for general corporate purposes and refinancing ourexisting indebtedness.

Sistema, which controls 52.8% of ouroutstanding shares and consolidates our results in its financial statements,has a significant amount of outstanding debt and requires funds for debtservice. These funds may come, in part, from dividends paid by itssubsidiaries, including us. On June 30, 2003, our shareholders approvedcash dividends totaling $111.4 million (including dividends on treasuryshares of $0.4 million), which have been fully paid. On June 26,2004, our shareholders approved cash dividends in the amount of$219.9 million (including dividends on treasury shares of $1.1 million),which have also been fully paid. On June 21, 2005, our shareholdersapproved cash dividends in the amount $402.6 million (including dividendson treasury shares of $1.5 million), which have also been fully paid. In June 2006,our shareholders approved annual cash dividends in the amount of $561.6 million(including dividends on treasury shares of $1.5 million) for the year2005, payable in 2006. We generally intend to finance our dividend requirementsthrough operating cash flows, and accordingly, our payment of dividends maymake us more reliant on external sources of capital to finance our capitalexpenditures and acquisitions.

We expect that we will continue to incurcertain expenditures and devote significant management resources in relation toour system of internal controls to ensure our compliance with Section 404of the Sarbanes-Oxley Act of 2002. See “Item 3. Key Information—D. Risk Factors—RisksRelating to Our Business—To comply with the requirements of Section 404 of the Sarbanes-OxleyAct of 2002, we will have to divert significant moneys and resources, includingsenior management time, from our operating businesses, which could materiallyadversely affect our business, results of operations and prospects.”

In addition, weare in the process of implementing an enterprise resource planning system thatwill require additional expenditures and devotion of significant managementresources.

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**CapitalResources**

We planto finance our capital requirements through a mix of operating cash flows andfinancing activities, as described above. Our major sources of cash have beencash provided by operations and the proceeds of our U.S. dollar-denominatednotes issuances and loans. We expect that these sources will continue to be ourprincipal sources of cash in the future.

The availability of financing is influencedby many factors, including our profitability, operating cash flows, debtlevels, credit ratings, contractual restrictions and market conditions. Wecannot assure you that we will be able to continue to obtain large amounts offinancing in the future, through note offerings or otherwise.

At December 31, 2005, our indebtedness was comprised of thefollowing:
| Indebtedness                                                            | ** ** | ** ** | ** ** | **Currency** | ** **                                  | **Annual interest rate  (Actual rate at December 31, 2005)** | ** ** | **Amount  (in thousands)** | ** **         |
|-------------------------------------------------------------------------|------------|------------|------------|--------------|---------------------------------------------|-------------------------------------------------------------------------------------------------|------------|---------------------------------|--------------------|
| 9.75%  notes due 2008                                                   |       | USD        |       |         | 9.75%                                       |                                                                                            |       |                            | $400,000           |   |   |
| 8.38%  notes due 2010                                                   |       | USD        |       |         | 8.38%                                       |                                                                                            |       |                            | 400,000            |   |   |
| 8.00%  notes due 2012                                                   |       | USD        |       |         | 8.00%                                       |                                                                                            |       |                            | 399,052            |   |   |
| Syndicated  loan                                                        |       | USD        |       |         | LIBOR+2.50%  (7.20%)                        |                                                                                            |       |                            | 460,000            |   |   |
| Citibank  N.A., ING Bank N.V. and Raiffeisen AG                         |       | USD        |       |         | LIBOR+0.75%-2.25%  (5.29%-6.79%)            |                                                                                            |       |                            | 200,000            |   |   |
| HSBC  Bank plc and ING BHF-Bank AG                                      |       | USD        |       |         | LIBOR+0.43%  (5.13%)                        |                                                                                            |       |                            | 171,816            |   |   |
| ING  Bank N.V.                                                          |       | USD        |       |         | LIBOR+0.75%  (5.14%)                        |                                                                                            |       |                            | 150,000            |   |   |
| Citibank  International plc and ING Bank N.V.                           |       | USD        |       |         | LIBOR+0.30%  (5.00%)                        |                                                                                            |       |                            | 111,009            |   |   |
| EBRD                                                                    |       | USD        |       |         | LIBOR+3.10%  (7.80%)                        |                                                                                            |       |                            | 138,462            |   |   |
| Commerzbank AG, ING Bank AG and HSBC   Bank plc                         |       | USD        |       |         | LIBOR+0.30%  (5.00%)                        |                                                                                            |       |                            | 92,826             |   |   |
| ABN  AMRO N.V.                                                          |       | USD/EUR    |       |         | LIBOR+0.35%  (5.05%)  EURIBOR+0.35% (2.99%) |                                                                                            |       |                            | 83,179             |   |   |
| Barclays  Bank plc                                                      |       | USD        |       |         | LIBOR+0.13%-0.15%  (4.83%-4.85%)            |                                                                                            |       |                            | 80,086             |   |   |
| HSBC Bank plc, ING Bank AG and Bayerische  Landesbank    |       | USD        |       |         | LIBOR+0.30%  (5.00%)                        |                                                                                            |       |                            | 63,338             |   |   |
| ING BHF  Bank and Commerzbank AG                                        |       | EUR        |       |         | EURIBOR+0.65%  (3.29%)                      |                                                                                            |       |                            | 43,168             |   |   |
| ING  Bank (Eurasia)                                                     |       | USD        |       |         | LIBOR+2.25%-4.15%  (6.79%-8.69%)            |                                                                                            |       |                            | 20,000             |   |   |
| Commerzbank  Belgium S.A./N.V.                                          |       | USD        |       |         | LIBOR+0.40%  (5.10%)                        |                                                                                            |       |                            | 13,314             |   |   |
| HSBC                                                                    |       | USD        |       |         | LIBOR+2.75%  (7.23%)                        |                                                                                            |       |                            | 7,500              |   |   |
| West LB                                                                 |       | EUR        |       |         | EURIBOR+2.00%  (4.64%)                      |                                                                                            |       |                            | 4,000              |   |   |
| Nordea  Bank Sweden                                                     |       | USD        |       |         | LIBOR+0.40%  (5.10%)                        |                                                                                            |       |                            | 3,249              |   |   |
| Ericsson                                                                |       | USD        |       |         | LIBOR+4.00%  (8.54%)                        |                                                                                            |       |                            | 3,150              |   |   |
| Other  ruble-denominated debt                                           |       | RUR        |       |         | —                                      |                                                                                            |       |                            | 687                |   |   |
| **Total  debt**                                                         | ** ** | ** ** | ** ** |         |                                        |                                                                                            | ** ** | ** **                      | **$****1,645,784** |   |   |
| **Less  current portion**                                               | ** ** | ** ** | ** ** |         |                                        |                                                                                            | ** ** | ** **                      | **$****765,881**   |   |   |
| **Total long-term  debt**                                               | ** ** | ** ** | ** ** |         |                                        |                                                                                            | ** ** | ** **                      | **$****879,903**   |   |   |

 

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The following tablepresents aggregate scheduled maturities of debt principal outstanding as of December 31,2005:
|                                                   | ** ** | **Amount**              | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **(in thousands)** | ** ** |
| Payments due  in the year ended December 31, | ** ** |                    | ** ** | ** ** |   |
| 2006                                              |       |                    | $765,881   | ** ** |   |
| 2007                                              |       |                    | 290,815    | ** ** |   |
| 2008                                              |       |                    | 510,693    | ** ** |   |
| 2009                                              |       |                    | 104,526    | ** ** |   |
| 2010                                              |       |                    | 498,359    | ** ** |   |
| Thereafter                                        |       |                    | 674,562    | ** ** |   |
|                                              |       |                    | $2,844,836 | ** ** |   |

 

In addition, we had capital leaseobligations in the amount of $5.7 million and $12.5 million as of December 31,2005 and December 31, 2004, respectively. The terms of our material debtobligations and capital lease obligations are described in Notes 11 and 12,respectively, to our audited consolidated financial statements.

Our ability to incur furtherindebtedness is limited by the covenants in our outstanding notes, including adebt/cash flow incurrence test and restrictions on our ability to grant lienson our properties and to enter into sale and lease-back transactions. Oursyndicated loan facility contains similar and other covenants, includingdebt/EBITDA and EBITDA/interest expense maintenance covenants. In addition,Sistema, which controls 52.8% of our outstanding shares and consolidates ourresults in its financial statements, is subject to various covenants in theindentures relating to its notes in the aggregate principal amount of$700 million, which impose restrictions on Sistema and its restrictedsubsidiaries, including us, with respect to, among others, incurrence ofindebtedness and liens. See “Item 3. Key Information—D. Risk Factors—RisksRelating to Our Financial Condition—Indentures relating to our notes and ourcontrolling shareholder Sistema’s notes contain, and some of our loanagreements contain, restrictive covenants, which limit our ability to incurdebt and to engage in various activities.”

A summary of our cashflows and cash outlays for capital expenditures and acquisitions ofsubsidiaries follows:
|                                                    | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(in thousands)**                    | ** ** |
| **Cash flows:**                                    |       |                                       |       |   |   |   |   |
| Net  cash provided by operating activities         |       | $965,984                                   |       | $1,711,589 |   | $1,797,380 |   |
| Net  cash used in investing activities             |       | (1,910,087                                 | )          | (1,543,201 | ) | (2,452,117 | ) |
| Net  cash provided by financing activities         |       | 997,545                                    |       | 10,773 |   | 461,528 |   |
| Net  increase/(decrease) in cash                   |       | $55,715                                    |       | $183,774 |   | $(195,866 | ) |
| **Cash outlays for:**                              |       |                                       |       |   |   |   |   |
| Capital  expenditures(1)                           |       | $(958,771                                  | )          | $(1,358,944 | ) | $(2,181,347 | ) |
| Acquisition  of subsidiaries, net of cash acquired |       | $(667,206                                  | )          | $(355,744 | ) | $(178,917 | ) |

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(1)                Includes acquisitions of property, plant and equipment andintangible assets.

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For the year ended December 31, 2005,net cash provided by operating activities was $1,797.4 million, anincrease of 5.0% from the year ended December 31, 2004. This increase wasprimarily attributable to a growth in net revenues due to an increase in our subscriberbase.

Net cash used in investing activities inthe year ended December 31, 2005, was $2,452.1 million, an increaseof 58.9% from the year ended December 31, 2004. This increase is mainlythe result of two factors: an increase in cash spent on the acquisition ofproperty, plant and equipment and intangible assets from $1,358.9 millionfor the year ended December 31, 2004 to $2,181.3 million for the yearended December 31, 2005, and decreased net cash inflow from disposals ofshort-term investments in the amount of $171.9 million during the yearended December 31, 2005.

Net cash provided by financing activitiesin the year ended December 31, 2005, was $461.5 million. We paiddividends in the total amount of $407.2 million during the year ended December 31,2005, which also included dividends paid to minority shareholders of certain ofour subsidiaries. These outflows were offset by net proceeds from notesissuance in the amount of $398.9 million and $462.0 million in net cash inflowfrom new bank loans, which were partly offset by debt issuance costs and therepayment of existing debt.

For the year ended December 31, 2004,net cash provided by operating activities was $1,711.6 million, anincrease of 77.2% from the year ended December 31, 2003. This increase wasprimarily attributable to a growth in net revenues from subscribers, which wascaused by an increase in our subscriber base.

Net cash used in investing activities inthe year ended December 31, 2004, was $1,543.2 million, a decrease of19.2% from the year ended December 31, 2003. This decrease is the resultof several factors, including a decrease in cash spent for the businessacquisitions from $667.2 million in the year ended December 31, 2003,to $355.7 million in the year ended December 31, 2004, and net cashinflow resulting from disposals of short-term investments, *i.e.,* matured bank deposits of$171.9 million during the year ended December 31, 2004. These factorswere partially offset by an increase in cash spent on acquisition of property,plant and equipment and intangible assets from $958.8 million for the yearended December 31, 2003 to $1,358.9 million for 2004.

Net cash provided by financing activitiesin the year ended December 31, 2004, was $10.8 million. In May 2004,we retired $300.0 million in principal amount of our Floating Rate Notesdue 2004 from the proceeds of a $200.0 million short-term bridge loan andour operating cash flows. We paid dividends in the total amount of$232.7 million during the year ended December 31, 2004, which alsoincluded dividends paid to minority shareholders of certain of oursubsidiaries. These outflows were offset by net proceeds from the new loans,reduced by repayments of $857.1 million.

In 2003, net cash provided by operatingactivities was $966.0 million, an increase of 134.0% from the year ended December 31,2002. The increase was primarily attributable to an increase in net revenuesfrom subscribers, which was a result of an increase in our subscriber base.

Net cash used in investing activities in2003 was $1,910.1 million, of which $958.8 million related to thepurchase of property, plant and equipment and intangible assets;$330.6 million were used to acquire the 100.0% stake in UMC;$107.0 million were used to acquire the 47.3% stake in Kuban-GSM in orderto obtain 100.0% control over it; $62.9 million were used to acquire 52.7%of the common shares and 50% of the preferred shares of TAIF Telcom;$47.0 million were used to acquire the 100.0% stake in Sibchallenge; and$188.7 million were used for other acquisitions of stakes in regionaloperators and advances to our affiliates, primarily to MTS Belarus. See “Item4. Information on Our Company—B. Business Overview,” “Item 5. Operating andFinancial Review and Prospects—Acquisitions” and “Item 4. Information on OurCompany—A. History and Development—Expansion.” We financed our acquisitions ofUMC, Kuban-GSM, TAIF Telcom and other regional operators primarily from theproceeds of $400 million of 9.75% notes due 2008 (issued in January 2003),$300 million of Floating Rate Notes due 2004 (issued in August 2003)and $400 million of 8.375% notes due 2010 (issued in October 2003).

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Net cashprovided by financing activities in 2003 was $997.5 million. Net proceedsfrom the notes offerings during 2003 were $1,087.4 million, which wereused, in addition to the acquisitions listed above, for the purchase of networkequipment and intangible assets and advances to affiliates. We paid dividendsin the total amount of $110.9 million during 2003, which also includeddividends paid to minority shareholders of certain of our subsidiaries.

**Liquidity**

As of December 31, 2005 and 2004, wehad total cash and cash equivalents of $78.3 million ($52.9 millionin rubles, $5.4 million in U.S. dollars, $4.5 million in Ukrainian hryvniasand $15.5 million in other currencies) and $274.2 million($93.1 million in rubles, $152.5 million in U.S. dollars,$10.2 million in Ukrainian hryvnias and $18.4 million in othercurrencies), respectively. In addition, as of December 31, 2005, we hadshort-term investments of $28.1 million mostly in U.S. dollar-denominatedinstruments at the Moscow Bank of Reconstruction and Development (MBRD), arelated party. As of December 31, 2005, we had unused availability underour credit facilities to draw another $153.6 million.

For details of external financing seeNote 11 to our audited consolidated financial statements. For subsequentevents related to our external financing, see Note 24 to our auditedconsolidated financial statements.

As of December 31, 2005, we had aworking capital deficit of $631.6 million compared to a deficit of$189.0 million as of December 31, 2004. The increase in workingcapital deficit was primarily attributable to a $692.9 increase in currentliabilities, including a $395.0 million increase in the current portion of ourdebt. An increase in current trade payables and accruals in the amount of$216.8 million was offset by increased prepaid expenses and inventories as of December 31,2005.

As of December 31, 2004, we had aworking capital deficit of $189.0 million compared to a deficit of$457.5 million as of December 31, 2003. The decrease in workingcapital deficit was primarily attributable to the growth in the balance oftotal current assets as of December 31, 2004, compared to December 31,2003 by $200.5 million. This growth was primarily attributable to anincrease in the trade receivables balance by $62.5 million and an increasein the VAT receivables balance by $62.9 million. Repayment of our$300 million floating rate notes in May 2004 and repayment of the$300 million 10.95% notes in December 2004, included in currentliabilities as of December 31, 2003, was offset by a $117.1 millionincrease in subscriber prepayments and a $267.5 million increase in thecurrent portion of our debt. As a result, the change in the current liabilitiesbalance as of December 31, 2004 compared to the balance as of December 31,2003 was not significant.

We expect to repay all long-term debts asthey become due from our operating cash flows or through re-financings. Webelieve that our working capital together with our plans for external financingwill provide us with sufficient funds for our present and future requirements.

Because most ofour operating subsidiaries are incorporated in Russia, their ability to paydividends to us is limited by provisions of Russian law. For example, Russianlaw requires that, among other things, dividends can only be paid in an amountnot exceeding net profits as determined under Russian accounting standards, denominatedin rubles, after certain deductions. In addition, dividends may only be paid ifthe value of the company’s net assets is not less than the sum of the company’scharter capital, the company’s reserve fund and the difference between theliquidation value and the par value of the issued and outstanding preferredstock of the company, if any, as determined under Russian accounting standards.Our net income for the years ended December 31, 2005, 2004 and 2003 thatwas distributable under Russian legislation amounted to $444.4 million, $527.9million and $437.4 million, respectively.

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**Inflation**

The Russian economy has been characterized by high rates of inflation:
| Year | ** ** | ** ** | ** ** | **Inflation rate** | ** ** |
|------|------------|------------|------------|-------------------------|------------|
| 2001 |       |       | 18.6       | %                       |       |
| 2002 |       |       | 15.1       | %                       |       |
| 2003 |       |       | 12.0       | %                       |       |
| 2004 |       |       | 11.7       | %                       |       |
| 2005 |       |       | 10.9       | %                       |       |

 

The Ukrainian economy has been characterized by varying rates ofinflation:
| Year | ** ** | ** ** | ** ** | **Inflation rate** | ** ** |
|------|------------|------------|------------|-------------------------|------------|
| 2001 |       |       | 6.1        | %                       |       |
| 2002 |       |       | (0.6       | )%                      |       |
| 2003 |       |       | 8.2        | %                       |       |
| 2004 |       |       | 12.3       | %                       |       |
| 2005 |       |       | 10.3       | %                       |       |

 

In most of theregions in which we operate, except for Ukraine (UMC), Turkmenistan (BCTI) andKrasnodar region (Kuban-GSM), we denominate our tariffs in units linked to theU.S. dollar. While a majority of our costs are denominated in U.S. dollars orare tightly linked to the U.S. dollar, certain of our costs, such as salariesand rents, are sensitive to rises in the general price level in Russia andUkraine. When, however, the rate of inflation exceeds the rate of devaluation,this results in real appreciation of the local currency versus the U.S. dollar,as was the case with the ruble in 2003. Moreover, in 2004 and 2005, the rubleappreciated in nominal terms against the U.S. dollar, which combined with therate of inflation in Russia, resulted in a real appreciation of the rubleagainst the U.S. dollar. We would expect inflation-driven increases inthese costs to put pressure on our margins. While we could seek to raise ourtariffs to compensate for such increase in costs, competitive pressures may notpermit increases that are sufficient to preserve operating margins. We intendto move to ruble-denominated tariffs and invoicing in the future and, to thatend, we introduced a fixed exchange rate for converting U.S. dollar-denominatedtariffs and charges into Russian rubles in 2006.

**CreditRating Discussion**

Our credit ratings impact our ability toobtain short- and long-term financing, and the cost of such financing. Indetermining our credit ratings, the rating agencies consider a number offactors, including our operating cash flows, total debt outstanding,commitments, interest requirements, liquidity needs and availability ofliquidity. Other factors considered may include our business strategy, thecondition of our industry and our position within the industry. Although weunderstand that these and other factors are among those considered by therating agencies, each agency might calculate and weigh each factor differently.

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Our credit ratings as of the date of this document are as follows:
| Rating Agency                  | ** ** | ** ** | ** ** | **Long-Term  Debt Rating** | ** ** | **Outlook/Watch** | ** ** |
|-------------------------------------|------------|------------|------------|---------------------------------|------------|-------------------|------------|
| Moody’s(1)                     |       |       | Ba3        |                            |       |              | Stable     |   |   |
| Standard &  Poor’s(2) |       |       | BB-        |                            |       |              | Stable     |   |   |

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(1)                Ratedon December 10, 2001.

(2)                Rated on March 24, 2005.

None of ourexisting indebtedness has any triggers related to our credit ratings.

**CriticalAccounting Policies**

Criticalaccounting policies are those policies that require the application ofmanagement’s most challenging, subjective or complex judgments, often as aresult of the need to make estimates about the effect of matters that areinherently uncertain and may change in subsequent periods. Critical accountingpolicies involve judgments and uncertainties that are sufficiently sensitive toresult in materially different results under different assumptions andconditions. We believe that our most critical accounting policies are thosedescribed below. For a detailed discussion of these and other accountingpolicies, see Note 2 to our audited consolidated financial statements.

**RevenueRecognition**

Revenues are recognized on an accrualbasis, when services are actually provided or title to equipment passes tocustomer, regardless of when the resulting monetary or financial flow occurs.

Wecategorize the revenue sources in the statements of operations as follows:

·       Servicerevenue and connection fees: (a) subscription fees, (b) usage fees, (c) valueadded service fees, (d) roaming fees charged to other operators for guestroamers utilizing our network, (e) connection fees and (f) prepaidphone cards;

·       Sales ofhandsets and accessories.

We deferinitial connection fees paid by subscribers from the time of the initialsigning of the contract with a subscriber and activation of value-addedservices over the estimated average subscriber life in our network. Weperiodically evaluate actual churn of our subscribers and adjust our estimatesof average subscriber lives accordingly. For example, effective January 1,2004, we have changed our estimates of average subscriber lives which increasedour income for the year ended December 31, 2004 by $8.5 million. Theeffect of the change in our estimates of average subscriber lives was notmaterial in 2005. If we change our estimates of the average subscribers life inthe future, the amounts of connection fees and amortization of the acquiredcustomer base we recognize in income would change accordingly.

**Managementestimates**

The preparationof our audited consolidated financial statements in accordance with U.S. GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses for the reporting period. Actual results could differfrom those estimates. Examples of significant estimates include the provisionfor doubtful accounts and valuation allowance on deferred tax assets.

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**LicenseCosts**

We capitalize the cost of licenses acquiredin business combinations and directly from the government. As thetelecommunications industries in Russia, Ukraine, Uzbekistan and Turkmenistando not have sufficient experience with renewal of licenses or extensions oflicense terms, we amortize each license on a straight-line basis over the termof the license commencing from the date such license area becomes commerciallyoperational. We review these licenses and their remaining useful life and, ifnecessary, revise the useful lives based on our actual utilization. Theestimated useful lives of licenses may vary depending on market or regulatoryconditions, and any revision to the estimated useful lives may result in a costwrite off or an increase in amortization costs.

A number of ourcurrent licenses provide for payments to be made to finance telecommunicationsinfrastructure improvements, which in the aggregate could total approximately$18.1 million, as of December 31, 2005. According to the terms oflicenses, such contributions are to be made during the license period upon thedecision and as defined by the Board of Directors of the Association of GSM-900Operators. The Association is a nongovernmental, not-for-profit association, andtheir Board of Directors comprises representatives of the major cellularcommunications companies, including us. The Association has not adopted anyprocedures for collecting such payments, nor have such procedures beenestablished by Russian legislation. To date, we have not made any paymentspursuant to any of the current operating licenses issued to us and ourconsolidated subsidiaries. Further, our management believes that we will not berequired to make any such payments in the future. In relation to theseuncertainties, we have not recorded a contingent liability in the accompanyingaudited consolidated financial statements.

**UsefulLives of Property Plant and Equipment**

We calculate depreciation expense forproperty, plant and equipment on a straight-line basis over their estimateduseful lives. We establish useful lives for each category of property, plantand equipment based on our assessment of the use of the assets and anticipatedtechnology evolution. We review and revise if appropriate the assumptions usedin the determination of useful lives of property, plant and equipment at leaston an annual basis.

As a result ofrecent financial statement restatements by numerous U.S. public companies andpublication of a letter by the Chief Accountant of the SEC regarding theinterpretation of longstanding lease accounting principles, we have correctedour accounting practices for leasehold improvements in the fourth quarter of2004. The primary effect of this accounting correction was to accelerate to earlierperiods depreciation expenses with respect to certain components of previouslycapitalized leasehold improvements.

**Impairmentof Long-lived Assets**

We periodicallyevaluate the recoverability of the carrying amount of our long-lived assets inaccordance with Statement of Financial Accounting Standard (“SFAS”) No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” Wheneverevents or changes in circumstances indicate that the carrying amounts of thoseassets may not be recoverable, we compare undiscounted net cash flows estimatedto be generated by those assets to the carrying amount of those assets. Whenthese undiscounted cash flows are less than the carrying amounts of the assets,we record impairment losses to write the asset down to fair value, measured bythe estimated discounted net future cash flows expected to be generated fromthe use of the assets.

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**TranslationMethodology**

We use the U.S. dollar as the functionalcurrency for us and most of our subsidiaries because the majority of our andtheir revenues, costs, property, plant and equipment and intangible assetspurchases and debt are either priced, incurred, payable or otherwise measuredin U.S. dollars. Each of the legal entities domiciled in Russia, Ukraine,Uzbekistan, Turkmenistan and Belarus maintains its records and prepares itsfinancial statements in the local currency, either the Russian ruble, theUkrainian hryvnia, the Uzbek som, Turkmenian manat or the Belarusian ruble, inaccordance with the requirements of local statutory accounting and taxlegislation.

Translation (re-measurement) of financialstatements denominated in local currencies into U.S. dollars has been performedin accordance with the provisions of SFAS No. 52 “Foreign CurrencyTranslation.”

For our subsidiaries where the functionalcurrency is the U.S. dollar, monetary assets and liabilities have beentranslated at the period-end exchange rates. Non-monetary assets andliabilities have been translated at historical rates. Revenues, expenses andcash flows have been translated at historical rates. Translation differencesresulting from the use of these rates have been accounted for as currencyexchange and transaction gains in our consolidated statements of operations.

For UMC andKuban-GSM, where the functional currency is the local currency, the Ukrainianhryvnia and the Russian ruble, respectively, all year-end balance sheet itemshave been translated into U.S. dollars at the period-end exchange rate.Revenues and expenses have been translated at the period-average exchangerate. In addition, a “new cost basis” for all non-monetary assets of Kuban-GSMhas been established as of January 1, 2003, when the Russian economyceased to be considered hyperinflationary. A cumulative translation adjustment,related to the translation of UMC and Kuban-GSM, in the amount of$47.9 million was reported as accumulated other comprehensive income inour audited consolidated balance sheet as of December 31, 2005.

**Taxation**

Generally, tax declarations remain open andsubject to inspection for a period of three years following the tax year. Whilemost of our tax declarations have been inspected without significant penalties,these inspections do not eliminate the possibility of re-inspection.

We believe that we have adequately providedfor tax liabilities in our financial statements; however, the risk remains thatrelevant authorities could take differing positions with regard to interpretiveissues and the effect could be significant. See Note 22 to our auditedconsolidated financial statements.

We recognizedeferred tax assets and liabilities for the expected future tax consequences ofexisting differences between financial reporting and tax reporting bases ofassets and liabilities, and for the loss or tax credit carry-forwardsusing enacted tax rates expected to be in effect at the time these differencesare realized. We record valuation allowances for deferred tax assets when it islikely that these assets will not be realized.

**NewAccounting Pronouncements**

In March 2005,the Financial Accounting Standards Board, or FASB, issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations—aninterpretation of FASB Statement No. 143.” This Interpretation clarifiesthat the term “conditional asset retirement obligation” as used in FASBStatement No. 143, “Accounting for Asset Retirement Obligations,” refersto a legal obligation to perform an asset retirement activity, in which thetiming and (or) method of settlement are conditional on a future event that mayor may not be within the control of the entity. The obligation to perform theasset retirement activity is unconditional even though uncertainty exists aboutthe timing and (or) method of 

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settlement.Uncertainty about the timing and (or) method of settlement of a conditionalasset retirement obligation should be factored into the measurement of theliability when sufficient information exists to make a reasonable estimate ofthe fair value of the obligation. Interpretation No. 47 is effectivebeginning January 1, 2006. We are currently assessing the impact ofInterpretation No. 47 on our consolidated financial position and results ofoperations.

In December 2004, the FASB issued Statement of FinancialAccounting Standards No. 123 (revised) “Share-Based Payment” (SFAS No. 123R),which requires all companies to measure compensation cost for all share-basedpayments (including employee stock options) at fair value. In April 2005,the SEC announced that it would provide a phased-in implementation processfor SFAS No. 123R. As a result of this phased-in process, the provisionsof SFAS No. 123R must be adopted by most public entities no later than thebeginning of the first fiscal year commencing after June 15, 2005. SFAS No. 123Rapplies to all awards granted after the required effective date and to awardsmodified, repurchased or cancelled after that date. Effective for the fiscalyear beginning January 1, 2006, we will adopt the provisions of SFAS No. 123Rusing a modified version of the prospective application. Under this transitionmethod, compensation cost will be recognized on or after the effective date forthe portion of outstanding awards for which the requisite service has not yetbeen rendered, based on the grant date fair value of those awards previouslycalculated under SFAS No. 148 for pro forma disclosures. The adoption ofSFAS No. 123R does not have a material impact on our consolidatedfinancial position or results of operations.

In March 2005, the SEC issued Staff Accounting Bulletin,or SAB, No. 107, “Share Based Payment” (SAB 107). SAB 107 summarizes theviews of the SEC staff regarding the interaction between SFAS 123R and certainSEC rules and regulations, and provides the staff’s views regarding thevaluation of share-based payment arrangements for public companies. We adoptSAB 107 concurrently with the adoption of SFAS 123(R) effective from January 1,2006. The adoption of SAB 107 does not have a material impact on ourconsolidated financial position or results of operations.

In May 2005, the FASB issued Statement of FinancialAccounting Standards No. 154, “Accounting Changes and Error Corrections”(SFAS No. 154), which replaces APB Opinion No. 20, “AccountingChanges” and SFAS No. 3, “Reporting Accounting Changes in InterimFinancial Statements.” SFAS No. 154 changes the requirements for theaccounting and reporting of a change in accounting principle and is applicable toall voluntary changes and to changes required by an accounting pronouncement ifsuch pronouncement does not specify transition provisions. SFAS No. 154requires retroactive application to the prior periods’ financial statements ofchanges in accounting principle. In cases when it is impracticable to determinethe period-specific or cumulative effects of an accounting change, thestatement provides that the new accounting principle should be applied as ofthe earliest period for which retroactive application is practicable or,if impracticable to determine the effect of a change to all prior periods,prospectively from the earliest date practicable. This Statement shall beeffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005.

In June 2005, the Emerging Issues Task Force, or EITF,  reached a consensus on EITF Issue No. 05-6,“Determining the Amortization Period for Leasehold Improvements.” As part of abusiness combination, the acquiring entity will often assume existing leaseagreements of the acquired entity and acquire the related leaseholdimprovements. The issues are whether the “lease term” should be reevaluated atconsummation of a purchase business combination and whether the amortization periodfor acquired leasehold improvements should be reevaluated by the acquiringentity in a business combination. The consensus reached by EITF No. 05-6is effective for leasehold improvements that are purchased or acquired inreporting periods beginning June 29, 2005. The adoption of EITF No. 05-6did not have a material impact on our financial position and results ofoperations.

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In October 2005, theFASB issued FASB Staff Position, or FSP, FAS 13-1, “Accounting forRental Costs Incurred during a Construction Period.” Under the provisions ofFSP FAS 13-1, lessees may not capitalize rental costs incurred onbuilding or ground operating leases during a construction period. Instead,rental costs should be expensed on a straight-line basis starting at the beginningof the lease term, *i.e*., whenthe lessee takes possession of or is given control of the leased property. Theprovisions of FSP FAS 13-1 are effective starting with the firstreporting period beginning after December 15, 2005. We are currentlyassessing the impact of FSP FAS 13-1 on our consolidated financialposition and results of operations.

**TrendInformation**

**Sales**

In 2005, our revenues increased by 28.9%from $3,887.0 million to $5,011.0 million. Our subscriber baseincreased to 58.2 million subscribers as of December 31, 2005, from34.2 million as of December 31, 2004, or by 70.2%. In 2004, ourrevenues increased by 52.7% from $2,546.2 million to$3,887.0 million. Our subscriber base increased to 34.2 millionsubscribers as of December 31, 2004 from 16.7 million as of December 31,2003, or by 104.8%.

Average monthly service revenue persubscriber in Russia fell from $17 in 2003 to $12 in 2004 due to theintroduction of lower tariffs in the Moscow license area and generally lowertariffs in regions, as well as penetration to mass-market. This trend continuedin the year ended December 31, 2005, as average monthly service revenueper subscriber in Russia decreased to $8 for the year ended December 31,2005.

In 2004 and 2005, more than half of oursubscriber growth occurred outside of the Moscow license area. However, as aresult of competition and the tariff structure providing for lower price levelsin the Russian regions outside of the Moscow license area, average monthlyservice revenue per subscriber in the Russian regions remains lower than in theMoscow license area (though costs are generally lower there, as well). See “Item3. Key Information—D. Risk Factors—Risks Relating to Our Business—Increasedcompetition and a more diverse subscriber base have resulted in decreasingaverage monthly service revenues per subscriber, which may materially adverselyaffect our results of operations.” We generally expect to see a continueddecline in average monthly service revenue per subscriber due to the growth inthe regional subscriber base outside Moscow and introduction of lower tariffplans or decrease in prices of the existing tariff plans in connection with ourcompetitive marketing efforts.

UMC experienced subscriber growth from3.4 million subscribers at December 31, 2003, to 7.4 millionsubscribers at December 31, 2004, and 13.3 million at December 31,2005, and we expect this trend to continue, assuming the Ukrainian economycontinues to grow. Average monthly service revenue per subscriber decreased in 2005to $10 from $13 in 2004 as a result of an extensive mass-marketing campaignfocused on Ukraine’s youth.

Uzdunrobitaexperienced an 87.1% increase in subscriber growth from 310,000 subscribers at December 31,2004 to 580,000 subscribers at December 31, 2005, and we expect this trendto continue due to Uzdunrobita’s leading position in terms of subscribers andUzbekistan’s low penetration rate. Average monthly service revenue persubscriber peaked at $16 in 2005.

**Inventory**

Overall, ourinventory was $156.7 million at December 31, 2005, as compared to$89.5 million at December 31, 2004. The increase is mainly explainedby a significant increase in purchases made in 2005 as part of our capitalexpenditure spending to support expansion and network maintenance requirements.

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**Churn**

Churn, as wedefine it, includes internal churn within our subscriber base, *i.e*., it includes subscribers whodisconnect from our network in order to enroll in another tariff plan offeredby us. Internal churn increased following the launch in November 2002 ofour “Jeans” tariff plan. See “—Subscriber Data” above. Our subscriber churn inRussia decreased from 47.3% in 2003 to 27.5% in 2004 as a result of certainmarketing initiatives we launched with the aim of increasing subscriber loyalty,and this trend continued in 2005 as our subscriber churn for the year ended December 31,2005, was 20.7%. Although our subscriber churn in Russia decreased for the yearended December 31, 2005, we believe that subscriber churn is highlydependent on competition and the number of mass-market subscribers in ouroverall subscriber mix. Mass-market subscribers generally choose to prepaytheir mobile phone usage by purchasing pre-paid packages and are more likely toswitch providers to take advantage of low-tariff promotions. As a result,competition for these subscribers will likely lead to sustained downwardpressure on tariffs. Other factors influencing subscriber churn include theabsence of connection fees and long-term service contracts between us and oursubscribers in Russia, both of which prevent early subscriber churn.

**Off-balanceSheet Arrangements**

We do not haveany off-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect on our financial condition, changes in financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources that is material to investors.

**Obligationsunder guarantee contracts**

As of December 31, 2005 and 2004, our off-balance sheet arrangementsconsisted of debt guarantees issued to related parties as follows:
|                       | ** ** | **Guaranteed  amount  outstanding at  December 31,** | ** ** |
|-----------------------|------------|----------------------------------------------------------------|------------|
| ** **            | ** ** | **2005**                                                       | ** ** | **2004** | ** ** |
| ** **            | ** ** | **(in millions)**                                         | ** ** |
| Invest-Svyaz  Holding |       | $3.5                                                           |       | $21.6 |   |
| MTS  Belarus          |       | 9.0                                                            |       | 25.0 |   |
| **Total**             | ** ** | **$****12.5**                                                  | ** ** | **$46.6** | ** ** |

 

We issued guarantees to various financialinstitutions on behalf of Invest-Svyaz Holding, a wholly-ownedsubsidiary of Sistema. Invest-Svyaz Holding’s primary business is leasingvarious types of telecommunications and other assets to us. See Note 17 toour audited consolidated financial statements for additional informationregarding these transactions. We classify these leases as capital leases in ourconsolidated financial statements and the present value of future leasepayments is reflected as a liability in our consolidated balance sheet.

We issuedfinancial guarantees on behalf of MTS Belarus, our equity investee to assist itwith its financing needs. See Note 19 to our audited consolidatedfinancial statements. Under each of the guarantees outstanding as of December 31,2005, we could be required to compensate financial institutions in the event ofthe borrower’s default. We are currently not aware of any events, and do notanticipate that any event will occur, that would cause a default of theborrowers and, therefore, require us to fulfill our obligations to makepayments under these guarantees. As of December 31, 2005, these guaranteesare reflected in our consolidated balance sheet at their fair values of $0.6million.

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**Obligationsunder derivative contracts**

In connection with our acquisition of 51%of the common shares and 50% of the preferred shares of TAIF Telcom in April 2003,we entered into call and put option agreements with shareholders of TAIF Telcomto acquire the remaining 49% of the common shares and 50% of the preferredshares of TAIF Telcom. The exercise periods for the call option on the commonshares was 48 months from the acquisition date and for the put option onthe common shares was 36 months following an 18-month period afterthe acquisition date. The call and put option agreements for the common sharesstipulated a minimum purchase price of $49.0 million plus 8% per annumcommencing from the acquisition date. The exercise periods for the call optionon the preferred shares was 48 months following a 24-month periodafter the acquisition date and for the put option on the preferred shares was a24-month period from the acquisition date. The call and put optionagreements for the preferred shares stipulated a minimum purchase price of$10.0 million plus 8% per annum commencing from the acquisition date. Weexercised our call option to acquire the remaining shares in September 2004and completed the acquisition in October 2004.

In connection with our acquisition of 74%of the shares in Uzdunrobita in August 2004, we entered into call and putoption agreements with the existing shareholders of the company to acquire theremaining 26% of the shares. See Note 3 to our audited consolidatedfinancial statements. The exercise period for the option is 36 months fromthe acquisition date. The call and put option agreements stipulate a minimumpurchase price of $37.7 million plus 5% per annum commencing from theacquisition date. The fair value of the put option was approximately $5.9 millionas of December 31, 2005.

In December 2004, we entered into twovariable-to-fixed interest rate swap agreements with ABN AMRO Bank N.V andwith HSBC Bank plc to hedge our exposure to variability of future cash flowscaused by the change in LIBOR related to the syndicated loan. We agreed withABN AMRO to pay a fixed rate of 3.27% and receive a variable interest of LIBORon $100.0 million for the period from October 7, 2004 up to July 27,2007. We agreed with HSBC Bank plc to pay a fixed rate of 3.25% and receive avariable interest of LIBOR on $150.0 million for the period from October 7,2004 up to July 27, 2007. These instruments qualify as cash flow hedgesunder the requirements of SFAS No. 133 as amended by SFAS No. 149. Asof December 31, 2005, we recorded an asset of $3.6 million in relation tothese contracts in the accompanying consolidated balance sheet and a gain of$2.8 million net of tax of $0.8 million as other comprehensive income inthe accompanying consolidated statement of changes in shareholders’ equity inrelation to the change in fair value of these agreements.

In December 2005,we acquired a 51.0% stake in Tarino for $150.0 million in cash. Tarino wasat that time the indirect owner, through its wholly-owned subsidiaries,of Bitel, a Kyrgyz company holding a GSM 900/1800 licensefor the entire territory of Kyrgyzstan. Concurrently with the purchase ofa 51.0% stake, we entered into a put and call option agreement with theshareholder of Tarino to acquire the remaining 49.0% interest in Tarino. Thecall option is exercisable by us from November 22, 2005 to November 17,2006, and the put option is exercisable by the seller from November 18,2006 to December 8, 2006. The call and put option price is $170.0 million.The put and call option were recorded at fair value, which approximated $nil atDecember 31, 2005, in the consolidated balance sheet.

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**TabularDisclosure of Contractual Obligations**

We have various contractual obligations and commercial commitments tomake future payments, including debt agreements, lease obligations and certaincommitted obligations. The following table summarizes our future obligations(including capital lease interest) under these contracts due by the periodsindicated as of December 31, 2005:
|                                                   | ** ** | **2006**           | ** ** | **2007-2008**      | ** ** | **2009-2010**    | ** ** | **2011-  thereafter** | ** ** | **Total**          | ** ** |
|---------------------------------------------------|------------|--------------------|------------|--------------------|------------|------------------|------------|-----------------------|------------|--------------------|------------|
| **Contractual Obligations:**                      |       |               |       |               |       |             |       |                  |       |               |       |
| Notes  payable                                    |       | $—            |       | $400,000           |       | $400,000         |       | $399,052              |       | $1,199,052         |       |
| Bank  loans                                       |       | 765,881            |       | 401,508            |       | 202,885          |       | 275,510               |       | 1,645,784          |       |
| Interest  payments                                |       | 183,050            |       | 245,853            |       | 140,192          |       | 48,000                |       | 617,095            |       |
| Capital  leases                                   |       | 3,413              |       | 3,160              |       | 12               |       | 2                     |       | 6,587              |       |
| Operating  leases and service agreements          |       | 80,211             |       | 47,899             |       | 31,682           |       | 37,705                |       | 197,497            |       |
| **Committed Investments:**(1)                     |       |               |       |               |       |             |       |                  |       |               |       |
| Purchases  of property, plant and equipment  |       | 388,190            |       | —             |       | —           |       | —                |       | 388,190            |       |
| **Total**                                         | ** ** | **$****1,420,745** | ** ** | **$****1,098,420** | ** ** | **$****774,771** | ** ** | **$****760,269**      | ** ** | **$****4,054,205** | ** ** |

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(1)                Under non-binding purchase commitments.

In addition, as of December 31, 2005,we had guaranteed indebtedness of related parties not reflected in ourfinancial statements, due to the insignificance of its fair value, under whichwe could be potentially liable for $12.5 million. See Note 22 to ouraudited consolidated financial statements.

Since thecommencement of our operations in 1994, a number of telecommunication licensesfor the Russian Federation were issued to us and our now consolidatedsubsidiaries. These license agreements stipulate that certain fixed “contributions”be made to a fund for the development of telecommunication networks in theRussian Federation. A number of our current licenses provide for the payment ofsuch fees, which in the aggregate could total approximately $18.1 millionas of December 31, 2005, which are not reflected in our financialstatements. See Note 22 to our audited consolidated financial statementsfor additional information.

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**Item 6.**                        *Directors, Senior Management and Employees*

**A.**                Directorsand Senior Management

**KeyBiographies**

Our directors and executive officers, and their dates of birth andpositions as of the date of this annual report were as follows: 
| Name                       | ** ** | ** ** | ** ** | **Year of Birth** | ** ** | **Position**                                            | ** ** |
|----------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------------------------------|------------|
| Sergey  D. Schebetov       |       |       | 1966       |                        |       | Chairman                                                |       |
| Vladimir  S. Lagutin       |       |       | 1947       |                        |       | Deputy Chairman                                         |       |
| Alexei  N. Buyanov(1)      |       |       | 1969       |                        |       | Director                                                |       |
| Alexander  E. Gorbunov     |       |       | 1967       |                        |       | Director                                                |       |
| Helmut  Reuschenbach(1)    |       |       | 1948       |                        |       | Director                                                |       |
| Sir  Peter Middleton(1)    |       |       | 1934       |                        |       | Director                                                |       |
| Leonid  A. Melamed         |       |       | 1967       |                        |       | Director, President and Chief Executive Officer         |       |
| Eric  Franke               |       |       | 1955       |                        |       | First Vice President and Chief Operating Officer        |       |
| Vsevolod  V. Rozanov       |       |       | 1971       |                        |       | Vice President—Finance and Chief Financial Officer |       |
| Tatiana  V. Evtushenkova   |       |       | 1976       |                        |       | Vice President—Strategy and Corporate Development  |       |
| Mikhail  V. Shamolin       |       |       | 1970       |                        |       | Vice President—Sales and Customer Service          |       |
| Dr. Yury  A. Gromakov |       |       | 1946       |                        |       | Vice President—Technology and Network Development  |       |
| Sergey  G. Aslanyan        |       |       | 1973       |                        |       | Vice President and Chief Information Officer            |       |
| Dmitry  A. Prokhorenko     |       |       | 1969       |                        |       | Vice President—Human Resources                     |       |
| Grzegorz  Esz              |       |       | 1970       |                        |       | Vice President—Chief Marketing Officer             |       |
| Andrei  B. Terebenin       |       |       | 1962       |                        |       | Vice President—Corporate Communications            |       |
| Pavel D.  Belik            |       |       | 1966       |                        |       | Vice  President—Security                           |       |

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(1)                Member of Audit Committee.

**Sergey D. Schebetov** has served as Chairman of our Board of Directors since March 2006.Mr. Schebetov also serves as the Chairman of the Board of Directors ofComstar UTS, a subsidiary of Sistema. He also serves as the Chief ExecutiveOfficer of Sistema Telecom, a subsidiary of Sistema which oversees all ofSistema’s telecommunications business, and also serves on the Board ofDirectors of four Sistema-affiliated companies (Concern RTI-Systems, SistemaMass-media, MGTS and Sistema-Hals). From 2001 to 2005, Mr. Schebetovserved as the Head of the Corporate Development Department of Sistema. From1999 to 2001, he served as the Development Director of Integrum-Techno, an ITcompany and, from 1997-1999, Mr. Schebetov served as the VicePresident of the corporate finance department of ATON Capital Group, aninvestment company.

**Vladimir S. Lagutin** has served as Deputy Chairman of our Board of Directors since March 2006and, from October 2003 to March 2006, he served as the Chairman ofour Board of Directors. From July 2003 to January 2006, Mr. Lagutinserved as the General Director of Sistema Telecom, and served as the GeneralDirector of MGTS from 1995 to July 2003. In addition, Mr. Lagutinserves as the Chairman of the Boards of Directors of MGTS and serves on theBoards of Directors of Sistema Telecom and OJSC CSC. All of these companies aresubsidiaries of Sistema. Mr. Lagutin also serves on the Board of Directorsof Sistema.

**Alexei N. Buyanov** has served as one of our Directors since June 2003. Mr. Buyanovhas served as First Vice President of Sistema since September 2002. From1998 to 2002, he served as our Vice President, Finance. He also serves on theboard of directors of various other companies affiliated with Sistema.

**Alexander E. Gorbunov** has served as one of our Directors since March 2006. Mr. Gorbunovhas served as the Head of the Corporate Development Department of Sistema sinceJuly 2005. From 2003 to 

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2005, he heldthe position of Director of Strategy with us and, from 2002 to 2003, Mr. Gorbunovwas in charge of the Strategic Analysis and Planning Department of SistemaTelecom. Prior to this, Mr. Gorbunov was employed by the Moscow andBoston offices of Bain & Company.

**Helmut Reuschenbach** has served as one of our Directors since November 2004. Mr. Reuschenbachhas served as a Director at Lazard & Co. GmbH Frankfurt since 2001.Prior to that, he was at Deutsche Telekom AG where he served as Treasurerand Senior Executive Vice President for Finance for six years. Prior to 1994,he was the Chief Financial Officer and a member of the Board of Directors ofMercedes-Benz S.A. in Belgium and also served as Chief Executive Officerof Daimler-Benz Coordination Center S.A. and Daimler-Benz Financial CompanyS.A. From 1989 to 1993, Mr. Reuschenbach served as Vice President forFinance at Daimler-Benz AG in Stuttgart. Previously, he has served as Directorof Finance at AEG Aktiengesellschaft in Frankfurt, Director of Finance andAdministration at AEG Italiana S.p.A. in Milan and Corporate Finance Manager atAEG-TELEFUNKEN Aktiengesellschaft in Frankfurt.

**Sir Peter Middleton** has served as one of Directors since June 2005. Sir PeterMiddleton also serves as the Chairman of the Camelot Group plc, Presidentof the British Bankers Association, Chairman of the Barclays GroupAsia Pacific Advisory Committee, Deputy Chairman of United Utilities, Chairmanof Sheffield Urban Regeneration Company (Sheffield One), Chairman of CEDR(Centre for Effective Dispute Resolution) and Chairman of Reyniers &Co.

**Leonid A. Melamed** has served as our Director, President and Chief Executive Officersince June 2006. Mr. Melamed has served in various managementpositions at Rosno since its founding in 1991 and continues to serve as amember of Rosno’s Board of Directors. From September 2003 to April 2006,he served as the General Director-Chief Executive Officer and, from March 2001to September 2003, he served as the First Deputy DirectorGeneral-Executive Director. Prior to that, from September 1997 to March 2001,Mr. Melamed served as First Deputy Director General of Rosno. From February 1992to June 1992 , Mr. Melamed served as Director of Rosno’s Center forMedical Insurance and, from June 1992 to June 2003, he held theposition of Deputy Chairman of the Management Board. From June 1993 to March 2001,Mr. Melamed served as First Deputy Chairman of the Management Board. In2004, Mr. Melamed was elected Chairman of the Expert Council in InsuranceLegislation, which is part of the Russian State Duma Committee on CreditOrganizations and Financial Markets.

**Eric Franke** has served as our First Vice President and Chief Operating Officersince October 2005. In March 2001, Mr. Franke was appointedDirector General of UMC. In August 1998, he was appointed Director forMobile Communications at Golden Telecom where he managed the company’soperations in Ukraine. From 1988 to 1998, Mr. Franke worked for Ericssonwhere he served as Director of Mobile Communications and later as VicePresident for Russia and the CIS.

**Vsevolod V. Rozanov** has served as our Vice President and Chief Financial Officer since April 2006.From August 2004 to April 2006, he served as Deputy General Directorand Chief Financial Officer of Comstar UTS and, from April 2002 to August 2004,Mr. Rozanov served as Deputy General Director and Chief Financial Officerof MTU-Inform. He worked as a Senior Manager at CenterInvest group from 2001 to2002 and, from 1994 until 2001, he held various consulting positions at theMoscow, London and Stockholm offices of Bain & Company.

**Tatiana V. Evtushenkova** has served as our Vice President—Strategy and Corporate Developmentsince October 2002. From December 1999 to October 2002, Ms. Evtushenkovaserved as the Director of the Investment Department at Sistema Telecom, asubsidiary of Sistema. Prior to joining Sistema Telecom, she worked in theinvestment banking division of Salomon Smith Barney. Ms. Evtushenkova isthe daughter of Vladimir P. Evtushenkov, the controlling shareholder andChairman of the Board of Sistema.

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**Mikhail V. Shamolin** has servedas our Vice President—Sales and Customer Service since July 2005. From2004 to 2005, Mr. Shamolin worked at Interpipe Corp. (Ukraine) as ManagingDirector of the Ferroalloys Division. From 1998 to 2004, he held various consultingpositions at McKinsey & Co.

**Dr. Yury A. Gromakov** hasserved as our Vice President—Technology and Network Development sinceMarch 2002, and served as our Vice President of Technology and NetworkDevelopment from 1994 until February 2002. He has been involved in mobilecommunications for over 30 years and holds a degree of Doctor of TechnicalSciences, the highest scientific degree in Russia, and has been awarded adegree as Honorable Radio Operator of Russia. Dr. Gromakov is also amember of the International Academy of the Science of Information andInformation Processes and Technologies.

**Sergey G. Aslanyan** has served asour Vice President and Chief Information Officer since December 2003.Prior to joining us, Mr. Aslanyan worked at TNK-BP Management as theDeputy Director of Information Technology. He worked at PricewaterhouseCoopersfrom 1997 to 2001.

**Dmitry A.Prokhorenko**has served asour Vice President—Human Resources since July 2005. Mr. Prokhorenkojoined MTS as the Director of Human Resources in February 2004. From 2002to 2004, he served as the Director of Human Resources at M. Video and, from1993 to 2002, he served as the Director of Human Resources at L’Oreal’s Russianbranch.

**Grzegorz Esz**has served as our Vice President—Chief MarketingOfficer since March 2005. Mr. Esz joined MTS as the Deputy VicePresident of Marketing in October 2005. Prior to joining MTS, he served asa Managing Director of Retail at one of the largest banks in Poland. From 1997to 2005, Mr. Esz held several management positions at ERA Company, whichis one of the largest GSM operators in Poland, serving as the Deputy ChiefMarketing Officer from 2003 to 2005.

**Andrei B. Terebenin**has served as our VicePresident—Corporate Communications since January 2006. Prior to joiningMTS, Mr. Terebenin served as the General Director of R.I.M. PorterNovelli, a leading public relations network agency from 1999 to 2005. From 1991to 1999, he held management positions at AIG Russia, Dun & BradstreetCIS and the financial magazine “Economica & Zhizn.”

**Pavel D. Belik**has served as our Vice President—Security since October 2005.Mr. Belik joined MTS in February 2005 as the Director of Security inthe Moscow macro region. Prior to joining MTS, he served in the FederalSecurity Service of the Russian Federation for more than 20 years.

The business address ofeach of our directors is 4 Marksistkaya Street, Moscow 109147, RussianFederation.

**B.**               Compensationof Directors and Senior Management

**ExecutiveCompensation**

Our officers and directorswere paid during 2005 an aggregate amount of approximately $13.7 million forservices in all capacities provided to us; this amount was comprised of$5.0 million in base salary and a $8.7 million bonus paid pursuant toa bonus plan for the management and directors whereby bonuses are awardedannually based on our financial performance.

**Management StockBonus and Stock Option Plans**

On April 27, 2000, contingent on the closing ofour initial public offering, we established a stock bonus plan and stock optionplan for selected officers, key employees and key advisors. Under the plans,directors, key employees and key advisors received 3,587,987 shares of ourcommon stock and will participate in a stock option plan under which they mayreceive options to purchase up to an additional 9,966,631 shares of our commonstock. At the time of the initial public offering, we issued 13,554,618 

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shares of common stock toour subsidiary Rosico pursuant to these plans at a price of $1.024 per sharefor the total amount of $13.9 million. Following the merger of Rosico intous in June 2003, these shares were transferred to our wholly-ownedsubsidiary, MTS LLC.

Underthe stock bonus plan, during the period from September 12, 2000, through September 22,2000, 3,587,987 shares of common stock were purchased from Rosico at a nominalprice of 0.1 rubles per share as follows:
|                          | ** ** | **Number of  shares  purchased** | ** ** | **Percentage of  total shares  outstanding** | ** ** |
|--------------------------|------------|---------------------------------------|------------|--------------------------------------------------------|------------|
| Employees and  Directors |       | 3,049,786                             |       |                                                   | 0.153      | % |   |
| Key Advisors             |       | 538,201                               |       |                                                   | 0.027      | % |   |
| Total                    |       | 3,587,987                             |       |                                                   | 0.180      | % |   |

 

On the date the shares were granted, we recognizedaggregate expenses under this plan as compensation and consulting expensesamounting to $4.5 million and $0.8 million, respectively, based onthe fair value of the shares on the date they were granted.

Under the stock option plan, board members and keyemployees, upon being granted stock options, will have the right to purchase upto 9,966,631 shares of our common stock or, in lieu of shares, receive a cashaward equal to the difference between the price per share fixed in the optionagreement and the market price per share of our common stock on the date ofexercise.

On August 14, 2001, pursuant to optionagreements, we granted options in respect of 1,020,682 shares of our commonstock to our board members and 808,529 shares of our common stock to our keyemployees. These options provided that, on July 15, 2003, board membersand key employees could purchase shares of our common stock at $1.31 per share,which represented the 100-day average sales price of the shares at August 14,2001. The stock option agreement for a board member terminated if the boardmember was terminated as a board member prior to our 2002 annual shareholders’meeting. The stock option agreement for a key employee terminated if theemployee left us before July 15, 2003.

In July 2003, board members and key employeespurchased a total of 37,557 shares pursuant to the August 2001 optionagreements. Fifty-seven of the option holders elected cash awards in lieuof shares, and cash awards were granted in respect of 1,746,310 shares in theamount of $1.633 per share (the difference between $1.31, the price per sharefixed in each agreement, and $2.943, the market price per share on July 15,2003). In addition, options relating to 45,344 shares were cancelled pursuantto the termination provisions described above.

On October 24, 2002, pursuant to optionagreements, we granted options in respect of 1,739,640 shares of our commonstock to our board members and 1,107,041 shares of our common stock to our keyemployees. These options have an exercise price of $1.49 per share, whichrepresents the 100-day average market price of the shares at the date ofgrant and will vest 21 months from the date of the grant. The stock optionagreement for a board member would have terminated if the board member wasterminated as a board member before our 2003 annual shareholders’ meeting. Thestock option agreement for a key employee would have terminated if the employeeleft us before July 15, 2004.

In July-August 2004, board members and keyemployees purchased a total of 2,726,966 shares pursuant to the October 2002option agreements. In addition, options relating to 119,715 shares werecancelled pursuant to the termination provisions described above.

In July 2003, pursuant to option agreements, wegranted options in respect of 1,434,400 shares of our common stock to our boardmembers and 518,232 shares of our common stock to our key employees. Theseoptions have an exercise price of $2.43 per share, which represents the 100-dayaverage market price 

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of the shares at the dateof grant and will vest 24 months from the date of the grant. The stockoption agreement for a board member would have terminated if the board memberwas terminated as a board member before our 2004 annual shareholders’ meeting.The stock option agreement for a key employee would have terminated if theemployee left us before July 15, 2005.

In August 2005, board members and key employeespurchased a total of 1,801,622 shares pursuant to the July 2003 optionagreements. In addition, options relating to 151,010 shares were cancelledpursuant to the termination provisions described above.

In August 2004, pursuant to option agreements, wegranted options in respect of 745,436 shares of our common stock to our boardmembers and 919,820 shares of our common stock to our key employees. Theseoptions have an exercise price of $5.95 per share, which represents the 100-dayaverage market price of the shares at the date of grant and will vest23 months from the date of the grant. The stock option agreement for aboard member will terminate if the board member is terminated as a board memberbefore our 2005 annual shareholders’ meeting. The stock option agreement for akey employee will terminate if the employee leaves us before July 15,2006. We expect to recognize a compensation expense of approximately$2.0 million over the 23-month period. By December 31, 2005, werecognized $1.3 million of compensation expenses based on the intrinsic valueof these options, and during 2006, we plan to recognize approximately $0.7million, according to the fair value method of SFAS 123R.

In August 2005, pursuant to option agreements, wegranted options in respect of 699,705 shares of our common stock to our boardmembers and 1,078,989 shares of our common stock to our key employees. Theseoptions have an exercise price of $6.89 per share, which represents the 100-dayaverage market price of the shares at the date of grant and will vest 23 monthsfrom the date of the grant. The stock option agreement for a board member willterminate if the board member is terminated as a board member before our 2006annual shareholders’ meeting. The stock option agreement for a key employeewill terminate if the employee leaves us before July 15, 2007. We expectto recognize a compensation expense of approximately $2.2 million over the23-month period. By December 31, 2005, we recognized $0.2 million ofcompensation expenses based on the intrinsic value of these options, and during2006, we plan to recognize approximately $2.0 million, according to the fairvalue method of SFAS 123R.

Prior to 2006, we accounted for stock options issuedto employees, non-employee directors and consultants following the requirementsof SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148“Accounting for Stock Based Compensation—Transition and Disclosure, anamendment to FASB Statement No. 123.” Under the requirements of thesestatements, we elected to use the intrinsic value of the options on themeasurement date as a method for accounting for compensation to employees andnon-employee directors. Compensation to consultants was measured based on thefair value of options on the measurement date as determined using a binomialoption-pricing model. Effective for the fiscal year beginning January 1,2006, we adopted a modified version of the provisions of SFAS No. 123R,which requires us to measure the compensation cost of all share-based payments(including employee stock options) at fair value. See “Item 5. Operating andFinancial Review and Prospects—New Accounting Pronouncements.”

In accordance with Russianlegislation, our board members and key employees may be considered insiderswith respect to us, and thus may be restricted from selling their shares.

**C.**               BoardPractices

**Board of Directors**

Members of our Board of Directors are elected by amajority vote of shareholders at the annual shareholders’ meeting using acumulative voting system. Directors are elected for one year terms and may bere-elected an unlimited number of times. The Board currently consists of sevenmembers, although it 

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may be increased to ninemembers by shareholder resolution. The Board has the authority to make overallmanagement decisions for us, except those matters reserved to the shareholders.It must meet at least once per quarter, though it may meet more often at itselection. The members of our Board do not serve pursuant to a contract.

In 2004, the Board of Directors approved the establishmentof, and guidelines for, three new Board committees: restructuring committee,budgeting committee and quality committee. The restructuring committee wasestablished to oversee and address matters related to the development andimplementation of a new organizational structure for our business. Thebudgeting committee was established to prepare recommendations to the Board ofDirectors on issues relating to the preparation, approval and supervision ofour budgets, long-term business plans and investment plans. The qualitycommittee was organized to manage issues relating to the quality of ourcellular network’s operation. The Board of Directors also approved a Code ofEthics applicable to our senior officers.

In 2006, the Board ofDirectors approved the establishment of, and guidelines for, two new Boardcommittees: Remuneration and Appointments Committee and the Committee forCorporate Conduct and Ethics. We established the Remuneration and AppointmentsCommittee to develop proposals to be presented to the Board of Directors withrespect to structuring remuneration and compensation levels for managementexecutives. The committee forcorporate conduct and ethics was established to maintain an effective corporategovernance system and to further enhance the quality of corporate management,and ensure we follow the best practices for public organizations worldwide.

**Audit Committee**

Our Audit Committeeconsists of three members appointed by the Board of Directors. The currentmembers are Helmut Reuschenbach, Sir Peter Middleton and Alexei Buyanov. SirPeter Middleton and Mr. Reuschenbach, who serves as Chairman of the AuditCommittee, are both independent members of the Board of Directors. Mr. Buyanovis exempt from the independence requirement under SEC Rule 10A-3because he is a non-voting member of the Audit Committee with observer statusonly. The Audit Committee is primarily responsible for the integrity of ourfinancial statements, our compliance with legal and regulatory requirements,assuring the qualifications and independence of our independent auditors andoverseeing the audit process, including audit fees, resolving matters arisingduring the course of audits and coordinating internal audit functions.

**Remuneration andAppointments Committee**

Our Remuneration andAppointments Committee****wasestablished on March 28, 2006 and consists of three members appointed bythe Board of Directors. The current members are Sergey Schebetov, VladimirLagutin and Helmut Reuschenbach, who serves as Chairman of the Remuneration andAppointments Committee. The Remuneration and Appointments Committee isprimarily responsible for developing a remuneration structure and compensationlevels for management executives.

**President**

The shareholders’ meeting,at the recommendation of the Board of Directors, appoints our President for aterm of three years. The rights, obligations and the times and amounts ofpayment for the President’s services are determined by a contract between himand us, as represented by our Chairman or by a person authorized by our Boardof Directors. The President is responsible for day-to-day management of ouractivities, except for matters reserved to our shareholders or the Board ofDirectors. The President reports to the shareholders’ meeting and to the Boardof Directors and is responsible for carrying out decisions made by theshareholders and by the Board of Directors. Leonid Melamed was appointed ouracting 

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Presidentin April 14, 2006 and elected as our President and CEO pursuant to anextraordinary shareholders’ meeting held on June 14, 2006.

**Review Commission**

Our ReviewCommission supervises our financial and operational activities. Members of theReview Commission are nominated and elected by our shareholders for a term ofone year. A director may not simultaneously be a member of the ReviewCommission. As of December 31, 2005, our Review Commission had threemembers:

·       AlexeiP. Petlinov holds the position of Senior Financial Analyst , Finance Departmentat Sistema Telecom.

·       VassilyV. Platoshin holds the position of Chief Accountant at Sistema.

·       IvanV. Matushkin holds the position of Executive Director of the Financial PlanningGroup, Department of Finance at Sistema.

The members of our ReviewCommission do not serve pursuant to a contract, and their terms expire at thenext annual shareholders’ meeting, which will take place on June 23, 2006.

**CorporateGovernance**

We are required under theNew York Stock Exchange listing rules to disclose any significantdifferences between the corporate governance practices that we follow underRussian law and applicable listing standards and those followed by U.S.domestic companies under New York Stock Exchange listing standards. Thisdisclosure is posted on our website (http://www1.company.mtsgsm.com/profile/ethics/).

**D.**              Employees

At December 31, 2005, we had 27,668 employees.Over 20.0% of these employees, or 5,537, worked in Moscow (including employeesof our corporate headquarters). Of our 24,253 employees in Russia, we estimatethat 515 were executives (including the President and other officers); 4,679were technical and maintenance employees; 12,589 were sales, marketing andcustomer service staff; and 6,470 were administration and finance staff.

As of December 31, 2005, 2,421 of our employeesworked in Ukraine. Of these employees, we estimate that 22 were executives; 708were technical and maintenance employees; 1,206 were sales, marketing andcustomer service staff; and 485 were administration and finance staff.

As of December 31, 2005, 844 of our employees workedin Uzbekistan. Of these employees, we estimate that 16 were executives; 317were technical and maintenance employees; 217 were sales, marketing andcustomer service staff; and 294 were administration and finance staff.

As of December 31, 2005, 150 of our employeesworked in Turkmenistan. Of these employees, we estimate that 4 were executives;16 were technical and maintenance employees; 91 were sales, marketing andcustomer service staff; and 39 were administration and finance staff.

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Thesubstantial growth in the number of our employees is attributable primarily tothe continued expansion of our network in Russia and the CIS and our increasedfocus on customer care. In addition, in 2004 we added a new intermediatemanagement level for “macro-regions” to our management structure. Our 10macro-region offices are responsible for implementing the strategydeveloped by our corporate headquarters in all regions falling within theirspecific macro-region. The following chart sets forth the number of ouremployees at December 31, 2003, 2004 and 2005:
|                                                                      | ** ** | **At December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                           | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| Moscow license  area (including employees of corporate headquarters) |       | 4,067                         |       | 4,603 |   | 5,060 |   |
| Other regions in  Russia                                             |       | 14,367                        |       | 16,215 |   | 19,193 |   |
| Ukraine                                                              |       | 1,121                         |       | 1,754 |   | 2,421 |   |
| Uzbekistan                                                           |       | —                        |       | 813 |   | 844 |   |
| Turkmenistan                                                         |       | —                        |       | — |   | 150 |   |
| Total                                                                |       | 19,555                        |       | 23,385 |   | 27,668 |   |

 

Our employees are notunionized, we have not experienced any work stoppages and we consider ourrelations with employees to be strong.

**E.**               ShareOwnership

We believe that theaggregate beneficial interest of our directors, senior management and employeesas of December 31, 2005 was less than 1% of our outstanding common stock.

**Item 7.**                        MajorShareholders and Related Party Transactions

**A.**                MajorShareholders

Thefollowing table sets forth, as of May 31, 2006, certain informationregarding the beneficial ownership of our outstanding common stock. All sharesof common stock have the same voting rights.
|                                                                         | ** ** | **Beneficial ownership as of  May 31, 2006** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Name**                                                                | ** ** | ** **                                                            | ** ** | **Number** | ** ** | **Percentage** | ** ** |
| Sistema(1)(2)                                                           |       | 636,224,752                                                           |       |   | 32.0 | % |   |
| Sistema Holding  Limited(2)                                             |       | 193,473,900                                                           |       |   | 9.7 | % |   |
| Invest-Svyaz(3)                                                         |       | 160,247,802                                                           |       |   | 8.1 | % |   |
| VAST(4)                                                                 |       | 60,219,432                                                            |       |   | 3.0 | % |   |
| ING Bank (Eurasia) ZAO(5)                                               |       | 818,105,315                                                           |       |   | 41.2 | % |   |
| Other Public  Float (including our directors and executive officers)(6) |       | 119,654,451                                                           |       |   | 6.0 | % |   |
| Total(7)                                                                |       | 1,987,925,652                                                         |       |   | 100.0 | % |   |
|                                                                         |            |                                                                       |            |  |  |  |  |  |  |

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(1)                Vladimir P.Evtushenkov has a controlling interest in Sistema, and would be consideredunder U.S. securities laws as the beneficial owner of our shares held bySistema, Sistema Holding Limited, Invest-Svyaz and VAST. Mr. Evtushenkovis also the chairman of the board of directors of Sistema.

(2)                In connection withits April 2003 Eurobond offering, Sistema pledged 193,473,900 shares ofour common stock held by Sistema Holding Limited to Deutsche Trustee CompanyLimited.

(3)                Invest-Svyazis a Russian closed joint stock company wholly-owned by Sistema. In 2005,Invest-Svyaz Holding was reorganized into two separate entities: Invest-Svyaz,which serves as a holding company of our shares and is one of our majorshareholders and Invest-Svyaz Holding, a company also 

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wholly-owned bySistema, whose primary business is leasing various types of telecommunicationsand other assets to us.

(4)                VAST is a limitedpartnership formed under the laws of Russia. Sistema owns 100% of VAST. Anextract from our shareholders register dated June 14, 2006 contains anentry prohibiting any transfer of these shares.

(5)                ING Bank (Eurasia)is the local custodian for our sponsored ADR program and the unsponsored GDRprograms.

(6)                We believe thatour directors and executive officers as a group own less than 1% of our shares.

(7)                Our wholly-ownedsubsidiary, Mobile TeleSystems LLC, owns 5,400,486, or 0.3%, of our shares inconnection with our Management Stock Bonus and Stock Option Plans. These areexcluded from the total number of shares presented here.

In April 2003, Sistema acquired directly andindirectly from T-Mobile 199,322,614 shares of common stock amounting, inaggregate, to an additional 10% of our outstanding common stock. This included120,811,184 shares of common stock acquired directly from T-Mobile and theacquisition of all the shares in Invest-Svyaz Holding previously held byT-Mobile, representing a beneficial interest in a further 78,521,430 shares ofcommon stock.

In April 2003 and December 2004, T-Mobilesold an additional 5.0% and 15.1% of our common stock, respectively, in theform of GDRs through an unsponsored GDR program. In September 2005, T-Mobilesold its remaining 10.1% interest in us on the open market.

At December 31, 2004, Sistema owned a 51.0%equity interest in VAST, and the remaining 49.0% interest was held by ASVT, aRussian open joint-stock company. In December 2005, Sistema acquired the49.0% stake in VAST bringing its total interest to 100.0%. In addition, Sistemaacquired a 0.7% stake in us on the open market during 2005. These transactionscollectively increased Sistema’s effective ownership in us from 50.6% at December 31,2004 to 52.8% by December 31, 2005.

As of May 31, 2006,the total number of ADSs outstanding was 155,469,097 representing underlyingownership of 777,345,485 shares, or approximately 39.1% of our outstandingcommon stock. Of these 155,469,097 ADSs, approximately 17.7% were held by U.S.investors, as of March 31, 2006. The shares underlying the ADSs aredeposited with JPMorgan Chase Bank, formerly known as Morgan Guaranty TrustCompany of New York and the local custodian is ING Eurasia.

**B.**               RelatedParty Transactions

**Transactions withSistema and its Affiliates**

**Moscow Bank of Reconstruction and Development (MBRD)**

We have been maintainingcertain bank and deposit accounts with MBRD, a subsidiary of Sistema. As of March 31,2006 and December 31, 2005, we had cash positions at MBRD in the amount of$18.1 million and $18.0 million in current accounts, respectively. Interestaccrued and collected on the deposits for the period ended March 31, 2006amounted to $0.3 million. The related interest accrued and collected on thedeposits for the year ended December 31, 2005 amounted to $5.4 million,and was included as a component of interest income in the accompanyingconsolidated statements of operations.

**Rosno OJSC (Rosno)**

Wearranged medical insurance for our employees and insured our property with Rosno, a subsidiary of Sistema. Insurance premiums paid toRosno for the period ended March 31, 2006 and the year ended 

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December 31,2005 amounted to$0.3 million and $12.6 million, respectively. Management believes that all ofthe insurance contracts with Rosno were entered into on market terms.

**Maxima Advertising Agency (Maxima) and Mediaplanning**

We have contracts foradvertising services with Maxima and Mediaplanning, subsidiaries of Sistema. Advertisingfees paid to Maxima and Mediaplanning forthe period ended March 31, 2006 amounted to $23.1 million and $6.0million, respectively, and to $58.6 million and $21.5 million for the yearended December 31, 2005, respectively. Management believes that theseagreements were entered into on market terms.

**Kvazar-Micro Corporation (Kvazar)**

In 2005, we signedagreements to purchase software systems andrelated equipment with Kvazar, a subsidiary of Sistema since July 2004.Related fees for the period ended March 31, 2006 and the year ended December 31,2005 amounted to approximately $9.0 millionand $62.0 million, respectively. Management believes that these agreements wereentered into on market terms.

**Telmos**

Wehave interconnection and line rental agreements with, and receive domestic and internationallong-distance services from Telmos, a subsidiary of Sistema. Interconnection and line rental expenses for theperiod ended March 31, 2006 and the year ended December 31, 2005 were$0.3 million and $1.2 million, respectively. Management believes thatthese arrangements were entered into on market terms.

**Moscow City Telephone Network (MGTS)**

We have line rentalagreements with MGTS, a subsidiary of Sistema. We also rent a cable plant fromMGTS for the installation of fiber optic cable, as well as buildings for administrative offices and premisesfor switching and base station equipment. Rental expenses for the period ended March 31, 2006 and the year ended December 31, 2005 amounted to$1.9 million and $8.3 million, respectively. Management believesthat all these transactions were entered into on market terms.

**MTU-Inform**

We have interconnectionand line rental agreements with MTU-Inform, a subsidiary of Sistema.Interconnection and rental expenses for the period ended March 31, 2006 and the year ended December 31,2005 were $8.5 million and $24.0 million, respectively. Management believesthat these agreements were entered into on market terms.

**Comstar UTS**

Wehave interconnection and line rental agreements with Comstar UTS, asubsidiary of Sistema. Amounts expensed under these arrangements for the period ended March 31, 2006 and theyear ended December 31, 2005 were $1.4 million and $4.7 million,respectively. Management believes that these arrangements were entered into onmarket terms.

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**Invest-Svyaz-Holding**

Welease network equipment from Invest-Svyaz Holding, a wholly-ownedsubsidiary of Sistema. These leases are classified as capital leases. Theinterest rate implicit in these leases varies from 14% to 44%, which managementbelieves are market terms. The following table summarizes the future minimumlease payments under capital leases to Invest-Svyaz Holding together with thepresent value of the net minimum lease payments as of December 31, 2005:
|                                                                                    | ** ** | **Amount**              | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                         | ** ** | **(in thousands)** | ** ** |
| **Payments due in the year ended December 31,** |       |                    |       |   |   |
| 2006                                                                               |       |                    | $3,233     |   |   |
| 2007                                                                               |       |                    | 653        |   |   |
| 2008                                                                               |       |                    | —     |   |   |
| Total minimum  lease payments (undiscounted)                                       |       |                    | 3,886      |   |   |
| Less amount  representing interest                                                 |       |                    | (540       | ) |   |
| Present value of  net minimum lease payments                                       |       |                    | 3,346      |   |   |
| Less current  portion of lease obligations                                         |       |                    | (2,740     | ) |   |
| Non-current portion of  lease obligations                                          |       |                    | $606       |   |   |

 

Principal and interest paid to Invest-Svyaz Holdingfor the period ended March 31, 2006 amounted to $1.8 million and $0.3million, respectively, and to $6.1 million and $2.0 million, respectively,for the year ended December 31, 2005. Management believes that theseagreements were entered into on market terms.

We have also guaranteeddebt of Invest-Svyaz Holding in the amount of $3.5****million to a third party, which is used by Invest-SvyazHolding primarily to finance its leases to us and expired in May 2006. Theissued guarantees are recorded at fair value in the audited consolidatedbalance sheet.

**Strom Telecom**

During 2005, we entered intoa number of agreements with Strom Telecom, a subsidiary of Sistema, for atotal amount of up to $166.5 million. Pursuant to these contracts, we purchasedbilling systems and communication software support systems for approximately$16.0 million and $179.2 million for the period ended March 31, 2006 andthe year ended December 31, 2005, respectively. Advances paid under theseagreements and outstanding as of March 31, 2006 and December 31, 2005amounted to $9.6 million and $45.7 million, respectively. Management believesthat these agreements were entered into on market terms.

**MTT**

In 2005, we entered into interconnection and linerental agreements with MTT, a subsidiary of Sistema. Amounts expensed underthese agreements for the period ended March 31, 2006 and the year ended December 31,2005 amounted to $12.6 million and $41.1 million, respectively. Managementbelieves that these agreements were entered into on market terms.

**East-West UnitedBank S.A.**

In 2004, we entered into adeposit agreement with East-West United Bank S.A., a subsidiary of Sistema, fora total amount of $23.1 million. In 2005, the agreement was amended to changethe maturity date from April 2005 to February 2006. As ofMarch 31, 2006, the deposit matured.

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**MTSBelarus**

As of December 31, 2005, we providedMTS Belarus with a total of $41.3million in loans. These loans bear interest of 3.00% to 11.00% perannum. In addition, we guarantee the debt of MTS Belarus in the amount of $9.0****million to Citibank Internationalplc, which expires by April 2007. The issued guarantees are recorded atfair value in the audited consolidated balance sheet. See Note 22 to ouraudited consolidated financial statements.

**C.**               Interestsof Experts and Counsel

Not applicable.

**Item 8.**                        Financial Information

**A.**                ConsolidatedStatements and Other Financial Information

**8.A.1-6.   SeeItem 18.**

**8.A.7.   Litigation**

On June 7, 2004, the GeneralProsecutor of Ukraine filed a claim against us and others in the KievCommercial Court seeking to unwind the sale by Ukrtelecom of its 51% stake inUMC to us. The complaint also sought an order prohibiting us from alienating51% of our stake in UMC until the claim was resolved on the merits and on August 12,2004, the Kiev Commercial Court rejected the General Prosecutor’s claim. On August 26,2004, the General Prosecutor requested the Constitutional Court of Ukraine toreview whether certain provisions of the Ukrainian privatization law limitingthe alienation of assets by privatized companies were applicable to the sale byUkrtelecom of UMC shares to us. For a description of this lawsuit, see “Item 3.Key Information—D. Risk Factors—Risks Relating to Our Business—If our purchaseof UMC is found to have violated Ukrainian law or the purchase is unwound, ourbusiness, prospects and results of operations would be materially adverselyaffected.”

In 2005, we acquired a 51.0%stake in Tarino for $150.0 million in cash. Tarino was at that time theindirect owner, through its wholly-owned subsidiaries, of Bitel,a Kyrgyz company holding a GSM 900/1800 license for the entireterritory of Kyrgyzstan. In December 2005, Bitel’s offices wereseized by an unidentified group of people, possibly in connection with a KyrgyzSupreme Court ruling in favor of a third party recognizing their rights to theshares of Bitel. As a result of these events, we currently do not exerciseoperational control over Bitel and are in the process of defending ourownership stake in the company in the courts of the Kyrgyz Republic, BritishVirgin Islands and United Kingdom. For additional information, see Note 20 toour audited consolidated financial statements.

**TaxAudit**

In March 2005, the Russian taxauthorities audited our compliance with tax legislation for the year ended December 31,2002. Based on the results of this audit, the Russian tax authorities assessedthat approximately 372.2 million rubles (approximately $12.9 million as atDecember 31, 2005) of additional taxes, penalties and fines were payableby us. We have filed a petition with the Moscow Arbitration Court seeking thepartial invalidation of the tax assessment. The amount of disputed taxes andfines equals 281.5 million rubles (approximately $9.8 million as at December 31,2005). Generally, tax declarations remainopen and subject to inspection for a period of three years following the taxyear. As of December 31, 2005, our tax declarations for the precedingthree fiscal years were subject to further review.

In Ukraine, there are regulatoryuncertainties related to the VAT treatment of mandatory contributions payableto the Ukrainian State Pension Fund, or Pension Fund. As a result, theadditional VAT charges (including penalties) calculated on UMC’s contributionsto the Pension Fund could be up to $38.1 million as of December 31, 2005,which includes a $13.5 million claim by the Ukrainian tax authorities during arecent audit of UMC. Although UMC initiated a claim against the tax authoritiesin 2005 and received favorable rulings in the Kyiv City Commercial Court andthe Kyiv City Commercial 

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Court ofAppeal, we expect that the tax authorities will appeal the rulings. We believethat paying the VAT charges is not in line with industry practice and intend todefend our position. As of December 31, 2005, no VAT amount was paid tothe Ukrainian tax authorities nor did we accrue the VAT amount in ourconsolidated financial statements.

**8.A.8.Dividend Distribution Policy**

On June 26, 2004, our shareholdersapproved cash dividends in the amount $220.0 million (including dividendson treasury shares of $1.1 million), which have been fully paid. On June 22,2005, our shareholders approved cash dividends in the amount$402.6 million (including dividends on treasury shares of$1.5 million), which have also been fully paid. In June 2006, ourshareholders approved annual cash dividends in the amount of $561.6 million(including dividends on treasury shares of $1.5 million) for the year2005, payable in 2006. We expect that our shareholders will continue to approveannual cash dividends, although we do not have a formal dividend policy.

Annual dividend payments, if any, must berecommended by our Board of Directors and approved by our shareholders. Weanticipate that any dividends we may pay in the future on the sharesrepresented by the ADSs will be declared and paid to the depositary in rublesand will be converted into U.S. dollars by the depositary and distributed toholders of ADSs, net of the depositary’s fees and expenses. Accordingly, thevalue of dividends received by holders of ADSs will be subject to fluctuationsin the exchange rate between the ruble and the dollar.

**B.**               SignificantChanges

**SyndicatedLoan**

On April 21, 2006, we entered into asyndicated loan facility with the following international financialinstitutions: The Bank of Tokyo-Mitsubishi UFJ, Ltd., Bayerische Landesbank,HSBC Bank plc, ING Bank N.V., Raiffeisen Zentralbank Oesterreich AG, SumitomoMitsui Banking Corporation Europe Limited. The facility allows us to borrow upto $1,330.0 million and is available in two tranches of $630.0 million and$700.0 million. We expect to use theproceeds for general corporate purposes, including acquisitions and refinancingof existing indebtedness.Thefirst tranche bears interest of LIBOR+0.80% per annum and matures in threeyears. The second bears interest of LIBOR+1.00% per annum within the firstthree years and LIBOR+1.15% per annum thereafter and is repayable in 13 equalquarterly installments, commencing in April, 2008. The second tranche maturesin April 2011. The loan is subject to certain restrictive covenants,including, *inter alia*, certain financial ratios,limitations on dispositions of assets and limitations on transactions withassociates.

**HSBC Bankplc Loan**

***In January 2006, we entered into acredit facility agreement with HSBC Bank plc. The facility allowed borrowing ofup to $100.0 million. We expect to use the proceeds for general corporatepurposes. The loan bore interest of LIBOR+0.75% per annum. An arrangement feein the amount of $0.6 million was paid in accordance with the agreement. Thefacility was repaid in April 2006.***

**Merger**

On March 31, 2006, the Russianregistration authority approved the merger of nine of our wholly-ownedsubsidiaries in Russia into us. These subsidiaries are Gorizont RT, TAIFTelcom, MTS-RTK, Sibchallenge, TSS, BM Telekom, FECS—900, SCS-900 andUraltel. The merger was completed in line with our strategy to consolidateadministratively all of our majority-owned subsidiaries and improve managementefficiency.

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**NewPresident and CEO**

On June 14, 2006, theExtraordinary General Meeting of Shareholders terminated the powersof the preceding President and CEO, Mr. Vassily Sidorov, and elected Mr. LeonidMelamed as our new President and CEO. Mr. Melamed has been our actingPresident and CEO since April 14, 2006.

**RenewedBrand**

On May 10, 2006, Sistema introduced auniversal brand featuring a new egg-shaped logo for each of thetelecommunications companies operating within the Sistema Telecom group,including us. We believe that our new brand symbolizes leadership and a dynamicand innovative approach to doing business. The re-branding reflects ashift in our marketing strategy with a renewed focus on the simplification ofour communications to the general public. One of the goals through ourre-branding efforts is to create a simple set of tariff plans with clearadvantages over our competitors and easy-to-understand descriptions of the widerange of our services and product offerings. In addition, we aim to simplifythe purchasing experience for our customers by creating a universal format forour sales offices, transforming them into visually appealing, practical andconvenient venues where buyers can obtain product information and test ourlatest products and services.

Under this universal brand, our subscriberswill have access to a wide range of telecommunications products and services,including Internet access, mobile and fixed-line telephones, single billing anda single interface for all of the subscriber’s telecommunications needs. Inaddition, we expect our re-branding efforts to increase our recognition amongexisting and potential clients, promote cross-sales of the companies using thebrand and enhance subscriber loyalty.

**Item 9.**                        Offer and Listing Details

(Only Items 9.A.4 and 9.C are applicable.)

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**A.4. MarketPrice Information**

The followingtable sets forth the annual high and low market prices per ADS on the New YorkStock Exchange for each of the fiscal years ended December 31, 2001, 2002,2003, 2004 and 2005; the high and low market prices per ADS for each fullfinancial quarter during the fiscal years ended December 31, 2004 and2005; and the high and low market prices per ADS for each of the most recentsix months. The table also sets forth the high and low market prices per shareof common stock for the first full financial quarter and each of the mostrecent six months. 
|                        | ** ** | **Common Stock  High** | ** ** | **Common Stock  Low** | ** ** | **ADS  High** | ** ** | **ADS  Low** | ** ** |
|------------------------|------------|-----------------------------|------------|----------------------------|------------|---------------|------------|--------------|------------|
| May 2006          |       |                        | 188.5  RUR |                       |       |          | 149.0  RUR |         |       | $35.14 |   | $28.65 |   |
| April 2006        |       |                        | 189.8  RUR |                       |       |          | 179.0  RUR |         |       | $34.15 |   | $32.25 |   |
| March 2006        |       |                        | 209.5  RUR |                       |       |          | 184.5  RUR |         |       | $38.96 |   | $33.03 |   |
| February 2006     |       |                        | 206.9  RUR |                       |       |          | 186.5  RUR |         |       | $37.90 |   | $35.10 |   |
| January 2006      |       |                        | 200.9  RUR |                       |       |          | 190.0  RUR |         |       | $38.14 |   | $35.00 |   |
| December 2005     |       |                        | 206.6  RUR |                       |       |          | 193.1  RUR |         |       | $35.86 |   | $34.10 |   |
| First Quarter  2006    |       |                        | 209.5 RUR  |                       |       |          | 184.5 RUR  |         |       | $38.96 |   | $33.03 |   |
| Fourth  Quarter 2005   |       |                        | 228.5  RUR |                       |       |          | 190.8  RUR |         |       | $40.15 |   | $34.10 |   |
| Third Quarter  2005    |       |                        | 228,7  RUR |                       |       |          | 194.0  RUR |         |       | $41.19 |   | $33.89 |   |
| Second  Quarter 2005   |       |                        | 208.0  RUR |                       |       |          | 179.0  RUR |         |       | $37.51 |   | $31.15 |   |
| First Quarter  2005(1) |       |                        | 222.0  RUR |                       |       |          | 182.0  RUR |         |       | $40.20 |   | $32.02 |   |
| Fourth  Quarter 2004   |       |                        |       |                       |       |          |       |         |       | $155.90 |   | $117.35 |   |
| Third Quarter  2004    |       |                        |       |                       |       |          |       |         |       | $149.75 |   | $108.20 |   |
| Second  Quarter 2004   |       |                        |       |                       |       |          |       |         |       | $141.15 |   | $98.40 |   |
| First Quarter  2004    |       |                        |       |                       |       |          |       |         |       | $131.70 |   | $83.00 |   |
| 2005(1)                |       |                        | 228.7 RUR  |                       |       |          | 179.0 RUR  |         |       | $41.19 |   | $31.15 |   |
| 2004                   |       |                        |       |                       |       |          |       |         |       | $155.90 |   | $83.00 |   |
| 2003                   |       |                        |       |                       |       |          |       |         |       | $87.50 |   | $35.40 |   |
| 2002                   |       |                        |       |                       |       |          |       |         |       | $41.50 |   | $23.75 |   |
| 2001                   |       |                        |       |                       |       |          |       |         |       | $38.75 |   | $22.41 |   |

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(1)                EffectiveJanuary 3, 2005, the ADS ratio was changed from 1 ADS per 20 ordinaryshares to 1 ADS per 5 ordinary shares, a 1:4 ADS split.

**C.**               Markets

Our commonstock has been listed on the Moscow Interbank Currency Exchange since December 2003.American Depositary Shares, each representing five of our common stock, havebeen listed on the New York Stock Exchange under the symbol “MBT” since June 30,2000. Our ADSs are also traded on the London Stock Exchange under the symbols “MOBD,”and on the Frankfurt Stock Exchange under the symbol “MKY.” Our U.S. dollar-denominatednotes are listed on the Luxembourg Stock Exchange.

**Item 10.**                 AdditionalInformation

**A.**                ShareCapital

Not applicable.

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**B.**               Charterand Certain Requirements of Russian Legislation

We describebelow material provisions of our charter in effect on the date of this documentand certain requirements of Russian legislation. In addition to thisdescription, we urge you to review our charter to learn its complete terms.

**OurPurpose**

Article 2.1 of our charter providesthat our principal purpose is to obtain profits through the planning,marketing, and operation of a radiotelephone mobile cellular network in theRussian Federation.

We areregistered with the Ministry of Taxes and Duties of the Russian Federationunder the state registration number 1027700149124.

**GeneralMatters**

Pursuant to ourcharter, we have the right to issue registered common stock, preferred stock,and other securities provided for by legal acts of the Russian Federation withrespect to securities. Our capital stock currently consists of 1,993,326,138common shares, each with a nominal value of 0.1 rubles, all of which are fullypaid, issued and outstanding. Under Russian legislation charter capital refersto the aggregate nominal value of the issued and outstanding shares. We arealso authorized to issue an additional 103,649,654 common shares with a nominalvalue of 0.1 rubles each. No preferred shares are authorized or outstanding.Preferred stock may only be issued if corresponding amendments have been madeto our charter pursuant to a resolution of the general meeting of shareholders.We have issued only common stock. The Federal Law on Joint Stock Companiesrequires us to dispose of any of our shares that we acquire within one year oftheir acquisition or, failing that, reduce our charter capital. We refer tosuch shares as treasury shares for the purposes hereof. Russian legislationdoes not allow for the voting of such treasury shares. As of June 14,2006, we had more than a 1000 shareholders for purposes of the Federal Law onJoint Stock Companies.

**RightsAttaching to Shares**

Holdersof our common stock have the right to vote at all shareholders’ meetings. Asrequired by the Federal Law on Joint Stock Companies and our charter, allshares of our common stock have the same nominal value and grant identicalrights to their holders. Each fully paid share of common stock, except fortreasury shares, gives its holder the right to:

·       freely transferthe shares without consent of other shareholders;

·       receivedividends;

·       participatein shareholders’ meetings and vote on all matters within shareholders’competence;

·       transfervoting rights to other Company’s shareholders or a representative on the basisof a power of attorney;

·       participatein the election and dismissal of members of the board of directors and reviewcommission;

·       ifholding, alone or with other holders, 2% or more of the voting stock, within105 days after the end of our fiscal year, make proposals for the agendaof the annual shareholders’ meeting and nominate candidates to the board ofdirectors, the counting commission, the review commission and for companypresident;

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·       ifholding, alone or with other holders, 10% or more of the voting stock, demandfrom the board of directors the calling of an extraordinary shareholders’meeting or an unscheduled audit by the review commission or an independentauditor;

·       demand,under the following circumstances, the repurchase by us of all or some of theshares owned by it, as long as such holder voted against or did not participatein the voting on the decision approving the following:

·       anyreorganization;

·       theconclusion of a major transaction, as defined under Russian law; and

·       any amendmentof our charter or approval of a restated version of our charter in a mannerthat restricts the holder’s rights;

·       uponliquidation, receive a proportionate amount of our property after ourobligations are fulfilled;

·       have freeaccess to certain company documents, receive copies for a reasonable fee and,if holding alone or with other holders, 25% or more of the voting stock, haveaccess to accounting documents; and

·       exercise other rights of a shareholder provided by our charter,Russian legislation and decisions of shareholders’ meeting approved inaccordance with its competence.

**PreemptiveRights**

The Federal Lawon Joint Stock Companies and our charter provide existing shareholders with apreemptive right to purchase shares or securities convertible into sharesduring an open subscription in the amount proportionate to their existingshareholdings. In addition, the Federal Law on Joint Stock Companies providesshareholders with a preemptive right to purchase shares or securitiesconvertible into shares, in an amount proportionate to their existingshareholdings, during a closed subscription if the shareholders voted againstor did not participate in the voting on the decision approving suchsubscription. The preemptive right does not apply to a closed subscription tothe existing shareholders provided that such shareholders may each acquire awhole number of shares or securities convertible into shares being placed in anamount proportion to their existing shareholdings. We must provide shareholderswith written notice of the proposed sale of shares at least 45 days priorto the offering, during which time shareholders may exercise their preemptiverights.

**Dividends**

The Federal Law on Joint Stock Companiesand our charter set forth the procedure for determining the quarterly andannual dividends that we may distribute to our shareholders. We may declaredividends based on our first quarter, six month, nine month or annual results.Dividends are recommended to a shareholders’ meeting by a majority vote of theboard of directors and approved by the shareholders’ meeting by a majorityvote. A decision on quarterly, six month and nine month dividends must be takenwithin three months of the end of the respective quarter at the shareholders’meeting; and a decision on annual dividends must be taken at the annual generalshareholders’ meeting. The dividend approved at the shareholders’ meeting maynot be more than the amount recommended by the board of directors. Dividends tobe paid based on the shareholders’ decision shall be paid up until the end ofthe year on which the decision to make the payment has been adopted, unless theshareholders’ decision provides for a lesser term. Dividends are distributed toholders of our shares as of the record date for the shareholders’ meetingapproving the dividends. See “—General Shareholders’ Meetings—Notice andParticipation” below.

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TheFederal Law on Joint Stock Companies allows dividends to be declared only outof net profits calculated under Russian accounting standards and as long as thefollowing conditions have been met:

·       thecharter capital of the company has been paid in full;

·       the valueof the company’s net assets on the date of the adoption of the decision to paydividends is not less (and would not become less as a result of the proposeddividend payment) than the sum of the company’s charter capital, the company’sreserve fund and the difference between the liquidation value and the par valueof the issued and outstanding preferred stock of the company;

·       the companyhas repurchased all shares from shareholders having the right to demandrepurchase; and

·       the company is not, and would not become, insolvent as the result ofthe proposed dividend payment.

**Distributionsto Shareholders on Liquidation**

UnderRussian legislation, liquidation of a company results in its terminationwithout the transfer of rights and obligations to other persons as legalsuccessors. The Federal Law on Joint Stock Companies and our charter allows usto be liquidated:

·       by a three-quartersmajority vote of a shareholders’ meeting; or

·       by a courtorder.

Following a decision to liquidate us, theright to manage our affairs would pass to a liquidation commission appointed byshareholders’ meeting. In the event of an involuntary liquidation, the courtmay assign the duty to liquidate the company to its shareholders. Creditors mayfile claims within a period to be determined by the liquidation commission, butsuch period must not be less than two months from the date of publication ofnotice of liquidation by the liquidation commission.

TheCivil Code of the Russian Federation gives creditors the following order ofpriority during liquidation:

·       individualsowed compensation for injuries, deaths or moral damages;

·       employees;

·       federaland local governmental entities claiming taxes and similar payments to thefederal and local budgets and to non-budgetary funds; and

·       othercreditors in accordance with Russian legislation.

·       Claims ofcreditors in obligations secured by a pledge of the company’s property (“securedclaims”) are satisfied out of the proceeds of sale of the pledged propertyprior to claims of any other creditors except for the creditors of the firstand second priorities described above, provided that claims of such creditorsarose before the pledge agreements in respect of the company’s property weremade. To the extent that the proceeds of sale of the pledged property are notsufficient to satisfy secured claims, the latter are satisfied simultaneouslywith claims of the fourth priority creditors as described above.

·       TheFederal Law on Insolvency (Bankruptcy), however, provides for a different orderof priority for creditors’ claims in the event of bankruptcy.

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Theremaining assets of a company are distributed among shareholders in thefollowing order of priority:

·       paymentsto repurchase shares from shareholders having the right to demand repurchase;

·       paymentsof declared but unpaid dividends on preferred shares and the liquidation valueof the preferred shares determined by the company’s charter, if any; and

·       payments to holders of common and preferred shares.

**Liabilityof Shareholders**

TheCivil Code of the Russian Federation and the Federal Law on Joint StockCompanies generally provide that shareholders in a Russian joint stock companyare not liable for the obligations of a joint stock company and bear only therisk of loss of their investments. This may not be the case, however, when oneperson or entity is capable of determining decisions made by another person orentity. The person or entity capable of determining such decisions is called an“effective parent.” The person or entity whose decisions are capable of beingso determined is called an “effective subsidiary.” The effective parent bearsjoint and several responsibility for transactions concluded by the effectivesubsidiary in carrying out these decisions if:

·       thisdecision-making capability is provided for in the charter of theeffective subsidiary or in a contract between such persons; and

·       theeffective parent gives binding instructions to the effective subsidiary.

Thus, a shareholder of an effective parentis not itself liable for the debts of the effective parent’s effectivesubsidiary, unless that shareholder is itself an effective parent of theeffective parent. Accordingly, a shareholder will not be personally liable forour debts or those of our effective subsidiaries unless such shareholdercontrols our business and the conditions set forth above are met.

In addition, aneffective parent is secondarily liable for an effective subsidiary’s debts ifan effective subsidiary becomes insolvent or bankrupt resulting from the actionor omission of an effective parent only when the effective parent has used theright to give binding instructions, knowing that the consequence of carryingout this action would be insolvency of this effective subsidiary. This is thecase no matter how the effective parent’s capability to determine decisions ofthe effective subsidiary arises, such as through ownership of voting securitiesor by contract. In these instances, other shareholders of the effectivesubsidiary may claim compensation for the effective subsidiary’s losses fromthe effective parent that caused the effective subsidiary to take any action orfail to take any action knowing that such action or failure to take actionwould result in losses.

**Alterationof Capital**

***Charter Capital Increase***

We mayincrease our charter capital by

·       issuingnew shares; or

·       increasingthe nominal value of previously issued shares.

A decision on any issuance of shares orsecurities convertible into shares by closed subscription, or an issuance byopen subscription of common shares or securities convertible into common sharesconstituting 25% or more of the number of issued common shares, requires a three-quartersmajority vote of a shareholders’ meeting. Otherwise, a decision to increase thecharter capital by increasing the nominal value of issued shares requires amajority vote of a shareholders’ meeting. In certain circumstances 

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provided in ourcharter, a decision to increase the charter capital may be taken by our boardof directors. In addition, the issuance of shares above the number provided inour charter necessitates a charter amendment, which requires a three-quartersaffirmative vote of a shareholders’ meeting.

The Federal Law on Joint Stock Companiesrequires that the value of newly issued shares be determined by the board ofdirectors based on their market value but not less than their nominal value,except in limited circumstances where (i) existing shareholders exercise apreemptive right to purchase shares at not less than 90% of the price paid bythird parties, or (ii) fees up to 10% are paid to intermediaries, in whichcase the fees paid may be deducted from the price. The price may not be set atless than the nominal value of the shares. The board of directors shall valueany in-kind contributions for the new shares, based on the appraisal report ofan independent appraiser.

Russiansecurities regulations set out detailed procedures for the issuance andregistration of shares of a joint stock company. These procedures require:

·       priorregistration of a share issuance with the Federal Service for the FinancialMarkets;

·       publicdisclosure of information relating to the share issuance; and

·       following the placement of the shares, registration and publicdisclosure of the results of the placement of shares.

***Charter Capital Decrease; Share Buy-Backs***

The Federal Law on Joint Stock Companiesdoes not allow a company to reduce its charter capital below the minimumcharter capital required by law, which is 100,000 rubles for an open jointstock company. Our charter requires that any decision to reduce our chartercapital, whether through the repurchase and cancellation of shares or areduction in the nominal value of the shares, be made by a majority vote of ashareholders’ meeting. Additionally, within 30 days of a decision toreduce our charter capital, we must issue a written notice to our creditors andpublish this decision. Our creditors would then have the right to demand,within 30 days of such notice or publication or receipt of our notice,early termination of relevant obligations by us, as well as compensation fordamages.

The Federal Law on Joint Stock Companiesand our charter allow our shareholders or the board of directors to authorizethe repurchase of up to 10% of our shares in exchange for cash. The repurchasedshares pursuant to a board decision must be resold at the market price withinone year of their repurchase or, failing that, the shareholders must decide tocancel such shares and decrease the charter capital. Repurchased shares do notbear voting rights.

A shares repurchase pursuant to a decisionof our shareholders’ meeting to decrease the overall number of shares arecancelled at their redemption.

TheFederal Law on Joint Stock Companies allows us to repurchase our shares onlyif, at the time of repurchase:

·       ourcharter capital is paid in full;

·       we are notand would not become, as a result of the repurchase, insolvent;

·       the valueof our net assets at the time of repurchase of our shares is not less (andwould not become less, as a result of the proposed repurchase) than the sum ofour charter capital, the reserve fund and the difference between theliquidation value and par value of our issued and outstanding preferred shares;and

·       we haverepurchased all shares from shareholders having the right to demand repurchaseof their shares in accordance with Russian law, as described immediately below.

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TheFederal Law on Joint Stock Companies and our charter provide that ourshareholders may demand repurchase of all or some of their shares as long asthe shareholder demanding repurchase voted against or did not participate inthe voting on the decision approving any of the following actions:

·       reorganization;

·       conclusionof a major transaction, as defined under Russian law; or

·       amendmentof our charter or approval of a restated version of our charter in a mannerwhich restricts shareholders’ rights.

We may spend upto 10% of our net assets calculated under Russian accounting standards on thedate of the adoption of the decision which gives rise to a share redemptiondemanded by the shareholders. If the value of shares in respect of whichshareholders have exercised their right to demand repurchase exceeds 10% of ournet assets, we will repurchase shares from each such shareholder on a pro-ratabasis. Repurchase of the shares is at a price agreed on by the board ofdirectors, but shall not be less than the market price determined by anindependent appraiser.

**Registrationand Transfer of Shares**

Russian legislation requires that a jointstock company maintain a register of its shareholders. Ownership of ourregistered shares is evidenced solely by entries made in such register. Any ofour shareholders may obtain an extract from our register certifying the numberof shares that such shareholder holds. Since May 10, 2000, RegistrarNIKoil OJSC has maintained our register of shareholders.

The purchase,sale or other transfer of shares is accomplished through the registration ofthe transfer in the shareholder register, or the registration of the transferwith a depositary if shares are held by a depositary. The registrar ordepositary may not require any documents in addition to those required byRussian legislation in order to transfer shares in the register. Refusal toregister the shares in the name of the transferee or, upon request of thebeneficial holder, in the name of a nominee holder, is not allowed, except incertain instances provided for by Russian legislation, and may be challenged incourt.

**ReserveFund**

Russianlegislation requires that each joint stock company establish a reserve fund tobe used only to cover the company’s losses, redeem the company’s bonds andrepurchase the company’s shares in cases when other funds are not available.Our charter provides for a reserve fund of 15% of our charter capital, fundedthrough mandatory annual transfers of at least 5% of our net profits until thereserve fund has reached the 15% requirement.

**Disclosureof Information**

Russiansecurities regulations require us to make the following periodic publicdisclosures and filings:

·       filingquarterly reports with the Federal Service for the Financial Markets, or theFSFM, containing information about us, our shareholders and depositary, thestructure of our management bodies, the members of the board of directors, ourbranches and representative offices, our shares, bank accounts and auditors,important developments during the reporting quarter, and other informationabout our financial and business activity;

·       filingwith the FSFM and publishing in the FSFM’s periodical print publication, aswell as in other media, any information concerning material facts and changesin our financial and business activity, including our reorganization, certainchanges in the amount of our assets, decisions on share issuances, certainchanges in ownership and shareholding as well as shareholder resolutions;

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·       disclosinginformation on various stages of share placement, issuance and registrationthrough publication of certain data as required by the securities regulations;

·       disclosingour annual report and annual financial statements prepared in accordance withRussian accounting standards;

·       filingwith the FSFM on a quarterly basis a list of our affiliated companies andindividuals; and

·       otherinformation as required by applicable Russian securities legislation.

**GeneralShareholders’ Meetings**

***Procedure***

Thepowers of a shareholders’ meeting are set forth in the Federal Law on JointStock Companies and in our charter. A shareholders’ meeting may not decide onissues that are not included in the list of its competence by the Federal Lawon Joint Stock Companies and our charter. Among the issues which theshareholders have the exclusive power to decide are:

·       charteramendments;

·       reorganizationor liquidation;

·       electionand removal of members of the board of directors;

·       determinationof the amount of compensation for members of the board of directors;

·       appointmentand removal of the company’s president;

·       determinationof the number, nominal value, class/type of authorized shares and the rightsgranted by such shares;

·       changes inour charter capital;

·       appointmentand removal of our external auditor and of the members of our review commissionand counting commission;

·       approvalof certain interested party transactions and major transactions;

·       decisionon our participation in holding companies, commercial or industrial groups, orother associations of commercial entities;

·       approvalof certain internal documents and corporate records;

·       distributionof profits and losses, including approval of dividends;

·       redemptionby the company of issued shares in cases provided by the Federal Law on JointStock Companies; and

·       otherissues, as provided for by the Federal Law on Joint Stock Companies and ourcharter.

Votingat a shareholders’ meeting is generally based on the principle of one vote pershare of common stock, with the exception of the election of the board ofdirectors, which is done through cumulative voting. Decisions are generallypassed by a majority vote of the voting shares present at a shareholders’meeting. However, Russian law requires a three-quarters majority vote ofthe voting shares present at a shareholders’ meeting to approve the following:

·       charteramendments;

·       reorganizationor liquidation;

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·       majortransactions involving assets in excess of 50% of the balance sheet value ofthe company’s assets;

·       determinationof the number, nominal value, and category (type) of authorized shares and therights granted by such shares;

·       repurchaseby the company of its issued shares;

·       anyissuance of shares or securities convertible into shares of common stock byclosed subscription; or

·       issuanceby open subscription of shares of common stock or securities convertible intocommon stock, in each case, constituting 25% or more of the number of issuedand outstanding shares of common stock.

The quorum requirement for our shareholders’meetings is met if holders of shares (or their representatives) accounting formore than 50% of the issued voting shares are present. If the 50% quorumrequirement is not met, another shareholders’ meeting with the same agenda may(and, in case of an annual shareholders’ meeting must) be scheduled and thequorum requirement is satisfied if holders of shares (or their representatives)accounting for at least 30% of the issued voting shares are present at thatmeeting.

Theannual shareholders’ meeting must be convened by the board of directors betweenMarch 1 and June 30 of each year, and the agenda must include thefollowing items:

·       electionof the members of the board of directors;

·       electionof the president of the company and the counting commission, if their terms areexpiring;

·       approvalof the annual report and the annual financial statements, including the balancesheet and profit and loss statement;

·       approvalof distribution of profits, including approval of dividends, and losses, ifany;

·       appointmentof an independent auditor; and

·       appointmentof the members of the review commission.

A shareholder or group of shareholdersowning in the aggregate at least 2% of the issued voting shares may introduceproposals for the agenda of the annual shareholders’ meeting and may nominatecandidates for the board of directors, counting commission, review commissionand company president. Any agenda proposals or nominations must be provided tothe company no later than 105 calendar days after the preceding financial yearend.

Extraordinary shareholders’ meetings may becalled by the board of directors on its own initiative, or at the request ofthe review commission, the independent auditor or a shareholder or group ofshareholders owning in the aggregate at least 10% of the issued voting sharesas of the date of the request. The decision by the board of directors to callor reject the call for an extraordinary shareholders’ meeting shall be sent tothe party that requested the meeting within three days after such a decisionwas made.

A general meeting of shareholders may beheld in a form of a meeting or by absentee ballot. The form of a meetingcontemplates the adoption of resolutions by the general meeting of shareholdersthrough the attendance of the shareholders or their authorized representativesfor the purpose of discussing and voting on issues of the agenda, provided thatif a ballot is mailed to shareholders for participation at a meeting convenedin such form, the shareholders may complete and mail the ballot back to thecompany without personally attending the meeting. A general meeting of theshareholders by absentee ballot contemplates the determination of collectingshareholders’ opinions on issues of the agenda by means of a written poll.

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Thefollowing issues cannot be decided by a shareholders’ meeting by absenteeballot:

·       electionof the members of the board of directors;

·       electionof the review commission;

·       approvalof a company’s independent auditor; and

·       approval of the annual report, the annual financial statements,including balance sheet, profit and loss statement, and any distribution ofprofits, including approval of annual dividends and losses, if any.

***Notice and Participation***

All shareholders entitled to participate ina general shareholders’ meeting must be notified of the meeting, whether themeeting is to be held in the form of a meeting or by absentee ballot, no lessthan 30 days prior to the date of the meeting, and such notification shallspecify the agenda for the meeting. However, if it is an extraordinaryshareholders’ meeting to elect the board of directors, shareholders must benotified at least 50 days prior to the date of the meeting. Only thoseitems that were set out in the agenda to shareholders may be voted upon at ageneral shareholders’ meeting.

If a nominal holder of the shares registersin the register of shareholders, then a notification of the shareholders’meeting shall be sent to the nominal holder. The nominal holder must notify itsclients in accordance with Russian legislation or an agreement with the client.

The list of shareholders entitled toparticipate in a general shareholders’ meeting is to be compiled on the basisof data in our shareholders register on the date established by the board ofdirectors, which date may neither be earlier than the date of adoption of theboard resolution to hold a general shareholders’ meeting nor more than50 days before the date of the meeting (or, in the case of anextraordinary shareholders’ meeting to elect the board of directors, not laterthan 65 days before the date of the meeting).

Theright to participate in a general meeting of shareholders may be exercised by ashareholder as follows:

·       bypersonally participating in the discussion of agenda items and voting thereon;

·       by sendingan authorized representative to participate in the discussion of agenda itemsand to vote thereon;

·       bysubmitting a written ballot reflecting the shareholders’ voting on the agendaitems; or

·       by delegating the right to submit such written ballot to anauthorized representative.

**Board ofDirectors**

Our charter provides that our entire boardof directors is up for election at each annual general shareholders’ meeting.Our board of directors is elected through cumulative voting. Under cumulativevoting, each shareholder may cast an aggregate number of votes equal to thenumber of shares held by such shareholder multiplied by the number of personsto be elected to our board of directors, and the shareholder may give all suchvotes to one candidate or spread them between two or more candidates. Beforethe expiration of their term, the directors may be removed as a group at anytime without cause by a majority vote of a shareholders’ meeting.

The Federal Law on Joint Stock Companiesrequires at least a five-member board of directors for all joint stockcompanies, at least a seven-member board of directors for a joint stockcompany with more than 1,000 holders of voting shares, and at least anine-member board of directors for a joint stock 

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company withmore than 10,000 holders of voting shares. Only natural persons (as opposed tolegal entities) are entitled to sit on the board. Members of the board ofdirectors are not required to be shareholders of the company. The actual numberof directors is determined by the company’s charter or a decision of theshareholders’ meeting. Our charter provides that our board of directorsconsists of seven members, which number may be increased to nine pursuant to adecision of the general meeting of shareholders. Currently, our board ofdirectors consists of seven members.

The Federal Law on Joint Stock Companies prohibits a board of directorsfrom acting on issues that fall within the exclusive competence of the generalshareholders’ meeting. Our board of directors has the power to perform thegeneral management of the company, and to decide, among others, the followingissues:

·       determinationof our business priorities;

·       conveningannual and extraordinary shareholders’ meetings, except in certaincircumstances specified in the Federal Law on Joint Stock Companies;

·       approvalof the agenda for the shareholders’ meeting and determination of the recorddate for shareholders entitled to participate in a shareholders’ meeting;

·       placementof our bonds and other securities in cases specified in the Federal Law onJoint Stock Companies;

·       determinationof the price of our property and of our securities to be placed or repurchased,as provided for by the Federal Law on Joint Stock Companies;

·       repurchaseof our shares, bonds, and other securities in certain cases provided for by theFederal Law on Joint Stock Companies;

·       recommendationson the amount of the dividend and the payment procedure thereof;

·       recommendationson the amount of remuneration and compensation to be paid to the members of ourreview commission and on the fees payable for the services of an independentauditor;

·       the use ofour reserve fund and other funds;

·       approvalof our internal documents, except for those documents whose approval fallswithin the competence of our shareholders or the president;

·       thecreation and liquidation of branches and representative offices;

·       approvalof major and interested party transactions in certain cases provided for by theFederal Law on Joint Stock Companies;

·       increasingour charter capital by issuing additional shares within the limits of theauthorized charter capital, except in certain circumstances specified in ourcharter;

·       approvalof our share registrar and the terms of the agreement with it; and

·       otherissues, as provided for by the Federal Law on Joint Stock Companies and ourcharter.

Our chartergenerally requires a majority vote of the directors present for an action topass, with the exception of actions for which Russian legislation requires aunanimous vote or a majority vote of the disinterested and independentdirectors, as described therein. A board meeting is considered duly assembledand legally competent to act when a majority of elected directors is present.

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The special Regulation “About the Board of Directors of OJSC MobileTeleSystems” was approved by the annual shareholders’ meeting on June 23,2006. In accordance with clause 1.8 of the Regulation, the members of theboard of directors have the right to:

·       receiveinformation regarding our operations;

·       proposeissues to be discussed by the board of directors;

·       review theminutes of the board of directors meetings;

·       expresstheir own point of view during the board of directors meetings;

·       request toinclude in the minutes of the meetings their personal opinion concerning issueson the agenda and decisions made with respect thereto; and

·       receive aremuneration and/or compensation of expenses related to the execution of theirduties as members of the board of directors in accordance with decisions of thegeneral shareholders’ meeting.

In accordance with clause 1.9 of the Regulation, the members ofthe board of directors must:

·       act in ourinterests;

·       executetheir duties in a confident and scrupulous manner;

·       act withintheir rights and in accordance with the purposes of the board of directors;

·       notdistribute confidential information concerning us and protect such informationfrom unlawful and improper use and publishing, and not use such confidentialinformation in their own or third parties’ commercial purposes;

·       participatein the work of the board of directors;

·       participatein the voting process during the board of directors meetings;

·       completethe tasks assigned by the board of directors;

·       evaluatethe risks and consequences of the decisions made;

·       inform uson a timely basis about their participation in the management of othercompanies and changes in such participation;

·       restrainfrom voting on issues of personal interest;

·       inform theboard of directors about future deals in which they may have a personalinterest;

·       discloseinformation about the holding, disposal or acquisition of our shares and othersecurities; and

·       restrain from actions, which could lead to a conflict between theirpersonal and our interests.

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**InterestedParty Transactions**

Underthe Federal Law on Joint Stock Companies, certain transactions defined as “interestedparty transactions” require approval by disinterested directors or shareholdersof the company. “Interested party transactions” include transactions involvinga member of the board of directors or member of any executive body of thecompany (including the company’s chief executive office and/or the company’smanaging organization), any person that owns, together with any affiliates, atleast 20% of a company’s issued voting shares or any person who is able todirect the actions of the company, if that person and/or that person’s spouse,parents, children, adoptive parents or children, brothers or sisters oraffiliates, is/are:

·       a partyto, or beneficiary of, a transaction with the company, whether directly or as arepresentative or intermediary;

·       the ownerof at least 20% of the issued shares of a legal entity that is a party to, orbeneficiary of, a transaction with the company, whether directly or as arepresentative or intermediary; or

·       a memberof the board of directors or a member of any management body of a company thatis a party to, or beneficiary of, a transaction with the company, whetherdirectly or as a representative or intermediary, or a member of the board ofdirectors or of any management body of a management organization of such acompany.

The Federal Law on Joint Stock Companiesrequires that an interested party transaction by a company with more than 1,000shareholders be approved by a majority vote of the independent directors of thecompany who are not interested in the transaction. For purposes of this rule,an “independent director” is a person who is not, and within the year precedingthe decision to approve the transaction was not, a general director/president,a member of any executive body or an affiliate of the company, or a member ofthe board of directors or any management body of the company’s managementorganization. Additionally, such person’s spouse, parents, children, adoptiveparents or children, brothers or sisters may not, and within the year precedingthe date of the decision to approve the transaction did not, occupy positionsin the executive bodies of the company or positions on the board of directorsor of any management body of the company’s management organization. Forcompanies with 1,000 or fewer shareholders, an interested party transactionmust be adopted by a majority vote of the directors who are not interested inthe transaction if the number of these directors is sufficient to constitute aquorum.

Approvalby a majority of shareholders who are not interested in the transaction isrequired if:

·       the valueof such transaction or a number of interrelated transactions is 2% or more ofthe balance sheet value of the company’s assets determined under Russianaccounting standards;

·       thetransaction or a number of interrelated transactions involves the issuance, bysubscription, of voting shares or securities convertible into voting shares, ora secondary market sale of such securities, in an amount exceeding 2% of thecompany’s issued voting stock;

·       the numberof directors who are not interested in the transaction is not sufficient toconstitute a quorum; or

·       all themembers of the board of directors of the company are interested parties, ornone of them is an independent director.

Approval by a majority of shareholders whoare not interested in the transaction may not be required, until the nextannual shareholders’ meeting, for an interested party transaction if suchtransaction is substantially similar to transactions concluded by the companyand the interested party in the ordinary course of business before such partybecame an interested party with respect to the transaction.

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Theapproval of interested party transactions is not required in the followinginstances:

·       thecompany has only one shareholder that simultaneously performs the functions ofthe executive body of the company;

·       allshareholders of the company are deemed interested in such transactions;

·       thetransactions arise from the shareholders executing their preemptive rights topurchase newly issued shares of the company;

·       thetransactions arise from the repurchase, whether mandatory or not, by thecompany of its issued shares; or

·       the company mergers with another company, and the latter owns morethan three-fourths of the voting capital stock of the company.

**MajorTransactions**

The Federal Lawon Joint Stock Companies defines a “major transaction” as a transaction, or anumber of interrelated transactions, involving the acquisition or disposal, ora possibility of disposal (whether directly or indirectly) of property having avalue of 25% or more of the balance sheet value of the assets of a companydetermined under Russian accounting standards, with the exception oftransactions conducted in the ordinary course of business or transactionsinvolving the placement of common stock, or securities convertible into commonstock. Major transactions involving assets having a value ranging from 25% to50% of the balance sheet value of the assets of a company require unanimousapproval by all members of the board of directors or, failing to receive suchapproval, a simple majority vote of a shareholders’ meeting. Major transactionsinvolving assets having a value in excess of 50% of the balance sheet value ofthe assets of a company require a three-quarters majority vote of ashareholders’ meeting.

**Changein Control**

***Anti-takeover Protection***

Russian legislation requires that anyperson that intends, either individually or together with its affiliates, toacquire 30% or more (including, for such purposes, the shares already owned bythis person or its affiliates) of the common stock of a company having morethan 1,000 holders of common stock, must give at least 30, but no more than 90,days’ prior written notice to the company. Additionally, the Federal Law onJoint Stock Companies provides that a person that has acquired eitherindividually, or together with its affiliates, 30% or more (including, for suchpurposes, the shares already owned by this person or its affiliates) of thecommon stock of a company with more than 1,000 holders of common stock, within30 days of acquiring the shares, must offer to buy all of the common stockor securities that are convertible into common stock at a market price whichshall not be lower than the weighted average price of the common stock over thesix month period before the date of acquisition. These requirements also applyto any acquisitions of each subsequent 5% or more of the issued common stock ofa company by a person already holding (together with its affiliates) over 30%of the issued common stock of such company. If the acquirer fails to observethese requirements, it will be limited to voting only those shares it purchasedin compliance with these requirements. The requirement to make a buyout offerof securities may be waived in a company’s charter or by a resolution adoptedby a majority vote of a shareholders’ meeting, excluding the votes of theacquirer (and its affiliates). Our charter does not contain a waiver of thisrequirement.

EffectiveJuly 1, 2006, the above requirements of Russian legislation will bemodified as follows:

·       A personintending to acquire 30% or more of an open joint stock company’s ordinaryshares and voting preferred shares (including, for such purposes, sharesalready owned by such person and its 

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affiliates),will be entitled to make a public tender offer to other holders of such sharesor securities convertible into such shares.

·       A personthat has acquired 30% or more of the totality of an open joint-stock company’sordinary shares and voting preferred shares (including, for such purposes,shares already owned by such person and its affiliates, but excluding sharesthat were acquired pursuant to previous voluntary or mandatory offers) willgenerally be required to make, within 35 days of acquiring such shares, apublic tender offer for other shares of the same class and for securitiesconvertible into such shares, at a price determined based on a weighted marketprice of the shares, or on a price supplied by an independent appraiser if theshares have no or insufficient trading history. From the moment of acquisitionof 30% or more of the shares until the moment of delivery of an offer to thesecurity holders, the person making an offer and its affiliates will be able toregister for quorum and vote only 30% of the shares of the company (regardlessof the size of their actual holdings). These rules are also applied (orreapplied) to acquisitions resulting in a person or a group of persons owningmore than 50% and 75% of a company’s outstanding shares.

·       A personthat as a result of such an offer becomes (individually or with its affiliates)the owner of more than 95% of the company’s ordinary shares and votingpreferred shares, must buy out the remaining shares of the company as well asother securities convertible into such shares upon request of the holders ofsuch shares or other securities, and may require such holders to sell suchshares and other securities, at a price based on the prices of the precedingacquisition by the offeror.

·       An offerof the kind described in either of the preceding three paragraphs must beaccompanied by a bank guarantee of payment. If the company is publicly traded,prior notice of the offer must be filed with the FSFM; otherwise, notice mustbe filed with the FSFM no later than the date of the offer. The FSFM may orderamendments to the terms of the offer (including price) in order to bring theminto compliance with the rules.

·       Once suchan offer has been made, competing offers for the same securities can be made bythird parties and, in certain circumstances, acceptance of the initial offermay be withdrawn by the security holders who choose to accept such competingoffer. From the making of such an offer until 20 days after its expiry (whichperiod may in certain cases exceed 100 days) the company’s shareholders’meeting will have the sole power to make decisions on charter capital increase,issuance of securities, approval of certain major transactions, and on certainother significant matters.

The above rules maybe supplemented through FSFM rulemaking, which may result in a wider, narroweror more specific interpretation of these rules by the government andjudicial authorities, as well as by market participants.

**Approvalof the Federal Antimonopoly Service**

Pursuant toRussian antimonopoly legislation, transactions involving companies with acombined value of assets under Russian accounting standards that exceeds acertain threshold or companies registered as having more than a 35% share of acertain commodity market, and which would result in a shareholder (or a groupof affiliated shareholders) holding more than 20% of the voting capital stockof such company, or in a transfer between such companies of assets or rights toassets, the value of which exceeds a certain amount, must be approved inadvance by the Federal Antimonopoly Service.

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**Disclosureof Ownership**

A holder of ourcommon shares is required to disclose information concerning its holdings inthe following cases:

·       the holderacquires 20% or more of our common shares;

·       the holderincreases its percentage holding of our common shares to a level in excess of5% (or an integral multiple thereof) higher than 20% thereof; and

·       the holderdecreases its percentage holding of our common shares to a level in excess of5% (or an integral multiple thereof) higher (but not lower) than 20% thereof.

Effective July 1, 2006, a holder ofour common shares will be required to publicly disclose an acquisition of 5% ormore of the outstanding common shares of the company, as well any change in theamount of common shares held by such holder, if as a result of such change thepercentage of common shares held by the holder becomes greater or lesser than5, 10, 15, 20, 25, 30, 50 or 75 percent of the outstanding common shares of thecompany.

**Notificationof Foreign Ownership**

Foreign persons registered as individualentrepreneurs in Russia who acquire shares in a Russian joint stock company andforeign companies that acquire shares in a Russian joint stock company may needto notify the Russian tax authorities within one month following suchacquisition. However, the procedure for notifying the Russian tax authoritiesby foreign companies that are not registered with such tax authorities at thetime of their share acquisition remains unclear.

**C.**               MaterialContracts

The following is a description of contractsthat we and/or our subsidiaries are a party to and that are or may be materialto our business:

**SyndicatedLoans and Credit Facilities**

On April 21, 2006, we entered into asyndicated loan facility with several international financial institutions,including: The Bank of Tokyo-Mitsubishi UFJ, Ltd., Bayerische Landesbank, HSBCBank plc, ING Bank N.V., Raiffeisen Bank Oesterreich AG, Sumitomo MitsuiBanking Corporation Europe Limited. The facility allows us to borrow up to$1,330.0 million and is available in two tranches of $630.0 million and $700.0million. We expect to use the proceeds for general corporate purposes,including acquisitions and refinancing of existing indebtedness. The firsttranche bears interest of LIBOR+0.80% per annum and matures in three years. Thesecond tranche matures in April 2011, bears interest of LIBOR+1.00% perannum within the first three years and LIBOR+1.15% per annum thereafter and isrepayable in 13 equal quarterly installments, commencing in April 2008.The loan is subject to certain restrictive covenants, including, *inter alia*, certain financial ratios, limitations ondispositions of assets and limitations on transactions with associates. As of June 23,2006, we had drawn $630 million under this loan facility.

In December 2005, UMC signed anagreement with Citibank N.A., ING Bank N.V. and Raiffeisen Zentralbank Osterreich AG, for a $200.0 millionaggregated loan facility to be made available in two tranches of $103.0 millionand $97.0 million. UMC expects to use these fundsfor general corporate purposes, including financing of capital expenditures andrefinancing of existing indebtedness. We have guaranteed the amountoutstanding under the first tranche. The first and the second tranche bearinterest at LIBOR+0.75% and LIBOR+2.25% per annum,respectively. The commitment fee is calculated on a daily basis at the rate of45% of the applicable margin established for each tranche. The loan issubject to certain restrictive covenants, includingfinancial ratios and covenants limiting our ability to convey or dispose ourproperties and assets to another person. We believe thatas of December 31, 2005, we were in 

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compliance withall existing covenants. Each tranche is redeemable in four equal installmentswithin a year after the signing date. As of December 31, 2005, theoutstanding balances under the loan were $103.0 million and $97.0 million,respectively.

In October 2004, we entered into twocredit facility agreements with HSBC Bank plc and ING BHF-BANK AG for atotal amount $121.4 million. The facilities also allow uncommitted additionalborrowing of up to $36.5 million. In April 2005, the lenders agreed toincrease the amount of available credit facility by $28.3 million. The fundsreceived under the facilities were used to purchase telecommunicationsequipment and software from Siemens AG and Alcatel SEL AG for technicalupgrades and the expansion of our network. The facility bears interest atLIBOR+0.43% per annum. A commitment fee of 0.20% per annum and an arrangementfee of 0.25% will be paid in accordance with the loan agreement. The principaland interest amounts are to be repaid in 17 equal half year installments,starting July 2005 for the first agreement and September 2005 for thesecond agreement. The debt issuance costs in the amount of $25.9 millionwere capitalized. As of December 31, 2005 and 2004, the outstandingbalances under these agreements were $171.8 million and $77.0 million,respectively. The facilities mature in July and September 2013, andare subject to certain restrictive covenants, including, inter alia, covenantsrestricting our ability to convey or dispose of our properties and assets toanother person. We believe that as of December 31, 2005, we were incompliance with all existing covenants. As of December 31, 2005, $3.8 millionwas available under the credit facilities.

In November 2005,MTS Finance entered into a credit facility agreement with ING Bank N.V., which allows it to borrow up to $150.0 million. MTSFinance expects to use these funds forgeneral corporate purposes. The loan bears interest at LIBOR+0.75% perannum. The arrangement fee totaled $0.8 million. The loan is subject tocertain restrictive covenants including, *inter alia*, certain financial ratios. Webelieve that as of December 31, 2005, we were in compliance with allexisting covenants. The facility matures in six months after the firstutilization of available loan amount. As of December 31, 2005,$150.0 million was outstanding under the credit facility.

In November 2005, we entered into acredit facility with HSBC Bank plc, ING Bank Deutschland AG and BayerischeLandesbank for up to $123.8 million, and up to $17.3 million of uncommittedadditional borrowing. We expect to use these funds to finance the acquisitionof telecommunications equipment from Alcatel SEL AG. The loan bears interest atLIBOR+0.30% per annum. An arrangement fee of 0.20% of the original facilityamount and an agency fee of $0.01 million per annum will be paid in accordancewith the agreement. The commitment fee is 0.10% per annum on the undrawnportion of the facility. The debt issuance costs in the amount of $19.3 millionwere capitalized. The loan is subject to certain covenants, including, interalia, covenants restricting our ability to convey or dispose our properties andassets to another person. We believe that as of December 31, 2005, we werein compliance with all existing covenants. The facilities are repayable on abiannual basis in equal installments over nine years. As of December 31, 2005, the balance outstanding under the loan was$63.3 million. As of December 31, 2005, $60.5 million was available underthe credit facility.

In December 2005, we signed anagreement with Citibank International plc and ING Bank N.V. for a $130.8million committed credit facility and a $36.6 million uncommittedadditional facility. These funds will be used to purchase telecommunicationsequipment from Ericsson AB. The loan bears interest at LIBOR+0.30% per annum.An arrangement fee of 0.20% of the original facility amount and agency fee of$0.01 million per annum will be paid in accordance with the agreement. Thecommitment fee is 0.10% per annum on the undrawn portion of the facility. Theloan is subject to certain covenants, including, *inter alia*,covenants restricting our ability to convey or dispose of our properties andassets to another person. We believe that as of December 31,2005, we were in compliance with all existing covenants. The facilities arerepayable on a biannual basis in equal installments over nine years. As of December 31, 2005, the balance outstanding under the loanwas $111.0 million. As of December 31, 2005, $19.7 million was availableunder the credit facility.

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In December 2004,we entered into a credit facility agreement with European Bank forReconstruction and Development, or EBRD, for a total amount of $150.0 million. The facility bears interest at LIBOR+3.10% per annum. A commitment fee of 0.50% per annum shouldbe paid in accordance with the credit agreement. The agreement matures on December 15, 2011. The debt issuancecosts in the amount of $1.5 million were capitalized. As of December 31, 2005 and 2004,the balances outstanding under the loan were $138.5 million and $150.0 million,respectively. The loan is subject to certainrestrictive covenants including, *inter alia*, certain financial ratios. We believe that as of December 31,2005, we were in compliance with all existing covenants.

In October 2005, we entered into anagreement with Commerzbank AG, HSBC Bank plc and ING Bank Deutschland AG for a$125.8 million committed credit facility. The agreement also allows us toborrow up to $28.3 million under an uncommitted additional facility. We expectto use these funds to purchase telecommunications equipment from Siemens AG.The loan bears interest of LIBOR+0.30% per annum. An arrangement fee of 0.20%of the original facility amount and $0.01 million per annum will be paid inaccordance with the agreement. The commitment fee is 0.10% per annum on theundrawn portion of the facility. The loan is subject to certain covenants,including, *inter alia*, covenants restricting ourability to convey or dispose of our properties and assets to another person. Webelieve that as of December 31, 2005, we were in compliance withall existing covenants. The facilities are repayable on a biannual basis inequal installments over nine years. As of December 31,2005, the outstanding balance under the loan was $92.8 million. As of December 31,2005, $33.0 million was available under the credit facility.

In February 2005, we entered into acredit facility with Barclays Bank plc to finance the acquisition of equipmentfrom Motorola Limited. The facility allows borrowing of up to $25.7million and uncommitted additional borrowing of up to $64.3 million. In December 2005,the agreement with Barclays Bank plc was amended to increase the amount ofavailable uncommitted funds under the facility by $23.3 million. The originalfacility bears interest at LIBOR+0.15% per annum and the additional uncommittedfacility bears interest at LIBOR+0.13% per annum. An arrangement fee of 0.4% ofthe original facility amount and of 0.4% of each additional commitment facilityamount will be paid in accordance with the agreement. The commitment fee is0.175% per annum. The debt issuance costs in the amount of $10.4 million havebeen capitalized. The facilities are redeemable in equal semi-annualinstallments by January 31, 2014. The loan is subject to certaincovenants, including, inter alia, covenants restricting our ability to conveyor dispose of our properties and assets to another person. We believe that asof December 31, 2005, we were in compliance with all existing covenants.As of December 31, 2005, the outstandingbalance under the facility was $80.1 million. As of December 31,2005, $31.7 million was available under the credit facility.

In July 2004,MTS OJSC entered into a $500.0 million syndicated loan agreement with INGBank N.V., ABN AMRO Bank N.V., HSBC Bank plc, Raiffeisen ZentralbankOesterreich AG ZAO, Bank Austria Creditanstalt AG, CommerzbankAktiengesellschaft and others. The credit facility bears interest ofLIBOR+2.50% per annum and matures in July 2007. The proceeds of theSyndicated Loan were used by us for corporate purposes, including refinancingour existing indebtedness. In September 2004, the total amount availableunder the Syndicated Loan was increased by $100.0 million to$600.0 million. The commitment fee for the Syndicated Loan amounted to$0.5 million. The debt issuance costs in the amount of $10.2 millionhave been capitalized. At December 31, 2005, $460.0 million remainedoutstanding under the Syndicated Loan. The Syndicated Loan is subject torestrictive covenants including, *inter alia*,certain financial ratios. As of December 31, 2005, we were in compliancewith all existing covenants. As of June 23,2006, we had drawn $320 million under the credit facility, which we expect tobe paid out in July 2006.

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**NotesIndentures and Guarantees**

Wecompleted a $400.0 million notes offering through Mobile TeleSystemsFinance S.A. on January 30, 2003. The 9.75% notes were issued under anindenture dated January 30, 2003. Interest on the notes is payable inarrears on January 30 and July 30 of each year, commencing on July 30,2003. These notes are guaranteed by us and mature on January 30, 2008.They are listed on the Luxembourg Stock Exchange. The net proceeds from thisoffering of $396.1 million were used for general corporate purposes,including the acquisition of 57.7% and 26.0% stakes in Ukrainian MobileCommunications in March and June 2003, respectively, and otheracquisitions of mobile operators in Russia.

We completed a $400.0 million notesoffering through Mobile TeleSystems Finance S.A. on October 14, 2003. The8.375% notes were issued under an indenture dated October 14, 2003.Interest on the notes is payable in arrears on April 14 and October 14of each year, commencing on April 14, 2003. These notes are guaranteed byus and mature on October 14, 2010. They are listed on the Luxembourg StockExchange. The net proceeds from this offering of $395.4 million were usedfor general corporate purposes, including dividend payments, capitalexpenditures, and repayment of existing indebtedness incurred in connectionwith our acquisitions of mobile operators in Russia and Ukraine.

We completed a $400.0 million notesoffering through Mobile TeleSystems Finance S.A. January 28, 2005. The8.00% notes were issued under an indenture dated January 28, 2005.Interest on the notes is payable in arrears on January 28 and July 28of each year, commencing on July 28, 2005. These notes are guaranteed byus and mature on January 28, 2012. They are listed on the Luxembourg StockExchange. The net proceeds from this offering of $398.9 million were usedto repay a $140 million loan we received from Credit Suisse First BostonInternational in October 2004 for general corporate purposes. We used theremaining net proceeds from the offering for general corporate purposes,including acquisitions and increasing our interests in certain of oursubsidiaries.

Each of the indentures sets forth variousoccurrences, each of which would constitute an event of default. If an event ofdefault, other than an event of default arising from events of bankruptcy,insolvency or bankruptcy-related reorganization, occurs and iscontinuing, either the trustee or the holders of at least 25% in principalamount of the outstanding notes may accelerate the maturity of all of the notes.After acceleration, but before a judgment or decree based on acceleration, theholders of a majority in aggregate principal amount of the outstanding notesmay, under circumstances set forth in the indenture, rescind the accelerationif all events of default, other than the nonpayment of principal of the noteswhich have become due solely because of the acceleration, have been cured orwaived as provided in the indenture. If an event of default arising from eventsof our bankruptcy, insolvency or bankruptcy-related reorganization occursand is continuing, then the principal of, and accrued interest on, all of thenotes will automatically become immediately due and payable without anydeclaration or other act on the part of the holders of notes or the trustee.

Each of the indentures contains covenantslimiting: (a) the ability of the issuer, us and our subsidiaries to incurdebt; (b) the ability of the issuer, us and our subsidiaries to createliens; (c) the ability of the issuer, us and our subsidiaries to leaseproperties sold or transferred by us; (d) our ability to enter into loanfacilities with affiliates; (e) our ability to merge or consolidate withanother person or convey our properties and assets to another person; and (f) ourability to sell or transfer any of our or our subsidiaries’ GSM licenses forthe Moscow and St. Petersburg license areas, the GSM license for the Krasnodarlicense area, and UMC’s licenses for Ukraine.

In addition, if weexperience certain types of mergers, consolidations or other changes incontrol, noteholders will have the right to require usto redeem the notes at 101% of their principal amount, plus accrued interest.We are also required to take all commercially reasonable steps necessary tomaintain a rating of the notes from Moody’s or Standard & Poor’s. Thenotes also have cross default provisions with publicly traded debt issued bySistema.

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If we fail to meet these covenants, aftercertain notice and cure periods, the noteholders can accelerate the debt to beimmediately due and payable. We believe that we are in compliance with allrestrictive debt covenants provisions during the three-year period ended December 31,2005.

Pursuant to theguarantees contained in each indenture, we fully and unconditionally guaranteedall payments of principal and interest on the notes. These guarantees are ourgeneral unsecured obligation, senior to all our existing and futuresubordinated obligations, equal to all our existing and future unsecuredobligations, and effectively junior to all our existing and future securedobligations and all existing and future obligations of our subsidiaries.

**D.**              ExchangeControls

The Federal Lawon Currency Regulation and Currency Control which came into effect on June 18,2004, empowers the government and the Central Bank of Russia to regulate andrestrict certain foreign currency operations, including certain types ofpayments in foreign currency, operations involving foreign securities(including ADSs) and domestic securities (including our common shares), as wellas certain types of settlements in rubles between residents and non-residentsof Russia. The new regulatory regime remains generally restrictive.

**Capitalimport and export restrictions**

Pursuantto the Federal Law on Currency Regulation and Currency Control, the governmentand the Central Bank of Russia have the power to restrict, in particular, thefollowing operations:

·       investments(not involving the acquisition of securities) by Russian residents intoparticipatory interests in joint ventures with foreign investors or acquiredfrom foreign investors;

·       acquisitionof Russian securities by foreign investors and foreign securities by Russianinvestors;

·       grants orreceipts of loans and credits between residents and non-residents of Russia;

·       paymentsfor export-import transactions with settlement over 180 days (and inlimited cases, from over three to five years) following completion; and

·       theopening by Russian residents of bank accounts outside Russia and the transfersby Russian residents to such accounts of their funds from domestic accounts.

Restrictionsthat may be introduced include:

·       therequirement for Russian residents to register their accounts in foreign bankswith the Russian tax authorities prior to the opening of such accounts (the “priorregistration requirement”);

·       therequirement to perform the operations listed above through special bankingaccounts with authorized Russian banks (the “requirement to use a specialaccount”); and

·       therequirement to deposit in a special non-interest bearing account with anauthorized Russian bank (the “reservation requirement”) a monetary sum of:

·        up to100% of the amount of the foreign currency operation in question for a periodof time not exceeding 60 days; or

·        up to 20%of the amount of the foreign currency operation in question for a period oftime not exceeding one year.

As of the date hereof, the priorregistration requirement has been introduced in respect of the Russian rubleand foreign currency accounts in banks located in countries which are notmembers of the Organization for Economic Co-operation and Development, or OECD,and the Financial Action Task 

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Force on MoneyLaundering, or FATF, established by the G-7, and in respect of rubleaccounts in banks located in countries which are members of the OECD or FATF.

As ofthe date hereof, the requirement to use a special account has been introducedin respect of acquisitions of Russian securities by foreign investors andforeign securities payable in a foreign currency by Russian investors and inrespect of the grant or receipt of loans and credits between residents andnon-residents of Russia. In particular, the following operations are subject tothe requirement to use special accounts:

·       receipt byresidents of Russia from non-residents of foreign currency and ruble loans andcredits with maturities of three years or less;

·       acquisitionof foreign securities (such as ADSs) by Russian investors; and

·       acquisitionof Russian securities (such as our shares) by foreign investors.

As ofthe date hereof, the reservation requirement has been introduced, inparticular, in respect of:

·       investmentsby Russian residents into participatory interests in joint ventures withforeign investors or acquired from foreign investors in the amount of 25% of thesum of the performed currency transaction for 15 days;

·       receipt byresidents of Russia of foreign currency and ruble loans and credits withmaturities of three years or less in the amount of 2% of the loan/credit forone year;

·       acquisitionof foreign securities (such as ADSs) by Russian investors in the amount of 25%of the sum payable for the securities for 15 days;

·       pre-paymentby Russian residents for the import of works, services and rights tointellectual property to be transferred by non-residents more than180 days following the pre-payment, in the amount of 10% of the sum ofpre-payment excluding the value of the consideration received fromnon-residents, for a period of time not exceeding 15 days; and

·       transferof funds by Russian companies and individual entrepreneurs from their accountsin Russian banks to their accounts in foreign banks, in the amount of 25% ofthe sum of the transfer for 15 days (except for transfers to supportforeign representative offices of Russian companies).

Up to $150,000 worth of foreign securitiesin one calendar year may be purchased/sold by Russian individuals from/tonon-residents without any of the above restrictions.

While atpresent restrictions imposed on foreign currency operations are limited inscope, the statutory powers of the government and the Central Bank of Russiaenable them to:

·       increasethe reservation requirements by an increase in the amount and/or the period ofreservation; and/or

·       extend thereservation requirements and other restrictions to other types of foreigncurrency operations envisaged by the Federal Law on Currency Regulation andCurrency Control.

Additionally,Russian companies must repatriate 100% of their receivables from the export ofgoods and services (with a limited number of exemptions, covering, inparticular, certain types of secured financing). Furthermore, certain types ofcross-border operations may be performed only in rubles, including, forexample, transactions with domestic securities, such as our shares, betweenresidents and non-residents of Russia. These requirements increase balances inour ruble-denominated accounts and, consequently, our exposure tocurrency devaluation risk.

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**Restrictions onthe remittance of dividends, interest or other payments to non-residents**

The Federal Law on Foreign Investments in the Russian Federation of July 9,1999, specifically guarantees foreign investors the right to repatriate theirearnings from Russian investments. However, the evolving Russian exchangecontrol regime may materially affect your ability to do so.

Currently, ruble dividends on common sharesmay be converted into U.S. dollars without restriction. However, the ability toconvert rubles into U.S. dollars is also subject to the availability of U.S.dollars in Russia’s currency markets. Although there is an existing marketwithin Russia for the conversion of rubles into U.S. dollars, including theinterbank currency exchange and over-the-counter and currency futures markets,the further development of this market is uncertain. At present, there is nomarket for the conversion of rubles into foreign currencies outside of Russiaand no viable market in which to hedge ruble and ruble-denominatedinvestments.

**E.**               Taxation

The following discussion describes thematerial United States federal and Russian income and withholding taxconsequences to you if you are a U.S. holder of common stock or ADSs and aresident of the United States for purposes of the United States-Russiaincome tax treaty and are fully eligible for benefits under the United States-Russiaincome tax treaty. Subject to certain provisions of the United States-Russiaincome tax treaty relating to limitations on benefits, you generally will be aresident of the United States for treaty purposes that is entitled to treatybenefits if you are:

·       liable,under the laws of the United States, to U.S. tax (other than taxes in respectonly of income from sources in the United States or capital situated therein)by reason of your domicile, residence, citizenship, place of incorporation, orany other similar criterion (and, for income derived by a partnership, trust orestate, residence is determined in accordance with the residence of the personliable to tax with respect to such income); and

·       not also a resident of the Russian Federation for purposes of theUnited States-Russia income tax treaty.

The benefits under the United States-Russia income tax treatydiscussed in this document generally are not available to U.S. persons who holdADSs or common stock in connection with the conduct of a business in theRussian Federation through a permanent establishment as defined in the UnitedStates-Russia income tax treaty. Subject to certain exceptions, a U.S.person’s permanent establishment under the United States-Russia incometax treaty is a fixed place of business through which such person carries onbusiness activities in the Russian Federation (generally including, but notlimited to, a place of management, a branch, an office and a factory). Undercertain circumstances, a U.S. person may be deemed to have a permanentestablishment in the Russian Federation as a result of activities carried on inthe Russian Federation through agents of the U.S. person. This summary does notaddress the treatment of holders described in this paragraph.

The following discussion is based on:

·       the United States Internal Revenue Code of 1986, as amended, theTreasury regulations promulgated thereunder, and judicial and administrativeinterpretations thereof;

·       Russian legislation; and

·       the United States-Russia income tax treaty (and judicial andadministrative interpretations thereof);

all as in effect on the date of thisdocument. All of the foregoing are subject to change, possibly on a retroactivebasis, after the date of this document. This discussion is also based, in part,on representations of the depositary, and assumes that each obligation in thedeposit agreement and any related agreements 

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will be performed in accordance with itsterms. The discussion with respect to Russian legislation is based on ourunderstanding of current Russian law and Russian tax rules, which are subjectto frequent change and varying interpretations.

We believe, and the following discussion assumes, that for UnitedStates federal income tax purposes, we were not a passive foreign investmentcompany for the taxable year ending in 2005, we are not a passive foreigninvestment company for the current taxable year and we will not become apassive foreign investment company in the future. However, passive foreigninvestment company determinations are made annually and may involve facts thatare not within our control. If we were to be a passive foreign investmentcompany, materially adverse tax consequences could apply to investors who are “UnitedStates persons” as defined in the United States Internal Revenue Code of 1986,as amended.

The following discussion is not intended astax advice to any particular investor. It is also not a complete analysis orlisting of all potential United States federal or Russian income and withholdingtax consequences to you of ownership of common stock or ADSs. We urge you toconsult your own tax adviser regarding the specific United States federal,state, and local and Russian tax consequences of the ownership and dispositionof the common stock or ADSs under your own particular factual circumstances.

**Russian Incomeand Withholding Tax Considerations**

The Russian tax rules applicable to U.S. holders are characterizedby significant uncertainties and limited interpretive guidance. Russian tax authoritieshave provided limited guidance regarding the treatment of ADS arrangements, andthere can be no certainty as to how the Russian tax authorities will ultimatelytreat those arrangements. In 2005, the Russian Ministry of Finance stated thatADS holders must be treated as the beneficial owners of the underlying sharesfor purposes of the double tax treaty provisions applicable to taxation ofdividend income from the underlying shares. However, double tax treaty reliefis available only if, before the transfer of dividends to the depository, thelatter has provided the issuer with a list of ADS holders accompanied by eachholder’s tax residency certificate (confirmation of the country of taxresidence). It is currently unclear whether depositories will be willing orable to provide residency certificates for ADS holders or implement proceduresfor holders to benefit from applicable tax treaties. Thus, while a U.S. holdermay technically be entitled to benefit from the provisions of the United States-Russiaincome tax treaty, in practice such relief may be difficult or impossible toobtain.

However, if the Russian tax authoritieswere not to treat U.S. holders as the beneficial owners of the underlyingshares, then the benefits discussed below regarding the United States-Russiaincome tax treaty would not be available to U.S. holders. Russian tax law andprocedures are also not well developed, and local tax inspectors haveconsiderable autonomy and often interpret tax rules without regard to the rule oflaw. Both the substantive provisions of Russian tax law and the interpretationand application of those provisions by the Russian tax authorities may besubject to more rapid and unpredictable change than in jurisdictions with moredeveloped capital markets.

**Taxation ofDividends**

Dividends paid to U.S. holders generally will be subject to Russianwithholding tax at a 15% rate for legal entities and up to a 30% rate forindividual holders. This tax may be reduced to 5% to 10% under the UnitedStates-Russia income tax treaty for U.S. holders; a 5% rate applies forU.S. holders who are legal entities owning 10% or more of the company’soutstanding shares, and a 10% rate applies to dividends paid to U.S. holders,including individuals and legal entities, owning less than 10% of the company’soutstanding shares. See “—United States-Russia Income Tax TreatyProcedures.”

If the appropriate documentation has notbeen provided to us before the dividend payment date, we are required towithhold tax at the full rate, and U.S. holders qualifying for a reduced rateunder the United States-Russia income tax treaty then would be requiredto file claims for refund within three years 

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with theRussian tax authorities. There is significant uncertainty regarding theavailability and timing of such refunds.

**Taxation ofCapital Gains**

U.S. holders generally should not be subject to any Russian income orwithholding taxes in connection with the sale, exchange, or other dispositionof ADSs or common stock outside of Russia if the shares or ADSs are not sold toa Russian resident. Sales or other dispositions of ADSs or common stock toRussian residents, however, may be subject to Russian income or withholdingtaxes, and for such a sale by a U.S. holder, the Russian resident purchaser maybe required to withhold 20% to 30% of any gain realized on the sale. However,there is no mechanism by which a Russian purchaser would be able to effect thiswithholding upon purchasing ADSs from a U.S. holder in connection with the saleof ADSs on the New York Stock Exchange.

U.S. holders may be able to claim the benefits of a reduced rate ofwithholding under the United States-Russia income tax treaty on thedisposition of shares of common stock or ADSs to Russian residents, or obtain arefund of any withheld amounts at rates different from provided in the treaty,by relying on the United States-Russia income tax treaty and complyingwith the appropriate procedures described below.

Regardless of the residence of thepurchaser, a U.S. holder which is a legal entity should not be subject to anyRussian income or withholding taxes in connection with the sale, exchange, orother disposition of ADSs if immovable property situated in Russia constitutes50% or less of our assets or if ADSs are sold via foreign exchanges where theyare legally circulated.

**United States-RussiaIncome Tax Treaty Procedures**

Under current rules, to claim the benefit of a reduced rate ofwithholding under the United States-Russia income tax treaty, anon-resident generally must provide official certification from the U.S. taxauthorities of eligibility for the treaty benefits in the manner required byRussian law.

A U.S. holder may obtain the appropriate certification by mailingcompleted forms, together with the holder’s name, social security number, taxreturn form number and the tax period for which certification is required, to:IRS-Philadelphia Accounts Management Center, U.S. Residency CertificationRequest, P.O. Box 16347, Philadelphia, Pennsylvania 19114-0447. Theprocedures for obtaining certification are described in greater detail inInternal Revenue Service Publication 686. As obtaining the requiredcertification from the Internal Revenue Service may take at least six to eightweeks, U.S. holders should apply for such certification as soon as possible.

If tax is withheld by a Russian resident on dividends or other amountsat a rate different from provided in the tax treaty, a U.S. holder may applyfor a tax refund by filing a package of documents with the Russian local taxinspectorate to which the withholding tax was remitted within three years fromthe withholding date for U.S. holders which are legal entities, and within oneyear from the end of the year in which the withholding occurred for individualU.S. holders. The package should include the appropriate form (1011DT (2002)for non-dividend income and 1012DT (2002) for dividend income), confirmationsof residence of the foreign holder (IRS Form 6166), a copy of theagreement or other documents substantiating the payment of income, documentsconfirming the beneficial ownership of the dividends recipient and the transferof tax to the budget. Under the provisions of the Tax Code, the refund of thetax should be effected within one month after the submission of the documents.However, procedures for processing such claims have not been clearlyestablished, and there is significant uncertainty regarding the availabilityand timing of such refunds.

Neither the depositary nor us has or will have any obligation to assistan ADS holder with the completion and filing of any tax forms.

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**UnitedStates Federal Income Tax Considerations**

Thefollowing is a general description of the material United States federal incometax consequences that apply to you if you are, for United States federal incometax purposes, a beneficial owner of ADSs or common stock who is a citizen orresident of the United States, a corporation (including any entity treated as acorporation for United States federal income tax purposes) created or organizedin or under the laws of the United States, any state thereof or the District ofColumbia, an estate the income of which is subject to U.S. tax regardless ofits source, or a trust, if a United States court can exercise primarysupervision over the administration of the trust and one or more United Statespersons can control all substantial trust decisions or, if the trust was inexistence on August 20, 1996 and has properly elected to continue to betreated as a United States person. If a partnership (including any entitytreated as a partnership for United States federal income tax purposes) is abeneficial owner of ADSs or common stock, the United States federal income taxtreatment of a partner in the partnership will generally depend on the statusof the partner and the activities of the partnership. Since your United Statesfederal income and withholding tax treatment may vary depending upon yourparticular situation, you may be subject to special rules not discussedbelow. Special rules will apply, for example, if you are:

·       aninsurance company;

·       atax-exempt organization;

·       afinancial institution;

·       a personsubject to the alternative minimum tax;

·       a personwho is a broker-dealer in securities;

·       an Scorporation;

·       anexpatriate subject to Section 877 of the United States Internal RevenueCode;

·       an ownerof, directly, indirectly or by attribution, 10 percent or more of theoutstanding shares of common stock; or

·       an ownerholding ADSs or common stock as part of a hedge, straddle, synthetic securityor conversion transaction.

In addition, this summary is generallylimited to persons holding common stock or ADSs as “capital assets” within themeaning of Section 1221 of the United States Internal Revenue Code andwhose functional currency is the U.S. dollar. The discussion below also doesnot address the effect of any United States state or local tax law or foreigntax law.

For purposes of applying United Statesfederal income and withholding tax law, a holder of an ADS should be treated asthe owner of the underlying shares of common stock represented by that ADS.

The UnitedStates Treasury has expressed concerns that parties to whom ADSs arepre-released may be taking actions that are inconsistent with the claiming, byUnited States persons holding ADSs, of foreign tax credits for United Statesfederal income tax purposes. Such actions would also be inconsistent with theclaiming of the reduced rate of tax applicable to dividends received by certainnon-corporate United States persons, as described below. Accordingly, theanalysis of the creditability of Russian taxes described below, and theavailability of the reduced tax rate for dividends received by certainnon-corporate United States persons, could be affected by future actions thatmay be taken by the United States Treasury.

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**Taxationof Dividends on Common Stock or ADSs**

For United States federal income taxpurposes, the gross amount of a distribution, including any Russian withholdingtaxes, with respect to common stock or ADSs will be treated as a taxabledividend to the extent of our current and accumulated earnings and profits,computed in accordance with United States federal income tax principles. Fortaxable years beginning before January 1, 2011, if you are a non-corporatetaxpayer such dividends may be taxed at the lower applicable capital gains rateprovided (1) certain holding period requirements are satisfied, (2) either(a) our ADSs continue to be listed on the New York Stock Exchange (orother national securities exchange that is registered under section 6 ofthe Securities Exchange Act of 1934, as amended, or the Nasdaq Stock Market) or(b) we are eligible for the benefits of the United States-Russiaincome tax treaty, and (3) we are not, for the taxable year in which thedividend was paid, or in the preceding taxable year, a “passive foreign investmentcompany.” Non-corporate U.S. holders are strongly urged to consult their owntax advisors as to the applicability of the lower capital gains rate todividends received with respect to ADSs or shares of common stock.Distributions in excess of our current or accumulated earnings and profits willbe applied against and will reduce your tax basis in common stock or ADSs and,to the extent in excess of such tax basis, will be treated as gain from a saleor exchange of such common stock or ADSs. You should be aware that we do notintend to calculate our earnings and profits for United States federal incometax purposes and, unless we make such calculations, you should assume that anydistributions with respect to common stock or ADSs generally will be treated asa dividend, even if that distribution would otherwise be treated as a return ofcapital or as capital gain pursuant to the rules described above. If youare a corporation, you will not be allowed a deduction for dividends receivedin respect of distributions on common stock or ADSs, which is generallyavailable for dividends paid by U.S. corporations.

If a dividend distribution is paid inrubles, the amount includible in income will be the U.S. dollar value of thedividend, calculated using the exchange rate in effect on the date the dividendis includible in income by you, regardless of whether the payment is actuallyconverted into U.S. dollars. Any gain or loss resulting from currency exchangerate fluctuations during the period from the date the dividend is includible inyour income to the date the rubles are converted into U.S. dollars will betreated as ordinary income or loss. You may be required to recognize foreigncurrency gain or loss on the receipt of a refund of Russian withholding tax pursuantto the United States-Russia income tax treaty to the extent the UnitedStates dollar value of the refund differs from the dollar equivalent of thatamount on the date of receipt of the underlying dividend.

Russian withholding tax at the rateapplicable to you under the United States-Russia income tax treaty shouldbe treated as a foreign income tax that, subject to generally applicablelimitations and conditions, is eligible for credit against your U.S. federalincome tax liability or, at your election, may be deducted in computing taxableincome. If, however, the holder of an ADS is not treated as the owner of theunderlying common stock represented by the ADS for U.S. federal income taxpurposes, then Russian withholding tax would not be treated as a foreign incometax eligible for credit as described in the preceding sentence. If Russian taxis withheld at a rate in excess of the rate applicable to you under the UnitedStates-Russia income tax treaty, you may not be entitled to credits forthe excess amount, even though the procedures for claiming refunds and thepractical likelihood that refunds will be made available in a timely fashionare uncertain.

A dividenddistribution will be treated as foreign source income and will generally beclassified as “passive income” or, in some cases, “financial services income”for United States foreign tax credit purposes. For taxable years beginningafter December 31, 2006, dividends will generally constitute “passivecategory income” but could, in the case of certain U.S. holders, constitute “generalcategory income.” The rules relating to the determination of the foreigntax credit, or deduction in lieu of the foreign tax credit, are complex and youshould consult your own tax advisors with respect to those rules.

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**Taxationon Sale or Exchange of Common Stock or ADSs**

The sale of common stock or ADSs willgenerally result in the recognition of gain or loss in an amount equal to thedifference between the amount realized on the sale and your adjusted basis insuch common stock or ADSs. That gain or loss will be capital gain or loss ifthe common stock or ADSs are capital assets in your hands and will be long-termcapital gain or loss if the common stock or ADSs have been held for more thanone year. If you are an individual, such realized long-term capital gain isgenerally subject to a reduced rate of United States federal income tax.Limitations may apply to your ability to offset capital losses against ordinaryincome.

Deposits and withdrawals of common stock byyou in exchange for ADSs will not result in the realization of gain or loss forU.S. federal income tax purposes.

Gain realizedon the sale of common stock or ADSs will generally be treated as U.S. sourceincome and therefore the use of foreign tax credits relating to any Russiantaxes imposed upon such sale may be limited. You are strongly urged to consultyour own tax advisors as to the availability of tax credits for any Russiantaxes withheld on the sale of common stock or ADSs.

**InformationReporting and Backup Withholding**

Dividends andproceeds from the sale or other disposition of common stock or ADSs that arepaid in the United States or by a U.S.-related financial intermediarywill be subject to U.S. information reporting rules and U.S. backupwithholding tax, unless you are a corporation or other exempt recipient. Inaddition, you will not be subject to backup withholding if you provide yourtaxpayer identification number and certify that no loss of exemption frombackup withholding has occurred. Holders that are not U.S. persons generallyare not subject to information reporting or backup withholding, but suchholders may be required to provide certification as to their non-U.S. status.

**F.**                Dividendsand Paying Agents

Not applicable.

**G.**              Statementby Experts

Not applicable.

**H.**              Documentson Display

The documentsthat are exhibits to or incorporated by reference in this document can be readat the U.S. Securities and Exchange Commission’s Public Reference Room at100 F Street, NE, Washington, D.C. 20549. You may obtain information on theoperation of the Public Reference Room by calling the SEC at 1-800-SEC-0330or, from outside the United States, at 1-202-942-8090. Copiesmay also be obtained from the SEC website at www.sec.gov. Information aboutMobile TeleSystems OJSC is also available on the Internet at www1.mtsgsm.com.Information included in our website does not form part of this document.

**I.**                   Subsidiary Information

Not applicable.

**Item 11.**                 *Quantitative and Qualitative Disclosures aboutMarket Risk*

We are exposedto market risk from changes in both foreign currency exchange rates andinterest rates. Foreign exchange risks exist to the extent our costs aredenominated in currencies other than dollars. 

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Weare subject to market risk deriving from changes in interest rates, which mayaffect the cost of our financing.

**InterestRate Risk**

We are exposed to variability in cash flowrisk related to our variable interest rate debt and exposed to fair value riskrelated to our fixed-rate notes. As of December 31, 2005,$1,645.5 million, or 57.7% of our total indebtedness, including capitalleases, was variable interest rate debt, while $1,205.1 million, or 42.3%of our total indebtedness, including capital leases, was fixed interest ratedebt.

Forindebtedness with variable interest rates, the table below presents principalcash flows and related weighted average interest rates by contractual maturitydates as of December 31, 2005.

**ContractualMaturity Date as of December 31, 2005**
| Bank                                                  | ** ** | ** **                                                          | ** ** | **Currency** | ** **  | **2006**   | ** ** | **2007**    | ** ** | **2008** | ** **  | **2009**   | ** ** | **2010**    | ** ** | **Thereafter** | ** ** | **Total**  | ** ** | **Annual  interest rate  (Actual  interest  rate at  December 31,  2005)** | ** **  |
|-------------------------------------------------------|------------|---------------------------------------------------------------------|------------|--------------|-------------|------------|------------|-------------|------------|----------|-------------|------------|------------|-------------|------------|----------------|------------|------------|------------|-------------------------------------------------------------------------------------------|-------------|
| ** **                                            | ** ** | **(amounts in thousands of U.S. dollars)** | ** ** |
| Syndicated loan                                       |       | USD                                                                 |       | $            | 280,000     |       | $          | 180,000     |       | $—  |        | $—    |       | $—     |       |           | $—    |       |       | $460,000                                                                                  |        | 7.20% |   |
| Citibank N.A., ING Bank N.V. and  Raiffeisen AG       |       | USD                                                                 |       | 200,000      |        | —     |       | —      |       | —   |        | —     |       |        | —     |           |       | 200,000    |       | 5.29%–6.79%                                                                          |        |
| HSBC Bank plc and ING BHF-BANK AG                     |       | USD                                                                 |       | 18,039       |        | 21,353     |       | 21,353      |       | 21,353   |        | 21,353     |       |        | 68,365     |           |       | 171,816    |       | 5.13%                                                                                     |        |
| ING Bank N.V.                                         |       | USD                                                                 |       | 150,000      |        | —     |       | —      |       | —   |        | —     |       |        | —     |           |       | 150,000    |       | 5.14%                                                                                     |        |
| Citibank International plc and ING Bank  N.V.         |       | USD                                                                 |       | 6,530        |        | 13,060     |       | 13,060      |       | 13,060   |        | 13,060     |       |        | 52,239     |           |       | 111,009    |       | 5.00%                                                                                     |        |
| EBRD                                                  |       | USD                                                                 |       | 23,077       |        | 23,077     |       | 23,077      |       | 23,077   |        | 23,077     |       |        | 23,077     |           |       | 138,462    |       | 7.80%                                                                                     |        |
| Commerzbank AG, ING Bank AG and HSBC Bank plc    |       | USD                                                                 |       | 10,921       |        | 10,921     |       | 10,921      |       | 10,921   |        | 10,921     |       |        | 38,221     |           |       | 92,826     |       | 5.00%                                                                                     |        |
| ABN AMRO N.V.                                         |       | USD/EUR                                                             |       | 10,397       |        | 10,397     |       | 10,397      |       | 10,397   |        | 10,397     |       |        | 31,194     |           |       | 83,179     |       | 5.05%–2.99%                                                                          |        |
| Barclays Bank plc                                     |       |                                                                |       | 9,609        |        | 9,558      |       | 9,436       |       | 9,436    |        | 9,437      |       |        | 32,610     |           |       | 80,086     |       | 4.83%–4.85%                                                                          |        |
| HSBC Bank plc, ING Bank AG and Bayerische  Landesbank |       | USD                                                                 |       | 3,726        |        | 7,452      |       | 7,452       |       | 7,452    |        | 7,452      |       |        | 29,804     |           |       | 63,338     |       | 5.00%                                                                                     |        |
| ING BHF Bank and Commerzbank AG                       |       | EUR                                                                 |       | 12,333       |        | 12,334     |       | 12,334      |       | 6,167    |        | —     |       |        | —     |           |       | 43,168     |       | 3.29%                                                                                     |        |
| ING Bank (Eurasia)                                    |       | USD                                                                 |       | 20,000       |        | —     |       | —      |       | —   |        | —     |       |        | —     |           |       | 20,000     |       | 6.79%–8.69%                                                                          |        |
| Commerzbank                                           |       | USD                                                                 |       | 2,663        |        | 2,663      |       | 2,663       |       | 2,663    |        | 2,662      |       |        | —     |           |       | 13,314     |       | 5.10%                                                                                     |        |
| HSBC                                                  |       | USD                                                                 |       | 7,500        |        | —     |       | —      |       | —   |        | —     |       |        | —     |           |       | 7,500      |       | 7.23%                                                                                     |        |
| West LB                                               |       | EUR                                                                 |       | 4,000        |        | —     |       | —      |       | —   |        | —     |       |        | —     |           |       | 4,000      |       | 4.64%                                                                                     |        |
| Nordea Bank Sweden                                    |       | USD                                                                 |       | 3,249        |        | —     |       | —      |       | —   |        | —     |       |        | —     |           |       | 3,249      |       | 5.10%                                                                                     |        |
| Ericsson                                              |       | USD                                                                 |       | 3,150        |        |       |       |        |       |     |        |       |       |        |       |           |       | 3,150      |       | 8.54%                                                                                     |        |
| Other                                                 |       | USD                                                                 |       | 687          |        |       |       |        |       |     |        |       |       |        |       |           |       | 687        |       |                                                                                      |        |
| **Total variable debt**                               |       |                                                                | ** ** | **$**        | **765,881** | ** ** | **$**      | **290,815** | ** ** | **$**    | **110,693** | ** ** | **$**      | **104,526** | ** ** | **$**          | **98,359** | ** ** | ** ** | **$**                                                                                     | **275,510** |   | ** ** | **$** | **1,645,784** | ** ** |   |   |
| **Weighted  average interest rate**         |       |                                                                |       | 6.23%        |        | 6.48%      |       | 5.31%       |       | 5.43%    |        | 5.57%      |       |        | 5.14%      |           |       | 5.94%      | ** ** |                                                                                      |        |
|                                                       |            |                                                                     |            |              |             |            |            |             |            |          |             |            |            |             |            |                |            |            |            |                                                                                           |             |  |  |  |  |  |  |  |  |  |

 

We would experience an additional interestexpense of approximately $16.5 million on an annual basis as a result of ahypothetical increase in the LIBOR/EURIBOR by 1% over the current rate as of December 31,2005. We would have experienced an additional interest expense of approximately$11.2 million on an annual basis as a result of a hypothetical increase in theLIBOR/EURIBOR by 1% over the current rate as of December 31, 2004. Theincrease by 47.3% in an additional interest expense is primarily attributableto the LIBOR/EURIBOR fluctuations and change in our debt structure during theyear ended December 31, 2005. The fair value of our publicly tradedfixed-rate long-term notes as of December 31, 2005, ranged from 101.7% to105.7% of the notional amount. As of December 31, 2005, the differencebetween the carrying value and the fair value of other fixed rate debt wasimmaterial and the majority of 

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capital leaseobligations is current. For details of our fixed-rate debt, refer toNote 11 to our audited consolidated financial statements. The fair valueof variable rate debt is equivalent to carrying value.

In December 2004, we entered into twovariable-to-fixed interest rate swap agreements with ABN AMRO Bank N.V and withHSBC Bank plc to hedge our exposure to variability of future cash flows causedby the change in LIBOR related to the syndicated loan. For details of thesecontracts, see Note 11 to our audited consolidated financial statements.

We continue toconsider other financial instruments available to us to mitigate exposure tointerest rate fluctuations.

**ForeignCurrency Risk**

The followingtables show, for the periods indicated, certain information regarding theexchange rate between the ruble and the U.S. dollar, based on data published bythe Central Bank of Russia. These rates may differ from the actual rates usedin preparation of our financial statements and other financial informationprovided herein.
|                                  | ** ** | **Rubles per U.S. dollar** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | **High**                                  | ** ** | **Low** | ** ** | **Average**(1) | ** ** | **Period  End** | ** ** |
| **Year ended December 31,** |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| 2001                             |       | 30.30                                     |       | 28.16 |   |   | 29.22 |   |   |   | 30.14 |   |   |
| 2002                             |       | 31.86                                     |       | 30.14 |   |   | 31.39 |   |   |   | 31.78 |   |   |
| 2003                             |       | 31.88                                     |       | 29.25 |   |   | 30.61 |   |   |   | 29.45 |   |   |
| 2004                             |       | 29.45                                     |       | 27.75 |   |   | 28.73 |   |   |   | 27.75 |   |   |
| 2005                             |       | 29.00                                     |       | 27.46 |   |   | 28.31 |   |   |   | 28.78 |   |   |

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**(1)**                 Theaverage of the exchange rates on the last business day of each full monthduring the relevant period.
|                    | ** ** | **Rubles per  U.S. dollar** | ** ** |
|--------------------|------------|---------------------------------------|------------|
| ** **         | ** ** | **High**                              | ** ** | **Low** | ** ** |
| December 2005 |       | 29.00                                 |       | 28.64 |   |
| January 2006  |       | 28.48                                 |       | 28.02 |   |
| February 2006 |       | 28.26                                 |       | 28.10 |   |
| March 2006    |       | 28.12                                 |       | 27.66 |   |
| April 2006    |       | 27.77                                 |       | 27.27 |   |
| May 2006      |       | 27.24                                 |       | 26.92 |   |

----

Source: Central Bank of Russia.

On June 30, 2006, the exchange ratebetween the ruble and the U.S. dollar was 27.08 rubles per U.S. dollar.

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The following tables show, for the periods indicated, certaininformation regarding the exchange rate between the hryvnia and the U.S.dollar, based on data published by the National Bank of Ukraine. These ratesmay differ from the actual rates used in preparation of our financialstatements and other financial information provided herein.
|                                  | ** ** | **Hryvnias per U.S. dollar** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **High**                                    | ** ** | **Low** | ** ** | **Average**(1) | ** ** | **Period End** | ** ** |
| **Year ended December 31,** |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| 2001                             |       | 5.43                                        |       | 5.27 |   |   | 5.37 |   |   |   | 5.30 |   |   |
| 2002                             |       | 5.33                                        |       | 5.30 |   |   | 5.33 |   |   |   | 5.33 |   |   |
| 2003                             |       | 5.33                                        |       | 5.33 |   |   | 5.33 |   |   |   | 5.33 |   |   |
| 2004                             |       | 5.33                                        |       | 5.31 |   |   | 5.32 |   |   |   | 5.31 |   |   |
| 2005                             |       | 5.31                                        |       | 5.05 |   |   | 5.12 |   |   |   | 5.05 |   |   |

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(1)                 Theaverage of the exchange rates on the last business day of each full monthduring the relevant period.
|                    | ** ** | **Hryvnias per  U.S. dollar** | ** ** |
|--------------------|------------|-----------------------------------------|------------|
| ** **         | ** ** | **High**                                | ** ** | **Low** | ** ** |
| December 2005 |       | 5.05                                    |       | 5.05 |   |
| January 2006  |       | 5.05                                    |       | 5.05 |   |
| February 2006 |       | 5.05                                    |       | 5.05 |   |
| March 2006    |       | 5.05                                    |       | 5.05 |   |
| April 2006    |       | 5.05                                    |       | 5.05 |   |
| May 2006      |       | 5.05                                    |       | 5.05 |   |

----

Source: National Bank of Ukraine.

On June 30, 2006, the exchange ratebetween the hryvnia and the U.S. dollar was 5.05 hryvnias per U.S. dollar.

Our principal exchange rate risk involveschanges in the value of the ruble and the euro relative to the U.S. dollar. Asa result of inflation in Russia and Ukraine, we link our monetary assets andtransactions, when possible, to the U.S. dollar, which under SFAS No. 52is reported in this document as our functional currency. We have not enteredinto any significant currency hedging arrangements.

Substantially all of our capitalexpenditures and operating and borrowing costs are either denominated in U.S.dollars or tightly linked to the U.S. dollar exchange rate. These includesalaries, interconnection costs, roaming expenses, cost of customer equipment,capital expenditures and borrowings. In order to hedge against a risk ofexchange rate currency fluctuations, we also denominate a majority of ourtariffs in Russia, which are payable in rubles, in units linked to the U.S. dollarand require accounts to be settled at the official exchange rate of the CentralBank of Russia on the date of payment. However, we intend to move toruble-denominated tariffs and invoicing in the future and, to that end, weintroduced a fixed exchange rate for converting U.S. dollar-denominated tariffsand charges into Russian rubles in 2006.

If either of the ruble or the hryvniadeclines against the U.S. dollar and tariffs cannot be maintained forcompetitive or other reasons, our operating margins could be adversely affectedand we could have difficulty repaying or refinancing our U.S. dollar-denominatedindebtedness.

Our investment in monetary assetsdenominated in rubles and hryvnias is also subject to risk of loss in U.S.dollar terms. In particular, we are unable mostly due to virtually absence ofthe respective market in Russia to hedge the risks associated with our rubleand hryvnia bank or deposit accounts. Generally, as the 

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value of theruble or the hryvnia declines, our net ruble and hryvnia monetary assetposition results in currency remeasurement losses.

The potential decline in the value of theruble or hryvnia against the U.S. dollar also reduces the U.S. dollar value oftax savings arising from the depreciation of our property, plant and equipmentsince their basis for tax purposes is denominated in rubles or hryvnias at thetime of the investment or acquisition.

A portion of our capital expenditures,operating and borrowing costs are denominated in euro. These include cost ofcustomer equipment, capital expenditures and certain borrowings. We currentlydo not hedge against the risk of decline in the U.S. dollar against the eurobecause settlements denominated in euros are not significant.

We wouldexperience a loss of $25.4 million in the fair value of our ruble andhryvnia-denominated net monetary assets as a result of a hypothetical10.0% increase in the ruble/hryvnia to U.S. dollar exchange rate at December 31,2005. We would have experienced a loss of $18.6 million in the fair value ofour ruble and hryvnia-denominated net monetary assets as a result of ahypothetical 10.0% increase in the ruble/hryvnia to U.S. dollar exchange rateat December 31, 2004. The increase by 36.6% in a hypothetical loss in thefair value of our ruble and hryvnia-denominated net monetary assetsprimarily resulted from significant ruble/hryvnia to U.S. dollar exchange rate’fluctuations during the year ended December 31, 2005. We would experiencea loss of $5.2 million in the fair value of our euro-denominated monetaryliabilities as a result of a hypothetical 10.0% increase in the U.S. dollar toeuro exchange rate at December 31, 2005. We would have experienced a lossof $9.4 million in the fair value of our euro-denominated monetaryliabilities as a result of a hypothetical 10.0% increase in the U.S. dollar toeuro exchange rate at December 31, 2004. The decrease by 44.7% in ahypothetical loss in the fair value of our euro-denominated monetaryliabilities was mainly the result of significant U.S. dollar to euro exchangerate fluctuations during the year ended December 31, 2005. We are unableto estimate future loss of earnings as a result of such changes.

**Item 12.**                 *Description of Securities Other Than EquitySecurities*

Not applicable.

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**PART II**

**Item 13.**                 *Defaults, Dividend Arrearages and Delinquencies*

None.

**Item 14.**                 *Material Modifications to the Rights of SecurityHolders and Use of Proceeds*

**A.-E.  **Not Applicable.

**Item 15.**                 *Controls and Procedures*

Our disclosure controls and procedures aredesigned to provide reasonable assurance that information required to bedisclosed in this report is recorded, processed, summarized and reported on atimely basis. Our President and Chief Financial Officer, with the assistance ofother members of management, performed an evaluation of our disclosure controlsand procedures as of December 31, 2005. Based on that evaluation, theyconcluded that our disclosure controls and procedures were effective as of December 31,2005, to achieve their intended objectives.

There were nochanges in our internal control over financial reporting during the fiscal year2005 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

**Item 16A.**         *AuditCommittee Financial Expert*

Our Board ofDirectors has determined that Helmut Reuschenbach is an “audit committeefinancial expert” as defined in Item 16A of Form 20-F.

**Item 16B.**        *Codeof Ethics*

We have adopteda Code of Ethics that applies to our senior officers. A copy of our Code ofEthics is available on our Internet website, www1.mtsgsm.com.

**Item 16C.**        *PrincipalAccountant Fees and Services*

ZAO Deloitte & Touche CIS has served as our independent publicaccountants for each of the fiscal years in the three-year period ended December 31,2005, for which audited financial statements appear in this Annual Report on Form 20-F.The following table presents the aggregate fees billed for professionalservices and other services to ZAO Deloitte & Touche CIS in 2005 and2004. 
|                     | ** ** | **Year ended  December 31,** | ** ** |
|---------------------|------------|----------------------------------------|------------|
| ** **          | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **          | ** ** | **(in thousands)**                | ** ** |
| Audit  Fees         |       | $1,364.8                               |       | $1,532.2 |   |
| Audit-Related  Fees |       | 407.2                                  |       | 220.5 |   |
| Tax  Fees           |       | 102.1                                  |       | 19.5 |   |
| All  Other Fees     |       | —                                 |       | — |   |
| **Total**           | ** ** | **$****1,874.1**                       | ** ** | **$1,722.2** | ** ** |

 

**Audit Fees**

The Audit Feesfor the years 2005 and 2004 were for services associated with the consolidatedU.S. GAAP audits, the quarterly reviews, several statutory audits,involvement with four U.S. dollar-denominated notes offerings including thepreparation of comfort letters and reviews of the related offering memoranda.

168

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**Audit-RelatedFees**

The Audit-RelatedFees paid in 2004 and 2005 mainly included fees for due diligence, accountingconsultations and audits in connection with acquisitions and internal control review.

**Tax Fees**

The Tax Feesfor the years 2004 and 2005 were mainly for services associated with taxcompliance and other tax consulting services.

**AllOther Fees**

No such feeswere billed in 2004 and 2005.

**AuditCommittee Pre-Approval Policies and Procedures**

The Sarbanes-OxleyAct of 2002 required us to implement a pre-approval process for all engagementswith our independent public accountants. In compliance with Sarbanes-Oxleyrequirements pertaining to auditor independence, our Audit Committee pre-approvesthe engagement terms and fees of ZAO Deloitte & Touche CIS for allaudit and non-audit services, including tax services. Our Audit Committeepre-approved the engagement terms and fees of ZAO Deloitte & ToucheCIS for all services performed for the fiscal year ended December 31,2005.

**Item 16D.**       *Exemptionfrom the Listing Standards for Audit Committees*

Not Applicable.

**Item 16E.**        *Purchasesof Equity Securities by the Issuer and Affiliated Purchasers*

No purchases were made by or on behalf ofus or any affiliated purchaser of shares or other units of any class of ourequity securities during the period covered by this annual report.

169

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**PART III**

**Item 17.**                 *Financial Statements*

See insteadItem 18.

**Item 18.**                 *Financial Statements*

The following financial statements, together with the report of ZAODeloitte & Touche CIS, are filed as part of this annual report onForm 20-F.

| Index to Consolidated  Financial Statements                                                                                           |   | F-1    |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Report of Independent Registered Public Accounting  Firm                                                                              |   | F-2    |
| Consolidated  Financial Statements at December 31, 2005 and 2004 and for the years  ended December 31, 2005, 2004 and 2003: |   |   |
| Consolidated  balance sheets at December 31, 2005 and 2004                                                                       |   | F-3    |
| Consolidated statements of operations for the years  ended December 31, 2005, 2004 and 2003                                      |   | F-5    |
| Consolidated  statements of changes in shareholders’ equity for the years ended  December 31, 2005, 2004 and 2003           |   | F-6    |
| Consolidated statements of cash flows for the years  ended December 31, 2005, 2004 and 2003                                      |   | F-7    |
| Notes  to consolidated financial statements                                                                                           |   | F-9    |

 

**Item 19.**              *Exhibits*

| No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-----|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1 |       | Charter of  Mobile TeleSystems OJSC (English Translation), restated version no. 4, as  approved by the Annual General Meeting of Shareholders of Mobile TeleSystems  OJSC held on June 23, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 1.2 |       | Amendments  and additions to the Charter of Mobile TeleSystems OJSC (English  Translation), as approved by the Annual General Meeting of Shareholders of  Mobile TeleSystems OJSC held on June 23, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 2.1 |       | Deposit  Agreement, dated as of July 6, 2000, by and among, MTS, Morgan Guaranty  Trust Company of New York (as depositary), and holders of ADRs is  incorporated herein by reference to Exhibit 2.1 to the Annual Report  filed pursuant to Section 13 or 15 (d) of the Securities  Exchange Act of 1934 for the fiscal year ended December 31, 2000, on  Form 20-F.                                                                                                                                                                                                                                      |
| 4.1 |       | Facility  Agreement for Mobile TeleSystems Open Joint Stock Company arranged by ABN  AMRO Bank N.V., HSBC Bank plc, ING Bank N.V., Raiffeisen Zentralbank  Oesterreich AG as Original Mandated Lead Arrangers and Bank Austria  Creditstalt AG, Commerzbank Aktiengesellschaft as New Mandated Lead  Arrangers, with ING Bank N.V., London Branch acting as Agent dated  July 26, 2004 is incorporated herein by reference to Exhibit 4.1 to  the Annual Report filed pursuant to Section 13 or 15 (d) of  the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2004, on Form 20-F. |
| 4.2 |       | Amendment and  Transfer Agreement dated 30 September 2004 relating to a Facility  Agreement dated July 26, 2004 is incorporated herein by reference to  Exhibit 4.2 to the Annual Report filed pursuant to Section 13 or  15 (d) of the Securities Exchange Act of 1934 for the fiscal year  ended December 31, 2004, on Form 20-F.                                                                                                                                                                                                                                                                   |

170

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| 4.3  |   | Indenture  dated as of January 28, 2005 between Mobile TeleSystems Finance S.A.,  Mobile TeleSystems OJSC and JPMorgan Chase Bank is incorporated herein by  reference to Exhibit 4.3 to the Annual Report filed pursuant to  Section 13 or 15 (d) of the Securities Exchange Act of 1934  for the fiscal year ended December 31, 2004, on Form 20-F.                                                                                                                                                                                                                                                                                                                   |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.4  |   | Indenture  dated as of October 14, 2003 between Mobile TeleSystems Finance S.A.,  Mobile TeleSystems OJSC and JPMorgan Chase Bank is incorporated herein by reference  to Exhibit 4.1 to the Annual Report filed pursuant to Section 13 or  15 (d) of The Securities Exchange Act of 1934 for the fiscal year  ended December 31, 2003, on Form 20-F.                                                                                                                                                                                                                                                                                                                   |
| 4.5  |   | Indenture  dated as of January 30, 2003 between Mobile TeleSystems Finance S.A.,  Mobile TeleSystems OJSC and JPMorgan Chase Bank is incorporated herein by  reference to Exhibit 4.1 to the Annual Report filed pursuant to  Section 13 or 15 (d) of the Securities Exchange Act of 1934  for the fiscal year ended December 31, 2002, on Form 20-F.                                                                                                                                                                                                                                                                                                                   |
| 4.6  |   | License  No. 000612 permitting activities in the field of communication in the  territory of Ukraine (English Translation) is incorporated herein by  reference to Exhibit 4.13 to the Annual Report filed pursuant to  Section 13 or 15 (d) of the Securities Exchange Act of 1934  for the fiscal year ended December 31, 2002, on Form 20-F.                                                                                                                                                                                                                                                                                                                         |
| 4.7  |   | License  No. 000613 permitting activities in the field of communication in the  territory of Ukraine (English Translation) is incorporated herein by  reference to Exhibit 4.14 to the Annual Report filed pursuant to  Section 13 or 15 (d) of the Securities Exchange Act of 1934  for the fiscal year ended December 31, 2002, on Form 20-F.                                                                                                                                                                                                                                                                                                                         |
| 4.8  |   | MTS license  No. 24134 to provide cellular radiotelephone communications services of  the public communications network using GSM equipment in the 1800-MHz  band (CMC-1800) in the territory of the Urals region, the Republic of  Komi, the Udmurt Republic; the Kirov, Kurgan, Orenburg, Perm, Sverdlovsk,  Tyumen, and Chelyabinsk oblasts; and the Komi-Permyak, Khanty-Mansyisk,  and Yamalo-Nenets autonomous okrugs (English Translation) is  incorporated herein by reference to Exhibit 4.15 to the Annual Report  filed pursuant to Section 13 or 15 (d) of the Securities  Exchange Act of 1934 for the fiscal year ended December 31, 2002, on  Form 20-F. |
| 4.9  |   | Amendment  No. 1 to license No. 24134 to provide cellular radiotelephone  communications services of the public communications network using GSM  equipment in the 900-MHz band on the same territory is incorporated  herein by reference to Exhibit 4.15 to the Annual Report filed pursuant  to Section 13 or 15 (d) of The Securities Exchange Act of 1934  for the fiscal year ended December 31, 2003, on Form 20-F.                                                                                                                                                                                                                                         |
| 4.10 |   | MTS license  No. 24135 to provide cellular radiotelephone communications services of  the public communications network using GSM equipment in the 1800-MHz  band (CMC-1800) in the territory of the Central and Central-Chernozem  regions and the Bryansk, Vladimir, Ivanovo, Tver, Kaluga, Kostroma, Orlov, Ryazan,  Smolensk, Tula, Yaroslavl, Belgorod, Voronezh, Kursk, Lipetsk, Tambov, and  Nizhny Novgorod oblasts (English Translation) is incorporated herein by  reference to Exhibit 4.16 to the Annual Report filed pursuant to  Section 13 or 15 (d) of the Securities Exchange Act of 1934  for the fiscal year ended December 31, 2002, on Form 20-F.  |
| 4.11 |   | Amendment  No. 1 to license No. 24135 to provide cellular radiotelephone  communications services of the public communications network using GSM  equipment in the 900-MHz band on the same territory is incorporated  herein by reference to Exhibit 4.17 to the Annual Report filed pursuant  to Section 13 or 15 (d) of The Securities Exchange Act of 1934  for the fiscal year ended December 31, 2003, on Form 20-F.                                                                                                                                                                                                                                         |

171

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| 4.12 |   | MTS license  No. 24136 to provide cellular radiotelephone communications services of  the public communications network using GSM equipment in the 1800-MHz  band (CMC-1800) in the territory of the city of Moscow and the Moscow  oblast (English Translation) is incorporated herein by reference to  Exhibit 4.17 to the Annual Report filed pursuant to Section 13 or  15 (d) of the Securities Exchange Act of 1934 for the fiscal year  ended December 31, 2002, on Form 20-F. |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.13 |   | Amendment  No. 1 to license No. 24136 to provide cellular radiotelephone  communications services of the public communications network using GSM  equipment in the 900-MHz band on the same territory is incorporated  herein by reference to Exhibit 4.19 to the Annual Report filed pursuant  to Section 13 or 15 (d) of the Securities Exchange Act of 1934  for the fiscal year ended December 31, 2003, on Form 20-F.                                                       |
| 4.14 |   | MTS GSM-900  license No. 14664 for the territory of Kostroma region is incorporated  herein by reference to Exhibit 10.3 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                                            |
| 4.15 |   | MTS GSM-900  license No. 14663 for the territory of the Komi republic is incorporated  herein by reference to Exhibit 10.4 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                                          |
| 4.16 |   | MTS GSM-900  license No. 14452 for the territory of Smolensk region is incorporated  herein by reference to Exhibit 10.5 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                                            |
| 4.17 |   | MTS GSM-900  license No. 14453 for the territory of Vladimir region is incorporated  herein by reference to Exhibit 10.6 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                                            |
| 4.18 |   | MTS GSM-900  license No. 14454 for the territory of Pskov region is incorporated  herein by reference to Exhibit 10.7 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                                               |
| 4.19 |   | MTS GSM-900  license No. 14455 for the territory of Tula region is incorporated  herein by reference to Exhibit 10.8 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                                                |
| 4.20 |   | MTS GSM-900  license No. 14456 for the territory of Kaluga region is incorporated  herein by reference to Exhibit 10.9 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                                              |
| 4.21 |   | MTS GSM-900  license No. 14457 for the territory of Ryazan region is incorporated  herein by reference to Exhibit 10.10 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                                             |
| 4.22 |   | ReCom GSM-900  license No. 10015 for the territory of Oryol region is incorporated  herein by reference to Exhibit 10.14 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                                            |
| 4.23 |   | ReCom GSM-900  license No. 10020 for the territory of Kursk region is incorporated  herein by reference to Exhibit 10.15 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                                            |

172

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| 4.24 |   | ReCom GSM-900  license No. 10021 for the territory of Belgorod region is incorporated  herein by reference to Exhibit 10.16 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.25 |   | ReCom GSM-900  license No. 10022 for the territory of Bryansk region is incorporated  herein by reference to Exhibit 10.17 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                 |
| 4.26 |   | ReCom GSM-900  license No. 10023 for the territory of Lipetsk region is incorporated  herein by reference to Exhibit 10.18 to Amendment No. 5 to the  Registration Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                 |
| 4.27 |   | ReCom GSM-900  license No. 10024 for the territory of Voronezh region is incorporated  herein by reference to Exhibit 10.19 to Amendment No. 5 to the Registration  Statement on Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                                                                |
| 4.28 |   | Sibintertelecom  GSM-900/1800 license No. 36728 for the provision of mobile  radiotelephony services in the public communications network in the territory  of Chita region (English translation).                                                                                                                                                                                                                                                                                         |
| 4.29 |   | MTS license  No. 37370 for the provision of telematic services in the Komi Republic  and Udmurt Republic; Perm Krai; Amur, Belgorod, Bryansk, Vladimir, Voronezh,  Ivanovo, Kaluga, Kirov, Kostroma, Kurgan, Kursk, Lipetsk, Moscow, Nizhny  Novgorod, Omsk, Orenburg, Orlov, Pskov, Ryazan, Sverdlovsk, Smolensk, Tambov,  Tver, Tula, Tyumen, Chelyabinsk and Yaroslavl regions; Khanty Mansiysk and  Yamalo Nenets Autonomous Districts; and the City of Moscow (English  translation). |
| 4.30 |   | MTS license  No. 33780 for the provision communications channels services in the  territories of Ivanovo, Kirov, Nizhny Novgorod and Yaroslavl regions (English  translation).                                                                                                                                                                                                                                                                                                             |
| 4.31 |   | MTS license  No. 33910 for the provision of mobile radiotelephone communications  services in the 900/1800—MHz band in the territories of the Karelia Republic,  Nenetsk Autonomous District, Arkhangelsk, Vologda, Kaliningrad, Leningrad,  Murmansk, Novgorod and Pskov regions and city of St. Petersburg (English  translation).                                                                                                                                                  |
| 4.32 |   | MTS License  No. 33919 for leasing of communications channels in the territory of the  Adygeya Republic and Krasnodar Krai (English translation).                                                                                                                                                                                                                                                                                                                                          |
| 4.33 |   | MTS License  No. 33920 for provision of data transmission services, excluding voice  information, in the territory of the Krasnodar Krai (English translation).                                                                                                                                                                                                                                                                                                                            |
| 4.34 |   | MTS License  No. 33922 for provision of telematic services in the territory of the  Krasnodar Krai (English translation).                                                                                                                                                                                                                                                                                                                                                                  |
| 4.35 |   | MTS License  No. 33927 for provision of mobile radiotelephone communications services  in the 900/1800—MHz band in the territory of the Adygeya Republic (English  translation).                                                                                                                                                                                                                                                                                                      |
| 4.36 |   | MTS License  No. 33928 for provision of mobile radiotelephone communications services  in the 900/1800—MHz band in the territory of the Krasnodar Krai (English  translation).                                                                                                                                                                                                                                                                                                        |
| 4.37 |   | BCTI license  No. 164 for the provision of cellular and paging services in the  territory of Turkmenistan (English translation).                                                                                                                                                                                                                                                                                                                                                           |
| 4.38 |   | Loan  Agreement, dated as of December 20, 1996, by and between Rosico and  Ericsson Project Finance AB is incorporated herein by reference to  Exhibit 10.24 to Amendment No. 5 to the Registration Statement on  Form F-1 (Registration No. 333-12032).                                                                                                                                                                                                               |

173

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| 4.39   |   | Interconnection  Agreement, dated as of December 29, 1995, as amended, by and between MTS  and Rostelecom is incorporated herein by reference to Exhibit 10.54 to  Amendment No. 1 to the Registration Statement on Form F-4  (Registration No. 333-86974).                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.40   |   | Interconnection  Agreement, dated as of November 4, 1996, as amended, by and between MTS  and MGTS is incorporated herein by reference to Exhibit 10.55 to  Amendment No. 1 to the Registration Statement on Form F-4  (Registration No. 333-86974).                                                                                                 |
| 4.41   |   | Interconnection  Agreement, dated as of December 25, 2001, by and between MTS and MGTS is  incorporated herein by reference to Exhibit 10.56 to Amendment  No. 1 to the Registration Statement on Form F-4 (Registration  No. 333-86974).                                                                                                            |
| 4.42   |   | Interconnection  Agreement, dated as of June 30, 1998, by and between MTS and MTU-Inform  is incorporated herein by reference to Exhibit 10.28 to Amendment  No. 5 to the Registration Statement on Form F-1 (Registration  No. 333-12032).                                                                                                          |
| 4.43   |   | Interconnection  Agreement, dated as of February 26, 1999, by and between MTS and  Sovintel is incorporated herein by reference to Exhibit 10.58 to  Amendment No. 1 to the Registration Statement on Form F-4  (Registration No. 333-86974).                                                                                                        |
| 4.44   |   | Interconnection  Agreement, dated as of August 28, 2000, by and between MTS and Sovintel  is incorporated herein by reference to Exhibit 10.59 to Amendment  No. 1 to the Registration Statement on Form F-4 (Registration  No. 333-86974).                                                                                                          |
| 4.45   |   | Software  License Agreement, dated as of August 13, 1999, by and between MTS and  Motorola, Inc. is incorporated herein by reference to Exhibit 10.33  to Amendment No. 5 to the Registration Statement on Form F-1  (Registration No. 333-12032).                                                                                              |
| 4.46   |   | Facility  Agreement for Mobile TeleSystems Open Joint Stock Company arranged by The  Bank of Tokyo-Mitsubishi UFJ, Ltd., Bayerische Landesbank, HSBC Bank plc, ING  Bank N.V., Raiffeisen Bank Oesterreich AG and Sumitomo Mitsui Banking  Corporation Europe Limited as Mandated Lead Arrangers and ING Bank N.V.,  London Branch acting as Agent dated April 21, 2006. |
| 4.47   |   | Facility Agreement for Closed Joint Stock Company Ukrainian Mobile  Communications arranged by Citibank N.A. and ING Bank N.V. as Bookrunner,  Citibank N.A., ING Bank N.V and Raiffeisen  Zentralbank Osterreich AG as Mandated Lead Arrangers with Citibank  International plc acting as Agent dated December 14, 2005.                                                |
| 4.48   |   | Credit Agreement between OJSC Mobile TeleSystems as Borrower and HSBC  Bank plc, ING BHF-Bank Aktiengesellschaft as Arrangers and Lenders, HSBC Bank  plc as Facility Agent and ING BHF-Bank Aktiengesellschaft as Hermes Agent  dated October 11, 2004.                                                                                                                 |
| 4.48.1 |   | Supplement Credit Agreement between OJSC Mobile TeleSystems as  Borrower and HSBC Bank plc and BHF-Bank Aktiengesellschaft as Arrangers and  Lenders, HSBC Bank plc as Facility Agent and BHF-Bank Aktiengesellschaft as  Hermes Agent dated April 12, 2005.                                                                                                             |
| 4.49   |   | Facility  Agreement for Mobile TeleSystems Finance S.A. arranged by ING Bank N.V. as  Mandated Lead Arranger with ING Bank N.V., London Branch acting as Agent  dated November 16, 2005.                                                                                                                                                                                 |
| 4.50   |   | Credit Agreement between OJSC Mobile TeleSystems as Borrower and HSBC  Bank plc, ING Bank Deutschland AG and Bayerische Landesbank as Mandated Lead  Arrangers and Lenders and ING Bank Deutschland AG as Facility Agent dated  November 25, 2005.                                                                                                                       |

174

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| 4.51   |   | Credit  Agreement between OJSC Mobile TeleSystems as Borrower and Citibank, N.A. and  ING Bank N.V. as Mandated Lead Arrangers, Citibank International plc and ING  Bank N.V. as Lenders and ING Bank N.V. as Facility Agent and Citibank  International plc as EKN Agent dated December 14, 2005.                                                                                                                                                                                                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.52   |   | Facility  Agreement between Mobile TeleSystems Open Joint Stock Company as Borrower and  European Bank for Reconstruction and Development as Lender dated  December 8, 2004.                                                                                                                                                                                                                                                                                                                       |
| 4.53   |   | Credit Agreement between OJSC Mobile TeleSystems as Borrower and HSBC  Bank plc, ING Bank Deutschland AG and Commerzbank Aktiengesellschaft as  Mandated Lead Arrangers and Lenders and HSBC Bank plc as Facility Agent and  BHF-Bank Aktiengesellschaft as Hermes Agent dated October 18, 2005.                                                                                                                                                                                                   |
| 4.54   |   | Loan  Agreement for Open Joint Stock Company Mobile TeleSystems as Borrower with  Barclays Bank plc as Banker and Her Britannic Majesty’s Secretary of State  (acting by the Export Credits Guarantee Department) as ECGD dated  February 15, 2005.                                                                                                                                                                                                                                           |
| 4.54.1 |   | Amendment  Agreement relating to the Loan Agreement for Open Joint Stock Company Mobile  TeleSystems as Borrower with Barclays Bank plc as Banker and Her Britannic  Majesty’s Secretary of State (acting by the Export Credits Guarantee  Department) as ECGD dated December 12, 2005                                                                                                                                                                                                        |
| 4.55   |   | Facility  Agreement for Mobile TeleSystems Open Joint Stock Company arranged by ABN  AMRO Bank N.V., HSBC Bank plc, ING Bank N.V. and Raiffeisen Zentralbank  Oesterreich AG as Original Mandated Lead Arrangers and Bank Austria  Creditanstalt AG and Commerzbank Aktiengesellschaft as New Mandated Lead  Arrangers with ING Bank N.V., London Branch acting as Agent dated  July 26, 2004.                                                                                                     |
| 4.55.1 |   | Amendment and  Transfer Agreement relating to Facility Agreement for Mobile TeleSystems Open  Joint Stock Company arranged by ABN AMRO Bank N.V., HSBC Bank plc, ING Bank  N.V. and Raiffeisen Zentralbank Oesterreich AG as Original Mandated Lead  Arrangers, Bank Austria Creditanstalt AG and Commerzbank Aktiengesellschaft  as New Mandated Lead Arrangers and Barclays Capital as Additional New  Mandated Lead Arranger with ING Bank N.V., London Branch acting as Agent  dated July 26, 2004. |
| 8.1    |   | List of  Subsidiaries of Mobile TeleSystems OJSC.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 12.1   |   | Certification  by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                          |
| 12.2   |   | Certification  by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                          |
| 13.1   |   | Certification  by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                                                                                |
| 13.2   |   | Certification  by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                      |

 

175

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**SIGNATURES**

The registrant hereby certifies that it meets all of the requirementsfor filing on Form 20-F and that it has duly caused and authorizedthe undersigned to sign this annual report on its behalf.
|                           | MOBILE  TELESYSTEMS OJSC |
|---------------------------|--------------------------|
| Date:  June 30, 2006 | By:                      | /s/ Leonid  Melamed |
|                      |                     | Leonid Melamed |
|                      | Title:                   | President and Chief Executive Officer |

 

176

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**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

**OJSC Mobile TeleSystems and Subsidiaries**

|                                                                                                                             | ** ** | Page   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------|------------|
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM                                                                    |       |   | F-2        |   |   |
| CONSOLIDATED  FINANCIAL STATEMENTS AT DECEMBER 31, 2005 AND 2004 AND FOR THE YEARS ENDED  DECEMBER 31, 2005, 2004 AND 2003: |       |   |       |   |   |
| Consolidated  balance sheets at December 31, 2005 and 2004                                                             |       |   | F-3        |   |   |
| Consolidated statements of operations for the years  ended December 31, 2005, 2004 and 2003                            |       |   | F-5        |   |   |
| Consolidated statements of changes in shareholders’  equity for the years ended December 31, 2005, 2004 and 2003  |       |   | F-6        |   |   |
| Consolidated statements of cash flows for the years  ended December 31, 2005, 2004 and 2003                            |       |   | F-7        |   |   |
| Notes  to consolidated financial statements                                                                                 |       |   | F-9        |   |   |

 

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

To the Shareholders of OJSC MobileTeleSystems:

We have audited the accompanyingconsolidated balance sheets of Mobile TeleSystems, a Russian Open Joint-Stock Company, and subsidiaries (“the Group”)as of December 31, 2005 and 2004, and the related consolidatedstatements of operations, changes in shareholders’ equity and cash flows foreach of the three years in the period ended December 31, 2005. These financial statements are the responsibilityof the Group’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Group is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Group’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

In our opinion,such consolidated financial statements present fairly, in all materialrespects, the financial position of the Group as of December 31, 2005 and2004, and the results of its operations andits cash flows for each of the three years in the period ended December 31, 2005,in conformity with accounting principles generally accepted in the UnitedStates of America.

/s/ ZAODeloitte & Touche CIS

March 27, 2006, except for Note 24,as to which the date is April 21, 2006

F-2

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSAT DECEMBER 31, 2005 AND 2004(Amounts in thousands of U.S. dollars, except share and per share amounts)**
|                                                                                                                                               | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **CURRENT ASSETS:**                                                                                                                           |       |                  |       |   |   |
| Cash and cash equivalents (Note 4)                                                                                                            |       | $                     | 78,284     |   | $ | 274,150 |   |
| Short-term investments, including related party  amounts of $23,100 and $73,100 as of December 31, 2005 and 2004,  respectively (Note 5) |       | 28,059                |       | 73,360 |   |
| Trade receivables, net (Note 6)                                                                                                               |       | 209,320               |       | 162,525 |   |
| Accounts receivable, related parties (Note 17)                                                                                                |       | 7,661                 |       | 17,768 |   |
| Inventory and spare parts (Note 7)                                                                                                            |       | 156,660               |       | 89,518 |   |
| Prepaid expenses                                                                                                                              |       | 234,345               |       | 79,971 |   |
| Deferred tax asset (Note 14)                                                                                                                  |       | 83,336                |       | 49,850 |   |
| VAT receivable                                                                                                                                |       | 398,021               |       | 272,578 |   |
| Other current assets                                                                                                                          |       | 95,567                |       | 21,235 |   |
| **Total current assets**                                                                                                                      |       | 1,291,253             |       | 1,040,955 |   |
| **PROPERTY, PLANT AND EQUIPMENT**, net of accumulated depreciation of $1,350,783 and $901,416,  respectively (Note 8)                    |       | 4,482,679             |       | 3,234,318 |   |
| **LICENSES**,  net of accumulated amortization of $561,137 and $385,664, respectively (Notes  3 and 21)                                       |       | 603,116               |       | 687,272 |   |
| **GOODWILL**  (Note 3)                                                                                                                        |       | 155,221               |       | 108,329 |   |
| **OTHER INTANGIBLE ASSETS**, net of accumulated amortization of  $505,098 and $309,399, respectively (Notes 3 and 9)                          |       | 681,025               |       | 412,532 |   |
| **DEBT ISSUANCE COSTS**, net of accumulated amortization of $23,692 and $9,345,  respectively (Note 11)                                  |       | 74,527                |       | 16,546 |   |
| **INVESTMENTS IN AND ADVANCES TO ASSOCIATES** (Note 19)                                                                                       |       | 107,959               |       | 81,235 |   |
| **OTHER INVESTMENTS** (Note 20)                                                                                                               |       | 150,000               |       | — |   |
| **Total assets**                                                                                                                              |       | $                     | 7,545,780  |   | $ | 5,581,187 |   |

 

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

F-3

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) AT DECEMBER 31, 2005 AND 2004 (Amounts in thousands of U.S. dollars, except share and per share amounts)**

 
|                                                                                                                                                                                                                                             | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                  | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **CURRENT LIABILITIES:**                                                                                                                                                                                                                    |       |                  |       |   |   |
| Accounts payable, related parties (Note 17)                                                                                                                                                                                                 |       | $                     | 40,829     |   | $ | 17,009 |   |
| Trade accounts payable                                                                                                                                                                                                                      |       | 363,723               |       | 242,495 |   |
| Deferred connection fees, current portion (Note 10)                                                                                                                                                                                         |       | 44,361                |       | 45,083 |   |
| Subscriber prepayments and deposits                                                                                                                                                                                                         |       | 344,493               |       | 308,859 |   |
| Debt, current portion (Note 11)                                                                                                                                                                                                             |       | 765,881               |       | 370,845 |   |
| Capital lease obligation, current portion (Notes 12  and 17)                                                                                                                                                                                |       | 2,793                 |       | 8,561 |   |
| Income tax payable                                                                                                                                                                                                                          |       | 7,565                 |       | 22,567 |   |
| Accrued liabilities (Note 13)                                                                                                                                                                                                               |       | 276,291               |       | 180,677 |   |
| Other payables                                                                                                                                                                                                                              |       | 76,890                |       | 33,872 |   |
| **Total current liabilities**                                                                                                                                                                                                               |       | 1,922,826             |       | 1,229,968 |   |
| **LONG-TERM LIABILITIES:**                                                                                                                                                                                                                  |       |                  |       |   |   |
| Notes payable (Note 11)                                                                                                                                                                                                                     |       | 1,199,052             |       | 800,000 |   |
| Debt, net of current portion (Note 11)                                                                                                                                                                                                      |       | 879,903               |       | 753,795 |   |
| Capital lease obligation, net of current portion  (Notes 12 and 17)                                                                                                                                                                         |       | 2,928                 |       | 3,947 |   |
| Deferred connection fees, net of current portion  (Note 10)                                                                                                                                                                                 |       | 57,824                |       | 47,665 |   |
| Deferred taxes (Note 14)                                                                                                                                                                                                                    |       | 158,414               |       | 160,390 |   |
| **Total long-term liabilities**                                                                                                                                                                                                             |       | 2,298,121             |       | 1,765,797 |   |
| **Total liabilities**                                                                                                                                                                                                                       |       | 4,220,947             |       | 2,995,765 |   |
| **COMMITMENTS AND CONTINGENCIES** (Note 22)                                                                                                                                                                                                 |       | —                |       | — |   |
| **MINORITY INTEREST**                                                                                                                                                                                                                       |       | 30,744                |       | 62,099 |   |
| **SHAREHOLDERS’ EQUITY:**                                                                                                                                                                                                              |       |                  |       |   |   |
| Common stock: (2,096,975,792 shares with a par value  of 0.1 rubles authorized and 1,993,326,138 shares issued as of  December 31, 2005 and 2004, 763,554,870 and 432,414,940 of which are in  the form of ADS, respectively (Note 1)) |       | 50,558                |       | 50,558 |   |
| Treasury stock (5,400,486 and 7,202,108 common  shares at cost as of December 31, 2005 and 2004)                                                                                                                                       |       | (5,534                | )          | (7,396 | ) |
| Additional paid-in capital                                                                                                                                                                                                                  |       | 568,104               |       | 564,160 |   |
| Unearned compensation (Note 16)                                                                                                                                                                                                             |       | (1,210                | )          | (1,780 | ) |
| Shareholder receivable (Note 11)                                                                                                                                                                                                            |       | (7,182                | )          | (18,237 | ) |
| Accumulated other comprehensive income (Note 2)                                                                                                                                                                                             |       | 50,614                |       | 22,444 |   |
| Retained earnings                                                                                                                                                                                                                           |       | 2,638,739             |       | 1,913,574 |   |
| **Total shareholders’ equity**                                                                                                                                                                                                         |       | 3,294,089             |       | 2,523,323 |   |
| **Total liabilities and shareholders’ equity**                                                                                                                                                                                         |       | $                     | 7,545,780  |   | $ | 5,581,187 |   |

 

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

F-4

----

**OJSC MOBILETELESYSTEMS AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003(Amounts in thousands of U.S. dollars, except share and per share amounts)**
|                                                                                                                                                                        | ** ** | **Years ended December 31,** | ** **    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|---------------|
| ** **                                                                                                                                                             | ** ** | **2005**                                    | ** **    | **2004** | ** ** | **2003** | ** ** |
| **NET OPERATING REVENUE**                                                                                                                                              | ** ** | ** **                                  | ** **    | ** ** | ** ** | ** ** | ** ** |
| Services  revenue and connection fees                                                                                                                                  |       | $                                           | 4,942,288     |   | $ | 3,800,271 |   | $ | 2,465,089 |   |
| Sales  of handsets and accessories                                                                                                                                     |       | 68,730                                      |          | 86,723 |   | 81,109 |   |
|                                                                                                                                                                   | ** ** | **5,011,018**                               | ** **    | **3,886,994** | ** ** | **2,546,198** | ** ** |
| Cost of  services, excluding of depreciation and  amortization shown separately below (including related party amounts of  $78,253, $61,770 and $37,680, respectively) |       | 732,867                                     |          | 481,097 |   | 301,108 |   |
| Cost of  handsets and accessories                                                                                                                                      |       | 254,606                                     |          | 218,590 |   | 173,071 |   |
| General  and administrative expenses (including related party amounts of $9,486,  $9,509 and $11,002,   respectively) (Note 18)                                   |       | 758,729                                     |          | 575,296 |   | 355,230 |   |
| Provision  for doubtful accounts (Note 6)                                                                                                                              |       | 50,407                                      |          | 26,459 |   | 32,633 |   |
| Other  operating expenses                                                                                                                                              |       | 67,173                                      |          | 29,777 |   | 18,859 |   |
| Sales  and marketing expenses (including related party amounts of $80,146, $59,113  and $23,668, respectively)                                                         |       | 608,092                                     |          | 460,983 |   | 326,783 |   |
| Depreciation  and amortization expenses                                                                                                                                |       | 907,113                                     |          | 675,729 |   | 415,916 |   |
| **Net operating income**                                                                                                                                               | ** ** | **1,632,031**                               | ** **    | **1,419,063** | ** ** | **922,598** | ** ** |
| **CURRENCY EXCHANGE AND  TRANSACTION GAINS**                                                                                                                 |       | (10,319                                     | )             | (6,529 | ) | (693 | ) |
| **OTHER  EXPENSES/(INCOME)**(including related party amounts of $2,070, $5,303  and $6,161, respectively):                                                             | ** ** | ** **                                  | ** **    | ** ** | ** ** | ** ** | ** ** |
| Interest  income                                                                                                                                                       |       | (24,828                                     | )             | (21,792 | ) | (18,076 | ) |
| Interest  expense, net of capitalized interest                                                                                                                         |       | 132,474                                     |          | 107,956 |   | 106,551 |   |
| Equity  in net income of associates (Note 19)                                                                                                                          |       | (42,361                                     | )             | (24,146 | ) | (2,670 | ) |
| Other  expenses/(income), net                                                                                                                                          |       | 13,211                                      |          | (9,310 | ) | 6,090 |   |
| Total  other expenses, net                                                                                                                                             | ** ** | **78,496**                                  | ** **    | **52,708** | ** ** | **91,895** | ** ** |
| **Income before provision for income taxes  and minority interest**                                                                                | ** ** | **1,563,854**                               | ** **    | **1,372,884** | ** ** | **831,396** | ** ** |
| **PROVISION FOR INCOME TAXES**(Note 14)                                                                                                                                |       | 410,590                                     |          | 354,664 |   | 242,480 |   |
| **MINORITY INTEREST**                                                                                                                                                  |       | 26,859                                      |          | 30,342 |   | 71,677 |   |
| **NET  INCOME**                                                                                                                                                        | ** ** | **$**                                       | **1,126,405** | ** ** | **$** | **987,878** | ** ** | **$** | **517,239** | ** ** |
| Weighted average number of common shares outstanding                                                                                                                   |       | 1,986,819,999                               |          | 1,984,497,348 |   | 1,983,374,949 |   |
| Earnings per share, basic and diluted:                                                                                                                                 |       |                                        |          |   |   |   |   |
| Net income                                                                                                                                                             |       | $                                           | 0.57          |   | $ | 0.50 |   | $ | 0.26 |   |

 

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

F-5

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003(Amounts in thousands of U.S. dollars, except share amounts)**

| ** **                                               | ** ** | ** **            | ** ** | ** **              | ** ** | **Other com-** | ** ** | **Additional** | ** ** | **Unearned** | ** ** | **Share-**  | ** ** | ** **   | ** ** | ** **     | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|---------------------|------------|----------------|------------|--------------|------------|-------------|------------|--------------|------------|----------------|------------|
| ** **                                               | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **prehensive**      | ** ** | **Paid-in**    | ** ** | **Compen-**  | ** ** | **holder**  | ** ** | **Retained** | ** ** | ** **     | ** ** |
| ** **                                               | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Shares**          | ** ** | **Amount**     | ** ** | **income**   | ** ** | **Capital** | ** ** | **sation**   | ** ** | **Receivable** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| **BALANCES, January 1, 2003**                       |       | 1,993,326,138         |       | $                       | 50,558     |                | (9,966,631 | )              | $          | (10,206      | )          |        | $          | —       |       |           |       | $ | 558,102 |   |   |   | $ | (212 | ) |   |   | $ | (34,412 | ) |   | $ | 738,214 |   | $ | 1,302,044 |   |
| Receivable from Sistema  (Note 11):                      |       |                  |       |                    |       |                |       |           |       |         |       |        |       |         |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Increases for interest                                   |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | 807        |           |       |   | — |   |   |   | (807 | ) |   | — |   | — |   |
| Payments from Sistema                                    |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | —     |           |       |   | — |   |   |   | 7,609 |   |   | — |   | 7,609 |   |
| Issuance of stock options (Note 16)                      |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | 1,002      |           |       |   | (1,002 | ) |   |   | — |   |   | — |   | — |   |
| Stock options exercised (Note 16)                        |       | —                |       | —                  |       | 37,557              |       | 9              |       |         | —     |        |       |         | —     |           |       |   | — |   |   |   | — |   |   | — |   | 9 |   |
| Amortization of deferred compensation (Note 16)          |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | —     |           |       |   | 345 |   |   |   | — |   |   | — |   | 345 |   |
| Dividends declared (Note 1)                              |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | —     |           |       |   | — |   |   |   | — |   |   | (110,931 | ) | (110,931 | ) |
| Translation adjustment                                   |       | —                |       | —                  |       | —              |       | —         |       |         | 7,595      |        |       |         | —     |           |       |   | — |   |   |   | — |   |   | — |   | 7,595 |   |
| Net income                                               |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | —     |           |       |   | — |   |   |   | — |   |   | 517,239 |   | 517,239 |   |
| **BALANCES, December 31, 2003**                     |       | 1,993,326,138         |       | $                       | 50,558     |                | (9,929,074 | )              | $          | (10,197      | )          |        | $          | 7,595        |       |           |       | $ | 559,911 |   |   |   | $ | (869 | ) |   |   | $ | (27,610 | ) |   | $ | 1,144,522 |   | $ | 1,723,910 |   |
| Receivable from Sistema  (Note 11):                      |       |                  |       |                    |       |                |       |           |       |         |       |        |       |         |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Increases for interest                                   |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | 1,190      |           |       |   | — |   |   |   | (1,190 | ) |   | — |   | — |   |
| Payments from Sistema                                    |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | —     |           |       |   | — |   |   |   | 10,563 |   |   | — |   | 10,563 |   |
| Issuance of stock options (Note 16)                      |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | 1,811      |           |       |   | (1,811 | ) |   |   | — |   |   | — |   | — |   |
| Stock options exercised (Note 16)                        |       | —                |       | —                  |       | 2,726,966           |       | 2,801          |       |         | —     |        |       |         | 1,248      |           |       |   | — |   |   |   | — |   |   | — |   | 4,049 |   |
| Amortization of deferred compensation (Note 16)          |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | —     |           |       |   | 900 |   |   |   | — |   |   | — |   | 900 |   |
| Dividends declared (Note 1)                              |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | —     |           |       |   | — |   |   |   | — |   |   | (218,826 | ) | (218,826 | ) |
| Translation adjustment                                   |       | —                |       | —                  |       | —              |       | —         |       |         | 15,361     |        |       |         | —     |           |       |   | — |   |   |   | — |   |   | — |   | 15,361 |   |
| Change in fair value of interest rate swaps, net of  tax |       | —                |       | —                  |       | —              |       | —         |       |         | (512       | )           |       |         | —     |           |       |   | — |   |   |   | — |   |   | — |   | (512 | ) |
| Net income                                               |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | —     |           |       |   | — |   |   |   | — |   |   | 987,878 |   | 987,878 |   |
| **BALANCES, December 31, 2004**                     |       | 1,993,326,138         |       | $                       | 50,558     |                | (7,202,108 | )              | $          | (7,396       | )          |        | $          | 22,444       |       |           |       | $ | 564,160 |   |   |   | $ | (1,780 | ) |   |   | $ | (18,237 | ) |   | $ | 1,913,574 |   | $ | 2,523,323 |   |
| Receivable from Sistema  (Note 11):                      |       |                  |       |                    |       |                |       |           |       |         |       |        |       |         |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Increases for interest                                   |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | 643        |           |       |   | — |   |   |   | (643 | ) |   | — |   | — |   |
| Payments from Sistema                                    |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | —     |           |       |   | — |   |   |   | 11,698 |   |   | — |   | 11,698 |   |
| Issuance of stock options (Note 16)                      |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | 907        |           |       |   | (907 | ) |   |   | — |   |   | — |   | — |   |
| Stock options exercised (Note 16)                        |       | —                |       | —                  |       | 1,801,622           |       | 1,862          |       |         | —     |        |       |         | 2,394      |           |       |   | — |   |   |   | — |   |   | — |   | 4,256 |   |
| Amortization of deferred compensation (Note 16)          |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | —     |           |       |   | 1,477 |   |   |   | — |   |   | — |   | 1,477 |   |
| Dividends declared (Note 1)                              |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | —     |           |       |   | — |   |   |   | — |   |   | (401,240 | ) | (401,240 | ) |
| Translation adjustment                                   |       | —                |       | —                  |       | —              |       | —         |       |         | 24,898     |        |       |         | —     |           |       |   | — |   |   |   | — |   |   | — |   | 24,898 |   |
| Change in fair value of interest rate swaps, net of  tax |       | —                |       | —                  |       | —              |       | —         |       |         | 3,272      |        |       |         | —     |           |       |   | — |   |   |   | — |   |   | — |   | 3,272 |   |
| Net income                                               |       | —                |       | —                  |       | —              |       | —         |       |         | —     |        |       |         | —     |           |       |   | — |   |   |   | — |   |   | 1,126,405 |   | 1,126,405 |   |
| **BALANCES,  December 31, 2005**                    |       | 1,993,326,138         |       | $                       | 50,558     |                | (5,400,486 | )              | $          | (5,534       | )          |        | $          | 50,614       |       |           |       | $ | 568,104 |   |   |   | $ | (1,210 | ) |   |   | $ | (7,182 | ) |   | $ | 2,638,739 |   | $ | 3,294,089 |   |

 

The accompanying notes to consolidated financial statements are anintegral part of these statements.

F-6

 

----

**OJSC MOBILETELESYSTEMS AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003(Amounts in thousands of U.S. dollars)**
|                                                                                                       | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **CASH FLOWS FROM  OPERATING ACTIVITIES:**                                                            |       |                                        |       |   |   |   |   |
| Net  income                                                                                           |       | $                                           | 1,126,405  |   | $ | 987,878 |   | $ | 517,239 |   |
| **Adjustments to reconcile net income  to net cash provided by operating activities:** |       |                                        |       |   |   |   |   |
| Minority interest                                                                                     |       | 26,859                                      |       | 30,342 |   | 71,677 |   |
| Depreciation and amortization                                                                         |       | 907,113                                     |       | 675,729 |   | 415,916 |   |
| Amortization of deferred connection fees                                                              |       | (44,207                                     | )          | (46,978 | ) | (29,372 | ) |
| Equity in net income of associates                                                                    |       | (42,361                                     | )          | (24,146 | ) | (2,670 | ) |
| Inventory obsolescence expense                                                                        |       | 9,112                                       |       | 4,610 |   | 3,307 |   |
| Provision for doubtful accounts                                                                       |       | 50,407                                      |       | 26,459 |   | 32,633 |   |
| Deferred taxes                                                                                        |       | (64,959                                     | )          | (76,023 | ) | (43,001 | ) |
| Non-cash expenses associated with stock bonus and  stock options                            |       | 1,477                                       |       | 900 |   | 213 |   |
| **Changes in operating assets and liabilities:**                                                      |       |                                        |       |   |   |   |   |
| Increase in accounts receivable                                                                       |       | (86,008                                     | )          | (101,223 | ) | (64,384 | ) |
| Increase in inventory                                                                                 |       | (74,557                                     | )          | (24,179 | ) | (14,737 | ) |
| Increase in prepaid expenses and other current  assets                                           |       | (163,630                                    | )          | (18,571 | ) | (19,151 | ) |
| Increase in VAT receivable                                                                            |       | (125,186                                    | )          | (55,044 | ) | (50,230 | ) |
| Increase in trade accounts payable, accrued  liabilities and other current liabilities                |       | 276,915                                     |       | 331,835 |   | 148,544 |   |
| **Net cash provided by operating activities**                                                         |       | 1,797,380                                   |       | 1,711,589 |   | 965,984 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                             |       |                                        |       |   |   |   |   |
| Acquisitions of subsidiaries, net of cash acquired                                                    |       | (178,917                                    | )          | (355,744 | ) | (667,206 | ) |
| Purchases of property, plant and equipment                                                            |       | (1,757,980                                  | )          | (1,204,400 | ) | (839,165 | ) |
| Purchases of intangible assets                                                                        |       | (423,367                                    | )          | (154,544 | ) | (119,606 | ) |
| Purchases of short-term investments                                                                   |       | (37,375                                     | )          | (114,440 | ) | (215,000 | ) |
| Proceeds from sale of short-term investments                                                          |       | 82,724                                      |       | 286,340 |   | — |   |
| Purchase of other investments                                                                         |       | (150,000                                    | )          | — |   | — |   |
| Payments from associates                                                                              |       | 12,245                                      |       | — |   | — |   |
| Investments in and advances to associates                                                             |       | 553                                         |       | (413 | ) | (69,110 | ) |
| **Net cash used in investing activities**                                                             |       | $                                           | (2,452,117 | ) | $ | (1,543,201 | ) | $ | (1,910,087 | ) |

 

F-7

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars)**

 
|                                                                                        | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **CASH FLOWS FROM  FINANCING ACTIVITIES:**                                             |       |                                        |       |   |   |   |   |
| Proceeds from stock options exercise                                                   |       | $                                           | 4,256      |   | $ | 4,049 |   | $ | — |   |
| Proceeds from issuance of notes                                                        |       | 398,944                                     |       | — |   | 1,097,000 |   |
| Repayment of notes                                                                     |       | —                                      |       | (600,000 | ) | — |   |
| Notes and debt issuance cost                                                           |       | (59,163                                     | )          | (12,039 | ) | (9,556 | ) |
| Capital lease obligation principal paid                                                |       | (8,129                                      | )          | (15,274 | ) | (22,646 | ) |
| Dividends paid including taxes                                                         |       | (407,210                                    | )          | (232,662 | ) | (110,864 | ) |
| Proceeds from loans                                                                    |       | 1,012,613                                   |       | 1,177,556 |   | 712,716 |   |
| Loan principal paid                                                                    |       | (491,481                                    | )          | (320,511 | ) | (677,374 | ) |
| Payments from Sistema                                                                  |       | 11,698                                      |       | 9,654 |   | 8,269 |   |
| **Net cash provided by financing activities**                                          |       | 461,528                                     |       | 10,773 |   | 997,545 |   |
| Effect of exchange rate changes on cash and cash equivalents                           |       | (2,657                                      | )          | 4,613 |   | 2,273 |   |
| **NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS:**                              |       | (195,866                                    | )          | 183,774 |   | 55,715 |   |
| **CASH AND CASH EQUIVALENTS, beginning of  year**                                      |       | 274,150                                     |       | 90,376 |   | 34,661 |   |
| **CASH AND CASH EQUIVALENTS, end of year**                                             |       | $                                           | 78,284     |   | $ | 274,150 |   | $ | 90,376 |   |
| **SUPPLEMENTAL INFORMATION:**                                                          |       |                                        |       |   |   |   |   |
| Income taxes paid                                                                      |       | $                                           | 588,105    |   | $ | 430,109 |   | $ | 286,016 |   |
| Interest paid                                                                          |       | $                                           | 145,081    |   | $ | 142,899 |   | $ | 79,824 |   |
| **Non-cash investing activities:**                                                     |       |                                        |       |   |   |   |   |
| Additions to network equipment and  software under capital lease   |       | $                                           | 4,091      |   | $ | 2,861 |   | $ | 10,928 |   |
| Payable related to business acquisition (Note 3)                                       |       | $                                           | 23,618     |   | $ | — |   | $ | 27,500 |   |
| Additions  to network through ING BHF Bank and Commerzbank AG financing (Note 11)      |       | $                                           | —     |   | $ | 8,800 |   | $ | — |   |

 

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

F-8

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**1.**   DESCRIPTION OFBUSINESS

***Businessof the Group******—OJSC*** Mobile TeleSystems and its subsidiaries (“MTS” or “the Group”) isthe leading provider of wireless telecommunication services in the RussianFederation (“RF”), Ukraine, Uzbekistan and Turkmenistan in terms of thenumber of subscribers and revenues.  TheGroup has operated primarily in the GSM standard since 1994.

Open Joint-Stock Company Mobile TeleSystems(“MTS OJSC” or “the Company”) was created on March 1, 2000, throughthe merger of Closed Joint-Stock Company Mobile TeleSystems (“MTS CJSC”)and RTC CJSC, a wholly-owned subsidiary. MTS CJSC was formed in 1993 todesign, construct and operate a cellular telecommunications network in Moscowand the Moscow region. The development of the network was achieved throughgreen-field build-out in the regions for which the Company was granted 900or 1800 MHz (“GSM-900” and “GSM-1800”) cellular licensesor through the acquisition of majority stakes in local GSM operators (seeNote 21 Operating Licenses and Note 3 Businesses Acquired).

A part of the Company’s shares is traded inthe form of American Depositary Shares (“ADS”). Each ADS initiallyrepresented 20 shares of common stock of the Company. Effective January 3,2005, the first trading day in 2005, the ratio was changed from 1 ADS per 20ordinary shares to 1 ADS per 5 ordinary shares. The Company initially issued atotal of 17,262,204 ADS, representing 345,244,080 common shares. Subsequently,as described below, due to sales of shares by shareholders on the open marketthe number of ADS increased to 152,710,974 and 86,482,988 as of December 31,2005 and 2004, respectively (representing underlying ownership of 763,554,870and 432,414,940 shares as of December 31, 2005 and 2004, respectively).

***Ownership******—As of December 31,2005 and 2004, MTS’ shareholders of record and their respective percentagedirect interests were as follows:***
|                                                                              | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Joint-Stock  Financial Corporation “Sistema” (“Sistema”) |       | 41.7                  | %          | 41.0 | % |
| T-Mobile  Worldwide Holding GmbH (“T-Mobile”)                      |       | —                |       | 10.1 | % |
| VAST,  Limited Liability Company (“VAST”)                          |       | 3.0                   | %          | 3.0 | % |
| Invest-Svyaz-Holding,  Closed Joint-Stock Company                            |       | 8.1                   | %          | 8.1 | % |
| ADS  Holders                                                                 |       | 38.4                  | %          | 21.7 | % |
| Free  float, GDR Holders and Others                                          |       | 8.8                   | %          | 16.1 | % |
|                                                                         |       | 100.0                 | %          | 100.0 | % |

 

In March 2003, Sistema and T-Mobile(together, “the Shareholders”) entered into a call option agreement, pursuant to which T-Mobile grantedSistema the option to acquire from it 199,332,614 shares of MTS,representing 10.0% of outstanding common stock of MTS. On April 26, 2003,Sistema exercised its option with T-Mobile to purchase an additional 6.0% ofthe outstanding common stock of MTS and purchased T-Mobile’s 49.0% interest inInvest-Svyaz-Holding, bringing its interest in Invest-Svyaz-Holding to 100.0%.Concurrently with this transaction, T-Mobile sold its holding of 5.0% in MTS onthe open market in the form of Global Depositary Receipts (“GDRs”) listed onthe London Stock Exchange.

F-9

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**1. DESCRIPTION OF BUSINESS (Continued)**

In December 2004,T-Mobile sold a 15.09% stake in MTS on the open market in the form of GDR’s. On September 12, 2005, T-Mobile sold its remaining holding of10.1% in MTS on the open market. Concurrently GDRs were converted into the formof ADS, that increased the number of ADS.

At December 31, 2004, Sistema owned a51.0% equity interest in VAST, a limited liability company incorporated underthe laws of the Russian Federation; the remaining 49.0% interest was heldby ASVT, a Russian open joint-stock company. Sistema’s effective ownership inMTS was 50.6% at December 31, 2004. In December 2005, Sistemaacquired the 49.0% stake in VAST bringing its total interest to 100.0%.Additionally Sistema acquired a 0.7% stake in MTS on the open market during2005. Collectively, those transactions increased Sistema’s effective ownershipin MTS to 52.8% by December 31, 2005.

In April 2003, Sistema issued $350.0million 10.25% notes, due in 2008. These notes are collateralized by193,473,900 shares of common stock of MTS OJSC.

On June 30, 2003, the Group approvedcash dividends of $1.12 per ADS ($0.056 per share) for a total of $111.0million. As of December 31, 2004, these dividends were fully paid.

On November 28, 2003, common shares ofMTS OJSC were included by the Board of Moscow Interbank Currency Exchange (“MICEX”)into the MICEX “B” Quotation List.

On June 24, 2004, MTS’ shareholdersapproved cash dividends of $2.2 per ADS ($0.110 per share) for a total of$220.0 million, which were fully paid by December 31, 2004.

On June 22, 2005, MTS’ shareholdersapproved cash dividends of $1.01 per ADS ($0.202per share) for a total of $402.6 million, which were fully paid by December 31,2005.

On July 1,2005, the Company completed a merger of eight of its wholly-owned subsidiaries in Russia. These subsidiarieswere Telecom XXI, Kuban-GSM, Udmurtia Digital Network-900 (“UDN-900”),Dontelecom, MTS-Barnaul, MTS-Nizhniy Novgorod (“MTS-NN”), Telecom-900 andAmur Cellular Communication (“ACC”). The merger process was approved by anextraordinary general meeting of shareholders on November 9,2004, and by the Russian registration authority on June 30,2005.

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTINGPRONOUNCEMENTS

***Accountingprinciples******—MTS*** maintains its accounting books andrecords in Russian rubles for its subsidiaries located in the RussianFederation (“RF”), in Ukrainian hryvnas for Ukrainian Mobile Communications (“UMC”),Uzbek som for Uzdunrobita and Turkmenian manat for Barash CommunicationsTechnologies, Inc. (“BCTI”) based on respective local accounting and taxlegislations. The accompanying consolidated financial statements have beenprepared in order to present MTS’ financialposition and its results of operations and cash flows in accordance withaccounting principles generally accepted in the United States (“U.S. GAAP”) andare expressed in terms of U.S. dollars.

F-10

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDNEW ACCOUNTING PRONOUNCEMENTS (Continued)

The accompanying consolidated financialstatements differ from the financial statements used for statutorypurposes in that they reflect various adjustments, not recorded on the entities’books, which are appropriate to present the financial position, results ofoperations and cash flows in accordance with U.S. GAAP. The principaladjustments are related to revenue recognition, foreign currency translation,deferred taxation, consolidation, acquisition accounting and depreciation and valuationof property and equipment and intangible assets.

***Basis ofconsolidation******—Wholly-owned*** subsidiaries and majority-owned subsidiaries where the Company hasoperating and financial control are consolidated. Those ventures where theCompany exercises significant influence, but does not have operating andfinancial control are accounted for using the equity method.All significant intercompany accounts and transactions are eliminated uponconsolidation. Investments in which the Company does not have the ability toexercise significant influence over operating and financial policies areaccounted for under the cost method and included in other investments in ourconsolidated balance sheets. The Company’s share in net income ofunconsolidated associates is included in other income in the accompanyingconsolidated statements of operations and disclosed in Note 19. Results ofoperations of subsidiaries acquired are included in the consolidated statementsof operations from the date of their acquisition.

As of December 31, 2005 and 2004, MTS hasinvestments in the following significant legal entities:
|                  | ** ** | **Accounting Method** | ** ** | **December 31,   2005** | ** ** | **December 31,   2004** | ** ** |
|------------------|------------|----------------------------|------------|------------------------------|------------|------------------------------|------------|
| ACC(2)           |       | Merged/Consolidated        |       |                         | —     |                         |       |   | 100.0 | % |   |
| Telecom XXI(2)   |       | Merged/Consolidated        |       |                         | —     |                         |       |   | 100.0 | % |   |
| Telecom-900(2)   |       | Merged/Consolidated        |       |                         | —     |                         |       |   | 100.0 | % |   |
| SCS-900          |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| FECS-900         |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| Uraltel          |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 99.8 | % |   |
| MTS Finance(1)   |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| BM Telecom       |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| Kuban-GSM(2)     |       | Merged/Consolidated        |       |                         | —     |                         |       |   | 100.0 | % |   |
| Dontelecom(2)    |       | Merged/Consolidated        |       |                         | —     |                         |       |   | 100.0 | % |   |
| MTS-Barnaul(2)   |       | Merged/Consolidated        |       |                         | —     |                         |       |   | 100.0 | % |   |
| BIT(3)           |       | Consolidated               |       |                         | —     |                         |       |   | 100.0 | % |   |
| MTS-Capital      |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| UMC              |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| Sibchallenge     |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| TSS              |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| Volgograd Mobile |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| Astrakhan Mobile |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| Mar Mobile GSM   |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| Primtelefon      |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |

 

F-11

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDNEW ACCOUNTING PRONOUNCEMENTS (Continued)
|                   | ** ** | **Accounting Method** | ** ** | **December 31,   2005** | ** ** | **December 31,   2004** | ** ** |
|-------------------|------------|----------------------------|------------|------------------------------|------------|------------------------------|------------|
| MSS               |       | Consolidated               |       |                         | 91.0       | %                            |       |   | 91.0 | % |   |
| ReCom             |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 53.9 | % |   |
| TAIF Telcom       |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| UDN-900(2)        |       | Merged/Consolidated        |       |                         | —     |                         |       |   | 100.0 | % |   |
| Novitel           |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| MTS-Kostroma      |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 100.0 | % |   |
| MTS-NN(2)         |       | Merged/Consolidated        |       |                         | —     |                         |       |   | 100.0 | % |   |
| Uzdunrobita       |       | Consolidated               |       |                         | 74.0       | %                            |       |   | 74.0 | % |   |
| Sibintertelecom   |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 93.5 | % |   |
| Gorizont-RT       |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 76.0 | % |   |
| Telesot Alania    |       | Consolidated               |       |                         | 100.0      | %                            |       |   | 52.5 | % |   |
| BCTI              |       | Consolidated               |       |                         | 100.0      | %                            |       |   | — |   |   |
| Sweet-Com         |       | Consolidated               |       |                         | 74.9       | %                            |       |   | — |   |   |
| MTS-Komi Republic |       | Consolidated/Equity        |       |                         | 100.0      | %                            |       |   | 26.0 | % |   |
| MTS Belarus       |       | Equity                     |       |                         | 49.0       | %                            |       |   | 49.0 | % |   |
| MTS-Tver          |       | Consolidated/Equity        |       |                         | 100.0      | %                            |       |   | 26.0 | % |   |

----

(1)          Represents beneficial ownership.

(2)          Represents wholly-owned entities merged with MTS OJSC on July 1,2005.

(3)          Disposed of in 2005.

***Translationmethodology******—Effective*** January 1, 2003, the Russianeconomy ceased to be considered hyperinflationary.Management believes that the U.S. dollar is the appropriate functional currencyfor most of its subsidiaries because the majority of their revenues, costs,property and equipment purchased, and debt are either priced, incurred, payableor otherwise measured in U.S. dollars. Each of the legal entitiesdomiciled in Russia, Ukraine, Uzbekistan, Turkmenistan and Belarus maintainsits records and prepares its financial statements in the local currency,either Russian ruble, Ukrainian hryvna, Uzbek som, Turkmenian manator Belarusian ruble, in accordance with the requirements of localstatutory accounting and tax legislation.

Translation (re-measurement) of financial statementsdenominated in local currencies into U.S. dollars has been performed inaccordance with the provisions of Statement of Financial Accounting Standard (“SFAS”)No. 52 “Foreign Currency Translation”:

·       For subsidiaries of the Group where thefunctional currency is the U.S. dollar, monetary assets and liabilities havebeen translated at the period end exchange rates. Non-monetary assets andliabilities have been translated at historical rates. Revenues, expenses andcash flows have been translated at historical rates. Translation differencesresulting from the use of these rates have been accounted for as currencyexchange and transaction gains and losses in the accompanying consolidatedstatements of operations.

F-12

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDNEW ACCOUNTING PRONOUNCEMENTS (Continued)

·       For UMC, Kuban-GSM and BCTI where the functionalcurrency is the local currency being the Ukrainianhryvna, Russian ruble and Turkmenian manat, respectively, all year-end balancesheet items have been translated into U.S. dollars at the period-end exchangerate. Revenues and expenses have been translated at period average exchangerate. In addition, a “newcost basis” for all non-monetary assets of Kuban-GSM has been established as ofJanuary 1, 2003, when the Russian economy ceased to be consideredhyperinflationary. Cumulative translation adjustment related to use oflocal currency as functional in the amount of $24,898, $15,361 and $7,595 wererecorded directly in the consolidated statement of shareholders’ equityas at December 31, 2005, 2004 and 2003, respectively.

***Managementestimates—***The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ fromthose estimates.

Examples of significant estimates includethe allowance for doubtful accounts, the recoverability of intangible assetsand other long-lived assets, and valuation allowances on deferred tax assets.

***Cash andcash equivalents******—***Cash represents cash on hand and in MTS’ bankaccounts and short-term investments having original maturities of less thanthree months.

***Short-terminvestments***—Short-term investments represent investments intime deposits, which have original maturities in excess of three months butless than twelve months. These investments are being accounted for at cost.

***Allowancefor doubtful accounts***—MTS provides an allowance for doubtful accountsbased on management’s periodic review for recoverability of accounts receivablefrom customers and other receivables.

***Prepaidexpenses***—Prepaid expenses are primarily comprised of advance payments made forinventory and services to vendors.

***Inventory***—Inventory, accounted for atcost, determined by the first-in, first-out, or FIFO method, consists oftelephones and accessories, held for sale, and spare parts, to be used forequipment maintenance within next twelve months, and other inventory items.

Telephones andaccessories, held for sale, are written down to their market values based on specificperiodic reviews and are expensed as cost of equipment sold.

***Value-addedtax (“VAT”)***—Value-added tax related to sales is payable tothe tax authorities on an accrual basis based upon invoices issued to thecustomer. VAT incurred for purchases may be reclaimed from the state, subjectto certain restrictions, against VAT related to sales.

F-13

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDNEW ACCOUNTING PRONOUNCEMENTS (Continued)

***Property,plant and equipment***—Property, plant and equipment, includingimprovements that extend useful lives, are stated at cost. Property, plant andequipment with a useful life of more than one year is capitalized at historicalcost and depreciated on a straight-line basis over its expected useful life asfollows:
| Network and base station equipment |   | 5–12 years                          |
|------------------------------------|--------|------------------------------------------|
| Leasehold improvements             |   | shorter of 8–10 years or lease term |
| Office equipment and computers     |   | 5 years                                  |
| Buildings                          |   | 50 years                                 |
| Vehicles                           |   | 4 years                                  |

 

Construction inprogress and equipment held for installation is not depreciated until theconstructed or installed asset is ready for its intended use.

Maintenance andrepair costs are expensed as incurred, while upgrades and improvements arecapitalized.

Interest expenseincurred during the construction phase of the MTS’s network under developmentis capitalized as part of property, plant and equipment until the projects arecompleted and placed into service.

As a result of recentfinancial statement restatements by numerous U.S. public companies andpublications of a letter by the Chief Accountant of the SEC regarding theinterpretation of longstanding lease accounting principles, MTS corrected itsaccounting practices for leasehold improvements in the fourth quarter of 2004.The primary effect of this accounting correction was to accelerate to earlierperiods depreciation expenses with respect to certain components of previouslycapitalized leasehold improvements.

These correctionsresulted in a cumulative net charge to net income of $34.9, net of income tax,million in the forth quarter of 2004, of which $21.5 million relates to theyears 1998 through 2003. The net cumulative chargeis comprised of a $44.5 million increase in depreciation expense relatedprimarily to depreciation of capitalized leasehold improvements expensesfor base stations; a decrease of $1.4 million in the equity net income from theMTS-Belarus also related to depreciation of capitalized leasehold improvementsexpense for base station sites; and an increase of $11.0 million related to anadditional deferred tax benefit due to the change in accounting base forproperty, plant and equipment.

All components of thenet charge are non-cash and do not impact historical or future cash flows orthe timing of payments under the related leases.

***Assetretirement obligations***—Inaccordance with Statement of Financial Accounting Standards, or SFAS, No. 143,“Accounting for Asset Retirement Obligations”, the Group calculates an assetretirement obligation and an associated asset retirement cost when the Grouphas a legal obligation in connection with the retirement of tangible long-livedassets. The Group’s obligations under SFAS No. 143 relate primarily to thecost of removing it’s equipment from sites. As of December 31, 2005, theestimated 

F-14

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDNEW ACCOUNTING PRONOUNCEMENTS (Continued)

assetsretirement obligations were not significant to the Group’s consolidatedfinancial position and results of operations.

***Licensecosts***—License costs arecapitalized as a result of (a) purchase price allocated to licensesacquired in business combinations and (b) licenses purchased directly fromgovernment organizations, which require license payments.

Current operating licenses of the Group donot provide for automatic renewal upon expiration. As the Group andthe industry do not have sufficient experience with the renewal of licenses,license costs are being amortized during the initial license period withoutconsideration of possible future renewals, subject to periodic review forimpairment, on a straight-line basis over three to ten years starting from thedate such license becomes commercially operational.

***Otherintangible assets and goodwill***—Intangible assets represent various purchasedsoftware costs, telephone numberingcapacity, acquired customer base, rights to use radio frequencies and rights touse premises. A part of the rights to use premises was contributed by shareholdersto the Group’s charter capital. Telephonenumbering capacity with finite contractual life**are being amortized over the contract period which vary from five toten years and the rights to use premises are being amortized over five to nineyears. Amortization of numbering capacity costs starts immediately uponthe purchase of numbering capacity. Telephone numbering capacity with unlimited contractual life is not amortized, but isreviewed, at least annually, for impairment in accordance with theprovisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”).

Software and otherintangible assets are amortized over three to fifteen years. Acquired customerbases commencing January 1, 2005, are amortized over their estimated average subscriber life from 32 to 60months. In 2004 the average subscriber life ranged from 20 to 76 months, the effect of change inestimate in 2005 was not material. Rights to use radio frequencies areamortized over the period of contractual life from three to fifteenyears. All finite-life intangible assets are being amortized using thestraight-line method.

Goodwill representsan excess of the cost of business acquired over thefair market value of identifiable net assets at the date of acquisition.

Goodwill is reviewedfor impairment at least annually or whenever it is determined that one or moreimpairment indicators exist. The Group determines whether an impairment hasoccurred by assigning goodwill to the reporting unit identified in accordancewith SFAS No. 142, and comparing the carrying amount of the reporting unit to the fair value of the reporting unit. Ifa goodwill impairment has occurred, the Group recognizes a loss forthe difference between the carrying amount and the implied fair value of goodwill.To date, no impairment of goodwill has occurred.

F-15

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**2.**   SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)

***Leasingarrangements***—The Group accounts for leases based on therequirements of SFAS No. 13, “Accounting for Leases.”**Certain subsidiaries of the Group leaseoperating facilities, which include switches, base stations and other cellularnetwork equipment as well as billing systems. For capital leases, the presentvalue of future minimum lease payments at the inception of the lease isreflected as an asset and a liability in the balance sheet. Amounts duewithin one year are classified as short-term liabilities and the remainingbalance as long-term liabilities.

***Dealerscommissions***—dealers commissions represent the direct costspaid for each new subscriber enrolled through MTS’ independent dealers. MTSexpenses these costs as incurred.

***Investmentsimpairment***—Management periodically assesses therealizability of the carrying values of the investments and if necessaryrecords impairment losses to write the investment down to fair value.  For the three years in the period ended December 31,2005, no such impairment has occurred.

***Debtissuance costs***—Debt issuance costsare amortized using the effective interest method over the terms of therelated debt.

***Impairmentof long-lived assets***—MTS periodically evaluates the recoverability ofthe carrying amount of its long-lived assets in accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” Wheneverevents or changes in circumstances indicate that the carrying amounts of thoseassets may not be recoverable, MTS compares undiscounted net cash flowsestimated to be generated by those assets to the carrying amount of thoseassets. When these undiscounted cash flows are less than the carrying amountsof the assets, MTS records impairment losses to write the asset down to fairvalue, measured by the estimated discounted net future cash flows expected tobe generated from the use of the assets. No impairment of long-lived assets hasoccurred during the three years in the period ended December 31, 2005.

***Subscriberprepayments***—MTS requires the majority of its customers to payin advance for telecommunication services. All amounts received in advanceof service provided are recorded as a subscriber prepayment liability andare not recorded as revenues until the related services have been provided tothe subscriber.

***Revenuerecognition***—Revenues are recognized on an accrual basis, whenservices are actually provided or title to equipment passes to customer, regardlessof when the resulting monetary or financial flow occurs.

MTS categorizes the revenue sources in the statements ofoperations as follows:

·       Service revenue and connection fees: (a) subscriptionfees, (b) usage charge, (c) value added service fees, (d) roamingfees charged to other operators for guest roamers utilizing MTS’ network, (e) connectionfees and (f) prepaid phone cards; and

·       Sales of handsets and accessories.

F-16

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDNEW ACCOUNTING PRONOUNCEMENTS (Continued)

***Subscriptionfees***—MTS recognizes revenues related to the monthly network fees in the monththat the wireless service is provided to the subscriber.

***Usagecharges and value added services fees***—Usage charges consist of feesbased on airtime used by subscriber, the destination of the call and theservice utilized.

Value added servicefees are based on usage of airtime or volume of data transmitted for valueadded services, such as short message services, internet usage and dataservices. MTS recognizes revenues related to usage charges and value addedservices in the period when services are rendered.

***Roamingfees***—MTS charges roaming per-minutes fees to other wireless operators fornon-MTS subscribers utilizing MTS’ network. MTS recognizes such revenues whenthe services are provided.

***Connectionfees—***MTS defers initialconnection fees on its prepaid and postpaid tariff plans from the moment ofinitial signing of the contract with subscribers and activation of value addedservices over the estimated average subscriber life. Prior to December 31,2003, the Group estimated that the average expected term of the subscriberrelationship ranged from 39 to 47 months.

Following management analysis of thesubscriber base in the regions where the Group operates, effective January 1,2004, average subscriber lives have been changed. Commencing January 1,2004, the Group calculates an average expected term of the subscriberrelationship for each region and amortizes regional connection feesaccordingly. Average expected subscriber life ranged from 20 to 76 months in2004 and from 12 to 60 months in 2005. The effect of change in estimate wasapproximately $8.5 million, net of income tax or $0.004 per share, in 2004 andnot material in 2005.

***Prepaidphone cards***—MTS sells prepaid phone cards to subscribers,separately from the handset. These cards allow subscribers to make apredetermined allotment of wireless phone calls and/or take advantage of otherservices offered by the Group, such as short messages and sending or receivingfaxes.

At the time that theprepaid phone card is purchased by a subscriber, MTS records the receipt ofcash as a subscriber prepayment. The Group recognizes revenues from thesale of phone cards in the period when the subscriber uses airtime under thephone card. Unused airtime on sold phone cards is not recognized as revenuesuntil the related services have been provided to the subscriber or the prepaidphone card expired.

Inaddition, MTS offers prepaid service tariff plans, whereby a customer maypurchase a package thatallows a connection to the MTS network and a predetermined allotment ofwireless phone calls and/or other services offered by the Group. Revenues underthese plans are allocated between connection fees and service fees based ontheir relative fair values.

***Sales ofhandsets and accessories***—MTS sells handsets and accessories to customerswho are entering into contracts for service and also as separate distincttransactions. The Group recognizes revenues from the sale of handsets andaccessories when title to the product passes to the customer. MTS recordsestimated returns as a direct reduction of sales at the time the related salesare recorded. The costs of 

F-17

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDNEW ACCOUNTING PRONOUNCEMENTS (Continued)

handsets and accessories, whether sold to subscribers through thedistribution channel or as part of the service contract, are expensed whentitle passes to the customer.

In Ukraine, UMC also from time to timesells handsets at prices below cost. MTS recognizes these subsidies in cost ofequipment when sale is recorded.

***Expenserecognition***—Expenses incurred by MTS inrelation to the provision of wireless communication services mainly relate tointerconnection and line rental costs, roaming expenses, costs of handsets andother accessories sold, depreciation and amortization and maintenance of thenetwork.

Calls made bysubscribers from areas outside of territories covered by the Group licenses aresubject to roaming fees charged by the wireless provider in thoseterritories. These fees are recorded as roaming expenses, as MTS acts as theprincipal in the transaction with subscriber and bears the risk ofnon-collection from the subscriber. Roaming fees are charged to MTS subscribersbased on Group’s existing tariffs and are recorded as service revenues.

Any fees paid todealers as commissions are recorded as a component of sales and marketing expenses.

***Taxation***—Deferred tax assets andliabilities are recognized for the expected future tax consequences of existingdifferences between financial reporting and tax reporting bases of assets andliabilities, and for the loss or tax credit carry-forwards using enacted taxrates expected to be in effect at the time these differences are realized.Valuation allowances are recorded for deferred tax assets for which it is morelikely that these assets will not be realized.

***Advertisingcosts***—Advertising costs are expensed as incurred. Advertising costs for theyears ended December 31, 2005, 2004 and 2003, were $248,610, $159,035 and$102,018, respectively, and are reflected asa component of sales and marketing expenses in the accompanying consolidatedstatements of operations.

***GovernmentPension Fund***—Subsidiaries of theGroup contribute to the local state pension fund and social fund, on behalf ofall its employees.

In Russia, starting from January 1,2001, all social contributions, including contributions to the pension fund,were substituted with a unified social tax (“UST”) calculated by theapplication of a regressive rate from 35.6% to 2% of the annual grossremuneration of each employee, that was changed, starting January 1, 2005,to a rate from 26% to 2%. UST is allocated to three social funds, including thepension fund, where the rate of contributions to the pension fund vary from 28%to 2% (from 20% to 2% starting January 1, 2005), depending on theannual gross salary of each employee. The contributions are expensed asincurred. Payments of the unified social tax in Russia amounted to $43.6million, $33.7 million and $27.8 million in 2005, 2004 and 2003, respectively.

In Ukraine, Uzbekistan and Turkmenistan,the subsidiaries of the Group are required to contribute a specifiedpercentage of each employee payroll up to a fixed limit to the local pensionfund, unemployment fund and social security fund. Payments to the Pension fundin Ukraine amounted to

F-18

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDNEW ACCOUNTING PRONOUNCEMENTS (Continued)

$6.6 million,$2.9 million and $1.7 million in 2005, 2004 and 2003 years, respectively.Amounts contributed to the Pension fund in Uzbekistan and Turkmenistan are notmaterial.

The Group does not participate in anypension funds other then described above.

***Earningsper share***—Basic earnings per share (“EPS”) have been determined using the weightedaverage number of shares outstanding during the year. Diluted EPS reflect thepotential dilutive effect of stock options granted to employees. There are3,187,240, 3,530,970 and 4,797,410 stock options outstanding as at December 31,2005, 2004 and 2003, respectively.

The following is the reconciliation of the share component for basic anddiluted EPS with respect to the Group’s net income:
|                                                                                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| Weighted average number of common share outstanding                                  |       | 1,986,819,999         |       | 1,984,497,348         |       | 1,983,374,949         |       |
| Dilutive effect of stock options, as if exercised                                    |       | 290,040               |       | 1,168,573             |       | 1,727,131             |       |
| Weighted average number of common shares and  potential shares outstanding |       | 1,987,110,039         |       | 1,985,665,921         |       | 1,985,102,080         |       |

 

***Fairvalue of financial instruments***—The fair market value of financial instruments,consisting of cash and cash equivalents, accounts receivable and accountspayable, which are included in current assets and liabilities, approximates thecarrying value of these items due to the short term nature of these amounts. Asof December 31, 2005, the $400 million Notes due in 2008 have a fair valueof 105.7% or $423 million, the $400 million Notes due in 2010 have a fair valueof 104.6% or $418 million and the $400 million Notes due in 2012 have a fairvalue of 101.9% or $408 million. As of December 31, 2005, the fair valueof other fixed rate debt including capital lease obligations approximated itscarrying value. The fair value of variable rate debt approximates carryingvalue.

***DerivativeFinancial Instruments and Hedging Activities***—From time to time, in its acquisitions the Group uses derivativeinstruments, consisting of put and call options on all or part of the minoritystakes of acquired companies, to defer payment of the purchase price andprovide optimal acquisition structuring. In addition, in December 2004,the Group entered into two variable-to-fixed interest rate swap agreements tomanage its exposure to variability in expected future cash flows of itsvariable-rate long term debt, which is caused by interest rate fluctuations.The Group does not use derivatives for trading purposes.

The Group accounts for its derivativefinancial instruments following the provisions of SFAS No. 133 “Accounting for DerivativeInstruments and Hedging Activities” and SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments andHedging Activities.” All derivatives are recorded as either assets orliabilities in the consolidated balance sheets and measured at their respectivefair values. The Group’s interest rate swap agreements are designated as a cashflow hedge and the hedging relationship qualifies for hedge accounting. Theeffective portion of the change in fair value of interest rate swap agreementsis, 

F-19

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDNEW ACCOUNTING PRONOUNCEMENTS (Continued)

accordingly, recorded in other comprehensiveincome and reclassified to interest expense in the same period that the relatedcash flows of the hedge transaction affect the interest expense. Changes in thefair value of other derivative instruments are recognized in net income asthose instruments were not designated as hedges.

At the inception of the hedge and on aquarterly basis, the Group performs an analysis to assess whether changes incash flows of its interest rate swap agreements are deemed highly effective inoffsetting changes in cash flows of the hedged debt. If at any time thecorrelation assessment will indicate that the interest rate swap agreements areno longer effective as a hedge, the Group will discontinue hedge accounting and all subsequent changes in fair valuewill be recorded in net income. As of December 31, 2005 the hedge ishighly effective. Approximately $0.7 million is expected to be reclassified innet income during the next twelve months.

***Comprehensiveincome***—Comprehensive income is defined as net incomeplus all other changes in net assets from non-owner sources. The following is the reconciliation ofother comprehensive income, net of tax for the years ended December 31,2005, 2004 and 2003:
|                                                                                                                                 | ** ** | **Year ended  December 31,  2005** | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Net Income                                                                                                                      |       |                                         | $          | 1,126,405                                    |       |                                         |       | $ | 987,878 |   |   |   | $ | 517,239 |   |   |
| Translation Adjustment                                                                                                          |       |                                         | 24,898     |                                         |       |                                         | 15,361     |   |   |   | 7,595 |   |   |
| Change in fair value of interest rate swaps, net of  tax of $1,033 and $123 as of December 31, 2005 and 2004, respectively |       |                                         | 3,272      |                                         |       |                                         | (512       | ) |   |   | — |   |   |
| Total Comprehensive Income                                                                                                      |       |                                         | $          | 1,154,575                                    |       |                                         |       | $ | 1,002,727 |   |   |   | $ | 524,834 |   |   |

 

***Stock-basedcompensation***—MTS accounts for stock options issued toemployees, non-employee directors and consultants following the requirements ofSFAS No. 123, “Accounting forStock-Based Compensation” and SFAS No. 148 “Accounting for Stock Based Compensation Transition and Disclosure, anamendment to FASB Statement No. 123.” Under the requirements ofthese statements, the Company elected to use intrinsic value of options on themeasurement date as a method for accountingfor compensation to employees and non-employee directors. Compensation toconsultants is measured based on the fair value of options on the measurementdate as determined using a binomial option-pricing model.

F-20

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDNEW ACCOUNTING PRONOUNCEMENTS (Continued)

If the Grouphad elected to recognize compensation costs based on the fair values of optionsat the date of the grant, net income and earning per share amounts would havebeen as follows:
|                                                                                                             | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Net  income as reported                                                                                     |       |                        | $          | 1,126,405                   |       |                        |       | $ | 987,878 |   |   |   | $ | 517,239 |   |   |
| Pro-forma effect of the application of fair value  method of accounting       |       |                        | (1,716     | )                           |       |                        | (1,078     | ) |   |   | (727 | ) |   |
| Pro-forma  net income                                                                                       |       |                        | $          | 1,124,689                   |       |                        |       | $ | 986,800 |   |   |   | $ | 516,512 |   |   |
| Earnings per  share—basic and diluted                                                                  |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| As reported                                                                                                 |       |                        | $          | 0.57                        |       |                        |       | $ | 0.50 |   |   |   | $ | 0.26 |   |   |
| Pro-forma                                                                                                   |       |                        | $          | 0.57                        |       |                        |       | $ | 0.50 |   |   |   | $ | 0.26 |   |   |

 

***Comparativeinformation***—Certain prior year amounts have been reclassifiedto conform to the current period presentation.

***New andrecently adopted accounting pronouncements***—In March 2005, the FinancialAccounting StandardsBoard (“FASB”) issued Interpretation No. 47, “Accounting for ConditionalAsset Retirement Obligations—an interpretation of FASB Statement No. 143.”This Interpretation clarifies that the term “conditional asset retirementobligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations”, refers to a legal obligation to perform anasset retirement activity, in which the timing and (or) method of settlementare conditional on a future event that may or may not be within the control of the entity. The obligationto perform the asset retirement activity is unconditional even thoughuncertainty exists about the timing and (or) method of settlement. Uncertaintyabout the timing and (or) method of settlement of a conditional assetretirement obligation should be factored into the measurement of the liabilitywhen sufficient information exists to make a reasonable estimate of the fairvalue of the obligation. Interpretation No. 47 is effective for the Groupbeginning January 1, 2006. The Group is currently assessing theimpact of Interpretation No. 47 on its consolidated financial position andresults of operations.

In December 2004, the FASB issuedStatement of Financial Accounting Standards No. 123 (revised) “Share-Based Payment” (SFAS No. 123R), which requires all companies to measurecompensation cost for all share-based payments(including employee stock options) at fair value. In April 2005,the Securities and Exchange Commission announced that it would provide a phased-in implementationprocess for SFAS No. 123R. As a result of thisphased-in process, the provisions of SFAS No. 123Rmust be adopted by most public entities no later than the beginning of thefirst fiscal year commencing after June 15, 2005. SFAS No. 123Rapplies to all awards granted after the required effective date and to awardsmodified, repurchased, or cancelled after that date. Effective for the fiscalyear beginning January 1, 2006, the Company will adopt the provisions ofSFAS No. 123R using a modified version of prospective application. Underthis transition method, compensation cost will be recognized on or after theeffective date for the portion of outstanding awards for which the requisiteservice has not yet been rendered, based on the grant date fair value of thoseawards previously calculated under SFAS No. 148 for pro forma disclosures.The 

F-21

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**2.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDNEW ACCOUNTING PRONOUNCEMENTS (Continued)

Company doesnot expect the adoption of SFAS No. 123R  to have a material impact on its consolidatedfinancial position or results of operations.

In March 2005, the Securities andExchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107,“Share Based Payment” (“SAB 107”). SAB 107 summarizes the views of the SECstaff regarding the interaction between SFAS 123R and certain SEC rules andregulations, and provides the staff’s views regarding the valuation ofshare-based payment arrangements for public companies. The Group will adopt SAB107 concurrently with the adoption of SFAS 123(R) with effect from January 1,2006. The Company does not expect the adoption of this SAB to have a materialimpact on its consolidated financial position or results of operations.

In May 2005, the FASB issued Statementof Financial Accounting Standards No. 154, “Accounting Changes and ErrorCorrections” (“SFAS No. 154”), which replaces APB Opinion No. 20,“Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes inInterim Financial Statements”. SFAS No. 154 changes the requirements forthe accounting and reporting of a change in accounting principle and isapplicable to all voluntary changes and to changes required by an accountingpronouncement if such pronouncement does not specify transition provisions.SFAS No. 154 requires retrospective application to the prior periods’financial statements of changes in accounting principle. In cases when it isimpracticable to determine the period-specific or cumulative effects of an accounting change, the statement providesthat the new accounting principle should be applied as of the earliestperiod for which retrospective application is practicable or, if impracticable to determine the effect of achange to all prior periods, prospectively from the earliest datepracticable. This Statement shall be effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005.

In June 2005, the Emerging Issues TaskForce (“EITF”)  reached a consensus onEITF Issue No. 05-6, “Determining the Amortization Period forLeasehold Improvements.” As part of a business combination, the acquiringentity will often assume existing leaseagreements of the acquired entity and acquire the related leaseholdimprovements. The issues are whether the “lease term” should be reevaluated atconsummation of a purchase business combination and whether theamortization period for acquired leasehold improvements should be reevaluated by the acquiring entity in a businesscombination. The consensus reached by EITF No. 05-6 iseffective for leasehold improvements that are purchased or acquired inreporting periods beginning June 29, 2005. The adoption of EITF No. 05-6did not have a material impact on the Group’s financial position and results ofoperations.

In October 2005, the FASB issued FASBStaff Position (“FSP”) FAS 13-1, “Accounting for Rental CostsIncurred during a Construction Period”. Under the provisions of FSP FAS 13-1,lessees may not capitalize rental costs incurred on building or groundoperating leases during a construction period. Instead, rental costs should beexpensed on a straight-line basis starting at the beginning of the lease term,i.e., when the lessee takes possession of or is given control of the leasedproperty. The provisions of FSP FAS 13-1 are effective starting with thefirst reporting period beginning after December 15, 2005. The Groupis currently assessing the impact of FSP FAS 13-1 on its consolidatedfinancial position and results of operations.

F-22

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**3.**   BUSINESSESACQUIRED

***BCTIacquisition***—In June 2005,MTS entered into an agreement to acquire 100.0% of  the outstanding stock of BCTI, which is aleading cellular operator in Turkmenistan with a customer base of approximately 59,100 subscribers (unaudited).BCTI holds a license to provide GSM-900/1800 services for the wholeterritory of Turkmenistan and a license for provision of AMPS services. Theagreement provided for the acquisition of a 51.0% stake and included a forwardcommitment to complete the acquisition of the remaining 49.0% stake withineight months of the date of the original agreement subject to certainconditions.

MTS acquired the 51.0% stake in BCTI forcash consideration of $28.2 million, including a finder’s fee of $2.5 million.The Group accounted for the purchase of the remaining 49.0% stake in BCTI as a financing of the minority interest and,consequently, consolidated 100.0 % of the subsidiary starting from July 1,2005. In November 2005, MTS completed the acquisition of the remaining49.0% stake in BCTI for a cash consideration of $18.5 million.

This acquisition was accounted for using the purchase method ofaccounting. Total purchase price amounted to $46.7 million. The purchase priceallocation for the acquisition was as follows: 
| Current assets       |   | $       | 7,808  |   |
|----------------------|--------|---------|--------|--------|
| Non-current  assets  |   | 3,804   |   |
| License costs        |   | 50,503  |   |
| Deferred  taxes      |   | (10,862 | )      |
| Current  liabilities |   | (4,566  | )      |
| Purchase  price      |   | $       | 46,687 |   |

 

In accordance with certain provisions ofthe license agreement with the Government of Turkmenistan (“the Government”),the Group shares net profit derived from the operations of the BCTI branchlocated in Turkmenistan. The amount of shared net profit is calculated based onthe financial statements prepared in accordance with local GAAP subject tocertain adjustments. The Group shared 49% of net profit since the date ofacquisition and until December 21, 2005, and 20% of net profit commencingDecember 21, 2005.

***ReComacquisition***—In December 2005,MTS purchased the remaining 46.1% stake in ReCom for $110.0 million.Previously MTS owned 53.9% of ReCom; as a result of the transaction, MTS’ownership in the subsidiary increased to 100.0%. The acquisition was accountedfor using the purchase method of accounting. The allocation of purchase priceincreased recorded license cost by $43.9 million, customer base cost by $15.0million and resulted in recognition of goodwill in the amount of $16.2 million.

Goodwill is mainlyattributable to economic potential of the market assuming low regionalpenetration level as of the date of acquisition. Licensecosts are amortized over the remaining contractual terms of the licenses ofapproximately 3 to 8 years and customer base is amortized over the averagesubscriber’s life of approximately 60 months.

F-23

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**3. BUSINESSES ACQUIRED (Continued)**

***Gorizont-RTacquisition***—In December 2004,MTS completed the acquisition of a 76.0% stake in Gorizont-RT, a mobilephone operator in the Republic of Sakha (Yakutia) in the Far Eastof Russia, for cash consideration of $53.2 million. Gorizont-RT holdslicenses to provide GSM-900/1800 services in the Republic of Sakha (Yakutia).The Gorizont-RT’s customer base as at the date of acquisition was approximately100,000 subscribers (unaudited). Commencing from the date of acquisition, MTSconsolidates financial results of Gorizont-RT.

The acquisition was accounted for using the purchase method. Thepurchase price allocation was as follows:
| Current assets          |   | $      | 3,820  |   |
|-------------------------|--------|--------|--------|--------|
| Non-current assets      |   | 17,501 |   |
| License costs           |   | 26,362 |   |
| Customer base cost      |   | 1,050  |   |
| Trade mark              |   | 153    |   |
| Goodwill                |   | 20,214 |   |
| Current liabilities     |   | (4,949 | )      |
| Non-current liabilities |   | (529   | )      |
| Deferred taxes          |   | (6,814 | )      |
| Minority interest       |   | (3,604 | )      |
| Purchase price          |   | $      | 53,204 |   |

 

Goodwill is mainlyattributable to economic potential of the market assuming low regionalpenetration level as of the date of acquisition. Licensecosts are amortized over the remaining contractual terms of the licenses ofapproximately 10 years and customer base is amortized over the averagesubscriber’s life of approximately 60 months.

In June 2005, MTS acquired the remaining24.0% stake in Gorizont-RT, increasing its ownership to 100.0%. Thepurchase price paid was $13.5 million. The acquisition was accounted for usingthe purchase method of accounting. The allocation of purchase price increasedrecorded license cost by $7.5 million.

***Sibintertelecomacquisition***—In November 2004,MTS acquired a 93.53% stake in Sibintertelecom, mobile phone operator in Chitaregion and Aginsk-Buryatsk District in the Far-East of Russia, for cashconsideration of $37.4 million. Sibintertelecom holds license to provide 900 MHz services in Chita region and Aginsk-BuryatskDistrict in the Far-East of Russia. Sibintertelecom is the sole mobile serviceprovider in two regions with a total population of 1.23 million. Commencingfrom the date of acquisition, MTS consolidates financial results ofSibintertelecom. The company’s customer base as at the date of acquisition wasapproximately 100,000 subscribers (unaudited).

F-24

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**3. BUSINESSES ACQUIRED (Continued)**

The acquisitionwas accounted for using the purchase method of accounting. The purchase priceallocation was as follows:
| Current assets      |   | $      | 5,939  |   |
|---------------------|--------|--------|--------|--------|
| Non-current asset   |   | 6,966  |   |
| License costs       |   | 29,555 |   |
| Customer base cost  |   | 1,488  |   |
| Trademark           |   | 465    |   |
| Goodwill            |   | 10,376 |   |
| Current liabilities |   | (9,523 | )      |
| Deferred taxes      |   | (7,668 | )      |
| Minority interest   |   | (190   | )      |
| Purchase price      |   | $      | 37,408 |   |

 

Goodwill is mainlyattributable to economic potential of the market assuming low regionalpenetration level as of the date of acquisition. Licensecosts are amortized over the remaining contractual terms of the licenses ofapproximately 5 years for Chita region and 7 years for Aginsk-BuryatskDistrict and customer base is amortized over the average subscriber’s life ofapproximately 44 months.

In December 2005, MTS aquired theremaining 6.47% stake in Sibintertelecom, which resulted in increase of MTS’ownership in Sibintertelecom to 100.0%.The amount paid for the stake amounted to $2.8 million. The acquisition was accounted for using thepurchase method of accounting. The allocation of purchase price increasedrecorded license cost by $1.4 million.

***TelesotAlania acquisition***—In December 2004,MTS purchased a 52.5% stake in Telesot Alania, a GSM mobile phone operator in the Republic of North Ossetia in theSouthern part of Russia, for cash consideration of $6.2 million. TelesotAlania holds license to provide 1800/900 MHz services in the Republic of North Ossetia inthe Southern part of Russia. Commencing from the date of acquisition, MTSconsolidates financial results of Telesot Alania. Telesot Alania’s customerbase as at the date of acquisition was approximately 54,000 subscribers (unaudited).

The acquisition was accounted for using the purchase method of accounting.The purchase price allocation was as follows:
| Current assets      |   | $      | 2,229  |   |
|---------------------|--------|--------|--------|--------|
| Non-current assets  |   | 5,085  |   |
| License costs       |   | 3,606  |   |
| Customer base cost  |   | 90     |   |
| Current liabilities |   | (767   | )      |
| Deferred taxes      |   | (887   | )      |
| Minority interest   |   | (3,110 | )      |
| Purchase price      |   | $      | 6,246  |   |

 

F-25

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**3. BUSINESSES ACQUIRED (Continued)**

License costs are amortized over theremaining contractual terms of the licenses of approximately 2 years andcustomer base is amortized over the average subscriber’s life of approximately60 months.

In December 2005,MTS acquired the remaining 47.5% stake in Telesot Alania, increasing its ownership in the company to 100.0%. In accordance with thepurchase agreement the purchase price amounted to $32.6 million of which $9.0million was paid in cash in December 2005 and $23.6 million was recordedas liability as of December 31, 2005, and included in other payables inthe consolidated balance sheet. The liability was fully settled in February 2006.The acquisition was accounted for using the purchase method of accounting. Thepreliminary allocation of purchase price increased recorded license cost by$2.7 million and $26.3 million was recognized as goodwill. Goodwill is mainlyattributable to economic potential of the market assuming low regionalpenetration level as of the date of acquisition. The purchase price allocation for this acquisition has not been yetfinalized at the date of these financial statements.

***Uzdunrobitaacquisition***—In July 2004,MTS entered into an agreement to acquire 74.0% of Uzbekistan mobile operator JVUzdunrobita (“Uzdunrobita”) for a cash consideration of $126.4 million,including transaction costs of $5.4 million. The acquisition was completed on August 1,2004, and starting from this date Uzdunrobita’s financial results areconsolidated. Uzdunrobita holds licenses to provide GSM-1800 mobile communication services on the whole territory ofUzbekistan, which has a population of approximately 25.2 million.Uzdunrobita’s customer base as of the date of acquisition was approximately230,000 subscribers (unaudited).

The acquisition was accounted for using the purchase method. Thepurchase price allocation for the acquisition was as follows:
| Current assets           |   | $       | 5,950   |   |
|--------------------------|--------|---------|---------|--------|
| Non-current  assets      |   | 67,293  |    |
| License  costs           |   | 40,861  |    |
| Customer  base cost      |   | 958     |    |
| Trademark                |   | 3,622   |    |
| Goodwill                 |   | 46,470  |    |
| Current  liabilities     |   | (14,705 | )       |
| Non-current  liabilities |   | (1,356  | )       |
| Deferred  taxes          |   | (6,384  | )       |
| Minority  interest       |   | (16,308 | )       |
| Purchase  price          |   | $       | 126,401 |   |

 

Goodwill is mainlyattributable to economic potential of the market assuming low penetration levelas of the date of acquisition. License costs are amortized over the remainingcontractual terms of the licenses of approximately 12 years and customerbase is amortized over the average remaining subscriber’s life of approximately39 months.

MTS also entered into call and put optionagreements with the existing shareholders of Uzdunrobita to acquire theremaining 26.0% of common shares of the company. The exercise period for thecall and put 

F-26

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**3. BUSINESSES ACQUIRED (Continued)**

option is 48months from the acquisition date. The call and put option agreements stipulate a minimum purchase price of $37.7 millionplus 5% per annum commencing from the acquisition date. Fair value of the option was $5.9 million and$4.0 million at December 31, 2005 and 2004, respectively, and was includedin other current assets on the accompanying consolidated balance sheets.

***Primtelefonacquisition***—In June 2004,MTS purchased 50.0% of Far-Eastern operator CJSC Primtelefon (“Primtelefon”)for cash consideration of $31.0 million, increasing its effective ownership to100.0%, as 50.0% of Primtelefon’s shares were controlled through Vostok Mobile,a wholly-owned subsidiary of MTS. Commencing from the date of acquisitionof the second stake, MTS consolidatesfinancial results of Primtelefon. Primtelefon holds licenses to provide GSM900/1800 mobile cellular communications in the Far-East region of Russia. Thecompany’s subscriber base as of the date of acquisition of the controllingstake was approximately 216,000 subscribers (unaudited).

The acquisition was accounted for using the purchase method. Thepurchase price allocation was as follows:
| Current assets           |   | $      | 11,041 |   |
|--------------------------|--------|--------|--------|--------|
| Non-current  assets      |   | 16,809 |   |
| License  costs           |   | 21,891 |   |
| Current  liabilities     |   | (7,488 | )      |
| Non-current  liabilities |   | (5,671 | )      |
| Deferred  taxes          |   | (5,582 | )      |
| Purchase price           |   | $      | 31,000 |   |

 

License costsacquired are amortized over the remaining contractual terms of the licenses ofapproximately 7 years and customer base is amortized over the average remainingsubscriber’s life of approximately 41 months.

***Telecom-900acquisition***—On August 13, 2003, Telecom-900, asubsidiary of MTS, completed the purchase of the 43.7% and 2.95% stakes inUraltel for a cash consideration of $35.7 million. The transaction increased Telecom-900’s ownership in Uraltel to 99.85%. The acquisition was accountedusing purchase method of accounting. The allocation of purchase price increasedrecorded license cost by $24.5 million.

In November 2003, the Group completed thepurchase of the 30.0% stake in SCS-900 from Sibirtelecom for cashconsideration of $28.6 million. The Group’s acquisition of this stake increasedits ownership in SCS-900 to 81.0%. On December 29, 2003, theGroup acquired for cash consideration of $9.3 million a 100.0% stake inILIT LLC, a company which owns a 7.5% stake in SCS-900, increasing itsownership in SCS-900 to 88.5%. The acquisition was accounted usingpurchase method of accounting. The allocation of purchase price increasedrecorded license cost by $25.7 million.

In March 2004, the Group acquired 11.0%stake in SCS-900 from CJSC Sibirskie Zvezdy for cash consideration of$8.5 million, increasing its ownership in SCS-900 to 99.5%. Theacquisition was accounted 

F-27

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**3. BUSINESSES ACQUIRED (Continued)**

for using apurchase method of accounting. The allocation of purchase price increasedrecorded license cost by $2.6 million.

In April 2004, the Group acquired 40.0%stake in FECS-900 from OJSC Dalnevostochnaya Kompaniya Electrosvyazi forcash consideration of $8.3 million, increasing its ownership in FECS-900to 100.0%. The acquisition was accounted for using a purchase method ofaccounting. The allocation of purchase price increased recorded licensecost by $4.1 million.

License costs are amortized over theremaining contractual terms of the respective license, ranging from 6 to 10years at the date of the first acquisition. Customer base is amortized over theaverage remaining subscribers life ranging from 32 to 40 months.

***TomskCellular Communications acquisition***—InSeptember 2003, MTS purchased 100.0% of Siberian operator TomskCellular Communications (“TSS”) for cash consideration of $47.0 million. TSSholds licenses to provide GSM 900/1800 mobile cellular communications in theTomsk region. The company’s customer base as of the date of acquisition wasapproximately 183,000 subscribers (unaudited).

The acquisition was accounted for using thepurchase method. The purchase price allocation was as follows:
| Current assets           |   | $       | 3,299  |   |
|--------------------------|--------|---------|--------|--------|
| Non-current  assets      |   | 11,412  |   |
| License  costs           |   | 49,282  |   |
| Current  liabilities     |   | (4,543  | )      |
| Non-current  liabilities |   | (105    | )      |
| Deferred  taxes          |   | (12,345 | )      |
| Purchase  price          |   | $       | 47,000 |   |

 

License costsacquired are amortized over the remaining contractual terms of the licenses ofapproximately 8 years and customer base is amortized over the average remainingsubscribers life of approximately 76 months.

***Sibchallengeacquisition***—On August 22,2003, MTS completed the purchase of 100.0% of Sibchallenge, a cellular operatorin the Krasnoyarsk region, for cash consideration of $45.5 million, paid afinder’s fee of $2.0 million and assumed net debt of approximately $6.6million. Sibchallenge holds licenses to provide GSM 900/1800 and DAMPS mobileservices in the Krasnoyarsk region of Siberia, the Republic of Khakasiya, andin the Taimyr Autonomous region, all of which are located in the Siberian partof Russia. At the date of acquisition, Sibchallenge had approximately132,000 subscribers (unaudited).

F-28

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**3. BUSINESSES ACQUIRED (Continued)**

The purchaseprice allocation was as follows:
| Current assets           |   | $       | 4,078  |   |
|--------------------------|--------|---------|--------|--------|
| Non-current  assets      |   | 16,678  |   |
| License  costs           |   | 52,625  |   |
| Current  liabilities     |   | (6,405  | )      |
| Non-current  liabilities |   | (6,628  | )      |
| Deferred  taxes          |   | (12,894 | )      |
| Purchase  price          |   | $       | 47,454 |   |

 

License costsacquired are amortized over the remaining contractual terms of the licenses ofapproximately 8 years and customer base is amortized over the average remainingsubscribers life of approximately 36 months.

***UMCacquisition***—On March 4, 2003, MTS acquired 57.7% of theoutstanding voting interest of UMC, a provider of mobile services in Ukraine,for cash consideration of $199.0 million, including the acquisition of 16.3% of the outstanding voting interest fromDeutsche Telekom AG, a related party, for $55.0 million.Acquisition costs relating to the transaction of $1.4 million were capitalized.In connection with the acquisition, MTSalso assumed debt of UMC with face value of approximately $65.0 million, withthe fair value of approximately $62.0 million. At the date of acquisition, UMChad approximately 1.8 million subscribers (unaudited) and wasone of the two leading mobile operators in Ukraine, operating under nationwideGSM 900/1800 and NMT 450 licenses.

The acquisition was accounted for using the purchase method. For convenience, MTS consolidated UMC fromMarch 1, 2003. Purchase price allocation is as follows:
| Current assets           |   | $       | 82,293  |   |
|--------------------------|--------|---------|---------|--------|
| Non-current  assets      |   | 272,721 |    |
| License  costs           |   | 82,200  |    |
| Customer  base cost      |   | 30,927  |    |
| Current  liabilities     |   | (63,551 | )       |
| Non-current  liabilities |   | (78,580 | )       |
| Deferred  taxes          |   | (27,425 | )       |
| Minority  interest       |   | (99,581 | )       |
| Purchase  price          |   | $       | 199,004 |   |

 

MTS paid $171.5million of the purchase price in cash and agreed to pay the balance of thepurchase price of $27.5 million to Cetel B.V., a wholly-owned subsidiary ofDeutsche Telekom AG, within one year. The amount payable accrued interest of9.0% per annum. In March 2004, MTS cash settled the balance payable toCetel B.V.

F-29

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**3.**   BUSINESSESACQUIRED (Continued)

MTS also had anoption agreement with Ukrtelecom to purchase its remaining 26.0% stake in UMC,exercisable from February 5, 2003 to November 5, 2005, with anexercise price of $87.6 million. On June 4, 2003, MTS exercised itscall option. As a result of the transaction, MTS’ ownership in UMC increasedfrom 57.7% to 83.7%. The acquisition was accounted for using purchase methodof accounting. The allocation of purchase price increased recorded licensecost by $10.2 million, increased customer base cost by $13.9 million, anddecreased minority interest by $66.4 million.

Inaddition, MTS entered into a put and call option agreement with TDC MobileInternational A/S (“TDC”)for the purchase of its 16.3% stake in UMC. The exercise period of the calloption was from May 5, 2003 to November 5, 2004, and the put optionwas exercisable from August 5, 2003 to November 5,2004. The call option price was $85.0 million plus interest accrued from November 5, 2002to the date of the exercise at 11% per annum; the price of the putoption was calculated based on reportedearnings of UMC prior to the exercise and was subject to a minimum amount of$55.0 million. On June 25, 2003, MTS notified TDC of its intent toexercise its rights under the put and call option agreement. The purchase wascompleted during July 2003. MTS paid cash consideration of approximately$91.7 million to purchase the remaining 16.3% stake in UMC. The acquisition wasaccounted for using purchase method of accounting. The allocation of purchaseprice increased recorded license cost by $52.7 million, increased customer basecost by $8.7 million, and decreased minority interest by $43.8 million.

The UMC license costsare amortized over the remaining contractual terms of the licenses ofapproximately 9 to 13 years at the date of the acquisition, acquired customerbase is amortized over the average remaining subscriber’s life ofapproximately 32 months. Other acquired intangible assets, represented mostlyby software, are amortized over their respective useful lives of 3 to10 years.

In accordance withSFAS No. 141 “Business Combinations,” the Group recognized $8.0 million ofgoodwill relating to workforce-in-place.

***TAIFTelcom acquisition***—In April 2003, MTS acquired 51.0% of thecommon shares of TAIF Telcom, a Russian open joint-stock company, for cashconsideration of $51.0 million and 50.0% of the preferred shares of TAIF Telcomfor cash consideration of $10.0 million. In May 2003, MTS acquired anadditional 1.7% of the common shares of TAIF Telcom for cash consideration of$2.3 million. In connection with the acquisitions, MTS also assumedindebtedness of approximately $16.6 million that was collateralized by telecomequipment.

MTS also entered into call and put optionagreements with the existing shareholders of TAIF Telcom to acquire theremaining 47.3% of common shares and 50.0% of preferred shares of TAIF Telcom. Theexercise period for the call option on common shares was 48 months from theacquisition date and for the put option on common shares was 36 monthsfollowing an 18 months period after the acquisition date. The call and putoption agreements for the common shares stipulated a minimum purchase price of$49.0 million plus 8% per annum commencing from the acquisition date. Theexercise period for the call option on preferred shares was 48 months followinga 24 months period after the acquisition date and for the put option onpreferred shares it was a 24 months period after the acquisition date. The calland put option agreements for the preferred shares stipulated a minimumpurchase price of $10.0 million plus 8% per 

F-30

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**3. BUSINESSES ACQUIRED (Continued)**

annumcommencing from the acquisition date. Fair value of the option was $3.5 millionat December 31, 2003.

The purchase price allocation for initial stake acquired was asfollows:
| Current assets           |   | $       | 3,870  |   |
|--------------------------|--------|---------|--------|--------|
| Non-current  assets      |   | 48,391  |   |
| License  costs           |   | 68,407  |   |
| Current  liabilities     |   | (26,099 | )      |
| Non-current  liabilities |   | (5,550  | )      |
| Deferred  taxes          |   | (16,814 | )      |
| Minority  interest       |   | (8,965  | )      |
| Purchase  price          |   | $       | 63,240 |   |

 

License costsacquired are amortized over the remaining contractual terms of the licenses ofapproximately 4 years and customer base is amortized over the average remainingsubscribers’ life of approximately 38 months.

TAIF Telcom provides mobile services in theGSM-900/1800 standard in the Republic of Tatarstan and in the Volgaregion of Russia. At the date of acquisition, TAIF Telcom had approximately 240,000 subscribers (unaudited).

In September 2004, MTS exercised itsoption to acquire the remaining 47.3% of common shares and 50.0% of preferredshares in TAIF Telcom for cash consideration of $63.0 million, increasing itsownership to 100.0%. The Group received title to the acquired shares in October 2004.The purchase price allocation increased recorded license costby $35,8 million, increased acquired customer base by $4.2 million;goodwill was recorded in the amount of $21.2 million. Goodwill is mainly attributable to economicpotential of the market.

***Acquisitionsof various regional companies***—In August 2003,the Group reached an agreement to acquire, in a series of relatedtransactions, equity interests in five Russian regional mobile phone operatorsfrom MCT Corporation for a total of $71.0 million. The Group agreed to purchasea 43.7% stake in Uraltel (described above) and 100.0% of Vostok Mobile BV,which holds a 50.0% stake in Primtelefon.

The Group also agreed to purchase Vostok MobileSouth, which holds 50.0% stakes in Astrakhan Mobileand Volgograd Mobile, as well as an 80.0% stake in Mar Mobile GSM. The Groupalso entered into agreements to acquire the remaining 20.0% of MarMobile GSM and another 2.95% stake in Uraltel from existing shareholdersunrelated to MCT Corporation for approximately $1.0 million.

On August 26, 2003, the Groupcompleted the acquisition of Vostok Mobile and recorded a 50.0% stakeinvestment in Primtelefon using equity method of accounting.

On October 14, 2003, the Groupcompleted the purchase of Vostok Mobile South and thus acquired a 50.0%stake in Volgograd Mobile and Astrakhan Mobile and an 80.0% stake in Mar MobileGSM. Also, 

F-31

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**3. BUSINESSES ACQUIRED (Continued)**

in a separatetransaction the Group completed the acquisition of the remaining 20.0% stake inMar Mobile GSM from existing shareholders unrelated to MCT Corporation, thusconsolidating a 100.0% ownership in the company.

In August 2004, MTS acquired from UTKthe remaining 50.0% stakes in Astrakhan Mobile and Volgograd Mobile, increasingits ownership to 100.0%. An acquisition price was paid in cash and amounted to $1.1 million and $2.9 million, respectively. Commencingfrom the date of acquisition financialresults of both companies are consolidated into MTS financial statements.Astrakhan Mobile holds a 800/1800 MHz licenses covering Astrakhan region(population of approximately 1 million) and Volgograd Mobile holds a 800/1800MHz licenses covering Volgograd region (population of approximately 2.7 million).As of July 31, 2004, two companies provided AMPS/DAMPS servicesto around 10 thousand subscribers (unaudited).The acquisition was accounted for using a purchase method of accounting. The allocation of purchase price forthe first and second stakes in both companies resulted in increase in licensecost by $16.5 million.

In April 2004, MTS acquired from OJSCSibirtelecom additional 7.5% stake in MSS, a company, which operates in the Omsk region, for $2.2 million in cash. Thisacquisition increased MTS’s ownership in MSS to 91.0%. The acquisitionwas accounted for using a purchase method of accounting. The allocation ofpurchase price increased recorded license cost by $1.1 million.

In April andMay of 2004, MTS acquired the remaining stakes in the followingsubsidiaries:

·       35.0% ofMTS-NN (a service provider in Nizhny Novgorod) for $0.5 million, and

·       49.0% ofNovitel (handsets dealer in Moscow) for $1.3 million.

Both acquisitionsincreased MTS’s share in the respective companies to 100.0%. The acquisitionswere accounted for using a purchase method ofaccounting. The allocation of purchase price increased recorded goodwill by$1.8 million.

In August 2004, MTS acquired from OJSCVolgatelecom remaining 49.0% stake in UDN-900 for $6.4 million incash. This acquisition increased MTS’s ownership in UDN to 100.0%. Theallocation of purchase price increased recorded license cost by $0.3 million.UDN-900 provides GSM 900 servicesunder the MTS brand in Udmurtia Republic (population 1.6 million). UDN’ssubscriber base as of July 31, 2004 was 219,760 (unaudited).

In February 2005, MTS completed theacquisition of 74.9% stake in Sweet-Com LLC for cash consideration of $2.0million. Sweet-Com LLC is a holder of 3.5GHz radio frequency allocation for Moscow region. The Company is providingwide-band radio access services for the “last mile” based on the Radio-Ethernettechnology. The acquisition was accounted for using purchase method ofaccounting. As the result of the purchase price allocation license cost wasincreased by $2.4 million.

In February 2005, MTS acquired 74.0%stake in MTS-Komi Republic increasing its ownership to 100.0%. The considerationpaid under the transaction amounted to $1.2 million. The acquisition wasaccounted for using the purchase method of accounting.

F-32

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**3. BUSINESSES ACQUIRED (Continued)**

In December 2005,MTS acquired an additional 74.0% stake in MTS-Tver for $1.4 million. As aresult of the transaction, MTS’ ownership in thecompany increased to 100.0%. The acquisition was accounted for using thepurchase method of accounting.

***Pro forma results of operations (unaudited)***—The following unaudited pro forma financial data for the yearsended December 31, 2005 and 2004, give effect to the acquisitions of BCTIand other various regional companies as if they had occurred at January 1,2004.
|                                       | ** ** | **December 31,2005** | ** ** | **December 31,2004** | ** ** |
|---------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Pro forma:                            |       |                      |       |                      |       |   |   |   |   |
| Net revenues                          |       |                      | $          | 5,038,735                 |       |   |   | $ | 3,919,782 |   |   |
| Net operating income                  |       |                      | 1,642,363  |                      |       |   | 1,419,518 |   |   |
| Net income                            |       |                      | 1,128,567  |                      |       |   | 980,416 |   |   |
| Earnings per share, basic and diluted |       |                      | $          | 0.57                      |       |   |   | $ | 0.49 |   |   |

 

The pro formainformation is based on various assumptions and estimates. The pro forma informationis not necessarily indicative of the operating results that would have occurredif the Group acquisitions had been consummated as of January 1, 2004, noris it necessarily indicative of future operating results. The pro formainformation does not give effect to any potential revenue enhancements or costsynergies or other operating efficiencies that could result from theacquisitions. The actual results of operations of these companies are includedin the consolidated financial statements of the Group only from the respectivedates of acquisition.

**4.**   CASH AND CASHEQUIVALENTS

Cash and cash equivalents as of December 31, 2005 and 2004comprised the following:
|                                    | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| U.S.  dollar current accounts |       |                        | $          | 4,599                       |       |   |   | $ | 107,172 |   |   |
| U.S.  dollar time deposits         |       |                        | 751        |                        |       |   | 45,295 |   |   |
| Ruble  current accounts            |       |                        | 46,119     |                        |       |   | 90,527 |   |   |
| Ruble  deposits                    |       |                        | 6,775      |                        |       |   | 2,596 |   |   |
| Hryvna  current accounts           |       |                        | 4,540      |                        |       |   | 10,190 |   |   |
| Uzbek  som current accounts        |       |                        | 920        |                        |       |   | 715 |   |   |
| Uzbek  som deposit accounts        |       |                        | 3,812      |                        |       |   | 15,106 |   |   |
| Turkmenian  manat current accounts |       |                        | 10,651     |                        |       |   | — |   |   |
| Other                              |       |                        | 117        |                        |       |   | 2,549 |   |   |
| Total cash  and cash equivalents   |       |                        | $          | 78,284                      |       |   |   | $ | 274,150 |   |   |

 

F-33

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**5.**   SHORT-TERMINVESTMENTS

Short-term investments, denominated in U.S. dollars, as of December 31,2005 comprised the following:
|                              | ** ** | **Annual   interest rate** | ** ** | **Maturity date** | ** ** | **December 31,  2005** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| East-West  United Bank S.A.  |       |                                 | 2.0        | %                      |       | February 15, 2006      |       |   | 23,100 |   |   |
| Other                        |       |                                 |       |                   |       |                        |       |   | 4,959 |   |   |
| Total short-term investments |       |                                 |       |                   |       |                        |       |   | $ | 28,059 |   |   |
|                              |            |                                      |            |                        |            |                             |            |  |  |  |  |  |

 

In 2005, the deposit agreement withEast-West United Bank S.A., a related party, whose shareholder is Sistema, wasamended to change the maturity date from April 2005 to February 2006.

Short-terminvestments, denominated in U.S. dollars, as of December 31, 2004comprised the following:
|                                                     | ** ** | **Annual   interest rate** | ** ** | **Maturity date** | ** ** | **December 31,   2004** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|------------------------|------------|-----------------------------------|------------|
| OJSC Moscow  Bank of Reconstruction and Development |       |                                 | 8.4        | %                      |       | December 9, 2005             |       |   | $ | 30,000 |   |   |
| East-West  United Bank S.A.                         |       |                                 | 2.0        | %                      |       | April 4, 2005                |       |   | 23,100 |   |   |
| OJSC Moscow  Bank of Reconstruction and Development |       |                                 | 8.4        | %                      |       | October 10, 2005             |       |   | 10,000 |   |   |
| OJSC Moscow  Bank of Reconstruction and Development |       |                                 | 8.4        | %                      |       | December 14, 2005            |       |   | 10,000 |   |   |
| Other                                               |       |                                 |       |                   |       |                              |       |   | 260 |   |   |
| Total short-term investments                        |       |                                 |       |                   |       |                              |       |   | $ | 73,360 |   |   |

 

OJSC MoscowBank of Reconstruction and Development is a related party (see also Note 17Related parties).

**6.**   TRADERECEIVABLES, NET

Trade receivables as of December 31, 2005 and 2004 were asfollows:
|                                   | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Accounts  receivable, subscribers |       |                        | $          | 147,138                     |       |   |   | $ | 113,869 |   |   |
| Accounts  receivable, roaming     |       |                        | 30,863     |                        |       |   | 24,731 |   |   |
| Accounts  receivable, other       |       |                        | 71,238     |                        |       |   | 40,584 |   |   |
| Allowance for  doubtful accounts  |       |                        | (39,919    | )                           |       |   | (16,659 | ) |   |
| Trade receivables, net            |       |                        | $          | 209,320                     |       |   |   | $ | 162,525 |   |   |

 

The followingtable summarizes the changes in the allowance for doubtful accounts for theyear ended December 31, 2005, 2004 and 2003:
|                                  | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Balance,  beginning of the year  |       |                        | $          | 16,659                      |       |                        |       | $ | 13,698 |   |   |   | $ | 6,270 |   |   |
| Provision for  doubtful accounts |       |                        | 50,407     |                        |       |                        | 26,459     |   |   |   | 32,633 |   |   |
| Accounts  receivable written off |       |                        | (27,147    | )                           |       |                        | (23,498    | ) |   |   | (25,205 | ) |   |
| Balance, end of the year         |       |                        | $          | 39,919                      |       |                        |       | $ | 16,659 |   |   |   | $ | 13,698 |   |   |

 

F-34

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**7.**   INVENTORY ANDSPARE PARTS

Inventory as of December 31, 2005 and 2004 comprised thefollowing:
|                                  | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Spare  parts for base stations   |       |                        | $          | 48,998                      |       |   |   | $ | 14,775 |   |   |
| Handsets  and accessories        |       |                        | 39,147     |                        |       |   | 30,574 |   |   |
| Other  inventory                 |       |                        | 68,515     |                        |       |   | 44,169 |   |   |
| Total  inventory and spare parts |       |                        | $          | 156,660                     |       |   |   | $ | 89,518 |   |   |

 

Other inventory mainly consists of SIMcards and advertising materials. Obsolescence expense for the years endedDecember 31, 2005, 2004 and 2003 amounted to $9,112, $4,610, and $3,307,respectively, and was included in general and administrative expenses in theaccompanying consolidated statements of operations. Spare parts for basestations included in inventory are expected to be utilized within 12 monthsperiod.

**8.**   PROPERTY,PLANT AND EQUIPMENT

The net book value of property, plant and equipment as of December 31,2005 and 2004 was as follows:
|                                                                                                                                                                       | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Network,  base station equipment (including leased network and base station  equipment of $58,664 and $67,905, respectively) and related leasehold  improvements |       | $                           | 3,534,574  |                        |       | $ | 2,538,240 |   |   |
| Office equipment, computers, software and other  (including leased office equipment, computers and software of $402 and  $1,613, respectively)                        |       | 339,788                     |       |                        | 249,458    |   |   |
| Buildings  and related leasehold improvements                                                                                                                         |       | 225,726                     |       |                        | 202,095    |   |   |
| Vehicles                                                                                                                                                              |       | 21,830                      |       |                        | 15,658     |   |   |
| Property,  plant and equipment, at cost                                                                                                                               |       | 4,121,918                   |       |                        | 3,005,451  |   |   |
| Accumulated depreciation (including accumulated  depreciation on leased equipment of $27,424 and $30,304)                                                             |       | (1,350,783                  | )          |                        | (901,416   | ) |   |
| Equipment  for installation                                                                                                                                           |       | 621,346                     |       |                        | 275,010    |   |   |
| Construction  in progress                                                                                                                                             |       | 1,090,198                   |       |                        | 855,273    |   |   |
| Property,  plant and equipment, net                                                                                                                                   |       | $                           | 4,482,679  |                        |       | $ | 3,234,318 |   |   |

 

Interest costs of $54.2 million and $33.2million were capitalized in property, plant and equipment during the yearsended December 31, 2005 and 2004, respectively.

Depreciationexpenses during the years ended December 31, 2005, 2004 and 2003, amountedto $510.5 million, $385.7 million and $233.1 million, respectively, includingdepreciation expenses for leased property, plant and equipment in the amount of$7.7 million, $5.4 million and $7.6 million, respectively.

F-35

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**9.**   OTHERINTANGIBLE ASSETS

Intangible assets at December 31, 2005 and 2004 comprised thefollowing:
|                                                      | ** ** | ** **                 | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **Useful  lives**          | ** ** | **Gross  carrying  value**      | ** ** | **Accumulated  amortization**   | ** ** | **Net  carrying  value** | ** ** | **Gross  carrying  value** | ** ** | **Accumulated  amortization** | ** ** | **Net  carrying  value** | ** ** |
| **Amortized  intangible assets**                     |       |                       |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquired customer base                               |       | 32 to  60 months |       | $                               | 110,360    |                            |       | $ | (78,219 | ) |   | $ | 32,141 |   | $ | 94,632 |   |   | $ | (50,276 | ) |   | $ | 44,356 |   |
| Rights to use premises                               |       | 5 to 9 years               |       | 8,749                           |       |                            | (2,573     | ) |   | 6,176 |   | 19,638 |   |   | (12,393 | ) |   | 7,245 |   |
| Radio frequencies                                    |       | 3 to 15 years         |       | 130,839                         |       |                            | (31,227    | ) |   | 99,612 |   | 115,493 |   |   | (31,494 | ) |   | 83,999 |   |
| Numbering capacity with finite contractual  life     |       | 5 to 10 years              |       | 65,763                          |       |                            | (50,325    | ) |   | 15,438 |   | 52,630 |   |   | (39,746 | ) |   | 12,884 |   |
| Software and other                                   |       | 3 to 15 years         |       | 850,068                         |       |                            | (342,754   | ) |   | 507,314 |   | 422,291 |   |   | (175,490 | ) |   | 246,801 |   |
|                                                 |       |                       |       | 1,165,779                       |       |                            | (505,098   | ) |   | 660,681 |   | 704,684 |   |   | (309,399 | ) |   | 395,285 |   |
| **Unamortized  intangible assets:**                  |       |                       |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Numbering capacity with indefinite  contractual life |       |                       |       | 20,344                          |       |                            | —     |   |   | 20,344 |   | 17,247 |   |   | — |   |   | 17,247 |   |
| Total  other intangible assets                  |       |                       |       | $                               | 1,186,123  |                            |       | $ | (505,098 | ) |   | $ | 681,025 |   | $ | 721,931 |   |   | $ | (309,399 | ) |   | $ | 412,532 |   |

 

As a result of alimited availability of local telephone numbering capacity in Moscow and theMoscow region, MTS has been required to enter intoagreements for the use of telephone numbering capacity with severaltelecommunication operators in Moscow. Costs of acquiring numbering capacitywith a finite contractual life are amortized over period of five to ten yearsin accordance with the terms of the contract entered into to acquire suchcapacity. Numbering capacity with indefinite contractual life is not amortized.

A significant component of MTS’ right touse premises was obtained in the form of contributions to its charter capitalin 1993. These premises included MTS’ administrative offices and facilitiesutilized for mobile switching centers. By December 31, 2005, these rightsare fully amortized and written-off due to the expiration. In addition andsimultaneously with acquisition of UMC in 2003 we obtained additional propertyrights in the amount of $8.7 million.

Amortizationexpense for the years ended December 31, 2005, 2004 and 2003 amounted to$202.3, $138.1 and $77.1 million, respectively. Based on the amortizableintangible assets existing at December 31,2005, the estimated amortization expense is $173.5 million during 2006, $164.4million during 2007, $141.0 million during 2008, $89.5 millionduring 2009, $27.5 million during 2010 and $64.8million thereafter. Actual amortization expense to be reported in futureperiods could differ from these estimates as a result of new intangibleassets acquisitions, changes in useful lives and other relevant factors.

F-36

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**10.**   Deferred connection fees

Deferred connection fees for the years ended December 31, 2005 and2004 were as follows:
|                                                              | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Balance  at beginning of the year                            |       |                        | $          | 92,748                      |       |   |   | $ | 46,644 |   |   |
| Payments  received and deferred during the year              |       |                        | 53,644     |                        |       |   | 93,082 |   |   |
| Amounts  amortized and recognized as revenue during the year |       |                        | (44,207    | )                           |       |   | (46,978 | ) |   |
| Balance  at end of the year                                  |       |                        | 102,185    |                        |       |   | 92,748 |   |   |
| Less  current portion                                        |       |                        | (44,361    | )                           |       |   | (45,083 | ) |   |
| Non-current  portion                                         |       |                        | $          | 57,824                      |       |   |   | $ | 47,665 |   |   |

 

MTS defersinitial connection fees paid by subscribers for the first time activation ofnetwork service as well as one time activation fees received for connection tovarious value added services. These fees are recognized as revenue over theestimated average subscriber life (see Note 2)*.*

F-37

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**11.**   DEBT

As at December 31, 2005 and 2004, debt comprised the following:
|                                                        | ** ** | **Currency** | ** ** | **Annual interest rate  (actual rate at  December 31, 2005)** | ** ** | **December 31,  2005** | ** **  | **December 31,  2004** | ** ** |
|--------------------------------------------------------|------------|--------------|------------|---------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| 9.75% Notes due 2008                                   |       | USD          |       | 9.75%                                                                                       |       |                        | $           | 400,000                     |       |   |   | $ | 400,000 |   |   |
| 8.38% Notes due 2010                                   |       | USD          |       | 8.38%                                                                                       |       |                        | 400,000     |                        |       |   | 400,000 |   |   |
| 8.00% Notes due 2012                                   |       | USD          |       | 8.00%                                                                                       |       |                        | 399,052     |                        |       |   | — |   |   |
| **Total notes, long-term**                             | ** ** | ** **   | ** ** | ** **                                                                                  | ** ** | ** **                  | **$**       | **1,199,052**               | ** ** | ** ** | ** ** | **$** | **800,000** | ** ** | ** ** |
| Syndicated loan                                        |       | USD          |       | LIBOR + 2.50% (7.20%)                                                                       |       |                        | $           | 460,000                     |       |   |   | $ | 600,000 |   |   |
| Citibank N.A.,ING Bank N.V.and Raiffeisen AG |       | USD          |       | LIBOR + 0.75%–2.25%                                                                    |       |                        | 200,000     |                        |       |   | — |   |   |
|                                                   |       |         |       | (5.29%–6.79%)                                                                          |       |                        |        |                        |       |   |   |   |   |
| HSBC Bank plc and ING BHF-BANK AG                      |       | USD          |       | LIBOR + 0.43% (5.13%)                                                                       |       |                        | 171,816     |                        |       |   | 77,003 |   |   |
| ING Bank N.V.                                          |       | USD          |       | LIBOR + 0.75% (5.14%)                                                                       |       |                        | 150,000     |                        |       |   | — |   |   |
| Citibank International plc and ING Bank N.V.           |       | USD          |       | LIBOR + 0.30% (5.00%)                                                                       |       |                        | 111,009     |                        |       |   | — |   |   |
| EBRD                                                   |       | USD          |       | LIBOR + 3.10% (7.80%)                                                                       |       |                        | 138,462     |                        |       |   | 150,000 |   |   |
| Commerzbank AG, ING Bank AG and HSBC Bank plc          |       | USD          |       | LIBOR + 0.30% (5.00%)                                                                       |       |                        | 92,826      |                        |       |   | — |   |   |
| ABN AMRO N.V.                                          |       | USD/EUR      |       | LIBOR + 0.35% (5.05%)  EURIBOR + 0.35% (2.99%)                                              |       |                        | 83,179      |                        |       |   | — |   |   |
| Barclays Bank PLC                                      |       | USD          |       | LIBOR + 0.13%–0.15%                                                                    |       |                        | 80,086      |                        |       |   | — |   |   |
|                                                        |       |         |       | (4.83%–4.85%)                                                                          |       |                        |        |                        |       |   |   |   |   |
| HSBC Bank plc, ING Bank AG and Bayerische  Landesbank  |       | USD          |       | LIBOR + 0.30% (5.00%)                                                                       |       |                        | 63,338      |                        |       |   | — |   |   |
| ING BHF Bank and Commerzbank AG                        |       | EUR          |       | EURIBOR + 0.65% (3.29%)                                                                     |       |                        | 43,168      |                        |       |   | 63,851 |   |   |
| ING Bank (Eurasia)                                     |       | USD          |       | LIBOR + 2.25%–4.15%                                                                    |       |                        | 20,000      |                        |       |   | 46,667 |   |   |
|                                                   |       |         |       | (6.79%–8.69%)                                                                          |       |                        |        |                        |       |   |   |   |   |
| Commerzbank Belgium S.A./N.V.                          |       | USD          |       | LIBOR + 0.40% (5.10%)                                                                       |       |                        | 13,314      |                        |       |   | — |   |   |
| HSBC                                                   |       | USD          |       | LIBOR + 2.75% (7.23%)                                                                       |       |                        | 7,500       |                        |       |   | 17,500 |   |   |
| West LB                                                |       | EUR          |       | EURIBOR+2.00% (4.64%)                                                                       |       |                        | 4,000       |                        |       |   | 4,000 |   |   |
| Nordea Bank Sweden                                     |       | USD          |       | LIBOR + 0.40% (5.10%)                                                                       |       |                        | 3,249       |                        |       |   | 6,499 |   |   |
| Ericsson                                               |       | USD          |       | LIBOR + 4.00% (8.54%)                                                                       |       |                        | 3,150       |                        |       |   | 14,850 |   |   |
| CSFB                                                   |       | USD          |       | LIBOR + 2.20% (6.74%)                                                                       |       |                        | —      |                        |       |   | 140,000 |   |   |
| KFW                                                    |       | EUR          |       | EURIBOR + 0.95% (3.59%)                                                                     |       |                        | —      |                        |       |   | 1,478 |   |   |
| Other debt                                             |       |         |       | —                                                                                      |       |                        | 687         |                        |       |   | 2,792 |   |   |
| **Total  debt**                                        | ** ** | ** **   | ** ** | ** **                                                                                  | ** ** | ** **                  | **$**       | **1,645,784**               | ** ** | ** ** | ** ** | **$** | **1,124,640** | ** ** | ** ** |
| **Less current portion**                               | ** ** | ** **   | ** ** | ** **                                                                                  | ** ** | ** **                  | **765,881** | ** **                  | ** ** | ** ** | **370,845** | ** ** | ** ** |
| **Total  long-term debt**                              | ** ** | ** **   | ** ** | ** **                                                                                  | ** ** | ** **                  | **$**       | **879,903**                 | ** ** | ** ** | ** ** | **$** | **753,795** | ** ** | ** ** |

 

***Notes******—On***January 30, 2003, MTS Finance S.A. (“MTS Finance”), a 100%beneficially owned subsidiary of MTS, registered under the laws of Luxembourg,issued $400.0 million 9.75% notes at par. Thesenotes are fully and unconditionally guaranteed by MTS OJSC and mature on January 30,2008. MTS Finance is required to make interest payments on the notessemi-annually in arrears on January 30and 

F-38

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**11.          DEBT (Continued)**

July 30, commencing on July 30, 2003. The notes are listed onthe Luxembourg Stock Exchange. Proceeds received fromthe notes’ issue were $400.0 million and related issuance costs of $3.9 millionwere capitalized.

On October 14, 2003, MTS Financeissued $400.0 million notes bearing interest at 8.375% at par. The cashproceeds from the notes were $395.4 million and related issuance costs ofapproximately $4.6 million were capitalized. Thesenotes are fully and unconditionally guaranteed by MTS OJSC and will mature on October 14,2010. MTS Finance is required to make interest payments on the notes semi-annually in arrears on April 14 and October 14 of each year,commencing on April 14, 2004. The notes are listed on the Luxembourg Stock Exchange.

On January 27, 2005, MTS Financeissued $400.0 million 8.0% unsecured notes at 99.736%. These notes are fully and unconditionally guaranteed by MTS OJSCand mature on January 28, 2012. MTS Finance is required to makeinterest payments on the notes semi-annually in arrears on January 28 and July 28, commencing on July 28,2005. The notes are listed on the Luxembourg Stock Exchange. Proceedsreceived from the notes were $398.9 million and related debt issuance cost of$2.5 million were capitalized.

Subjectto certain exceptions and qualifications, the indentures governing the notescontain covenants limiting the Group’s ability to:

·       Incurdebt;

·       Createliens;

·       Leaseproperties sold or transferred by the Group;

·       Enter intoloan transactions with affiliates;

·       Merge orconsolidate with another person or convey its properties and assets to anotherperson; and

·       Sell ortransfer any of its GSM licenses for the Moscow, St. Petersburg, Krasnodar and Ukrainelicense areas.

In addition, if the Group experiencescertain types of mergers, consolidations or other changes in control,noteholders will have the right to require the Group to redeem the notes at101% of their principal amount, plus accruedinterest. The Group is also required to take all commercially reasonable stepsnecessary to maintain a rating of the notes from Moody’s or Standard &Poor’s. The notes also have cross defaultprovisions with publicly traded debt issued by Sistema, the shareholder of theGroup.

If the Group fails to meet these covenants,after certain notice and cure periods, the noteholders can accelerate the debtto be immediately due and payable.

Management believes that the Group is incompliance with all restrictive debt covenants provisions during the three yearperiod ended December 31, 2005.

***Syndicatedloan******—In*** July 2004, MTS OJSC entered into a $500.0 million syndicatedloan agreement (“Syndicated Loan”) with international financial institutions:ING Bank N.V., ABN AMRO Bank N.V., 

F-39

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**11.          DEBT (Continued)**

HSBC Bank plc,Raiffeisen Zentralbank Oesterreich AG ZAO, Bank Austria Creditanstalt AG,Commerzbank Aktiengesellschaft and others. The credit facility bears interestof LIBOR+2.50% per annum and matures in 3years. The proceeds were used by MTS OJSC for corporate purposes, includingrefinancing of its existing indebtedness. In September 2004, MTS extendedthe total amount available under the Syndicated Loan for an additional $100.0million to the total amount of $600.0 million. Commitment fee for theSyndicated Loan amounted to $0.5 million. The debt issuance costs in the amountof $10.2 million were capitalized. As of December 31, 2005 and 2004, theoutstanding balances under the Syndicated Loan were $460.0 million and $600.0million, respectively. The loan facility is subject to certain restrictivecovenants including, but not limited to, certain financial ratios. Managementbelieves that as of December 31, 2005, the Group is in compliancewith all existing covenants.

***CitibankN.A., ING Bank N.V. and Raiffeisen AG******—In*** December 2005, UMC signed an agreement with Citibank N.A., INGbank N.V. and Raiffeisen ZentralbankOsterreich AG, for a $200.0 million aggregated loan facility to be madeavailable in two tranches of $103.0 million and $97.0 million. These funds will be used for generalcorporate purposes, including financing of capital expenditure and refinancingof existing indebtedness. The amount outstanding under the first tranche isguaranteed by MTS OJSC. The first and the second tranche bear interest atLIBOR+0.75% and LIBOR+2.25% per annum,respectively. The commitment fee is calculated on a daily basis at the rate of45% of the applicable margin established for each tranche. The loan issubject to certain restrictive covenants including financial ratios andcovenants limiting the Group’s ability to convey or dispose its properties andassets to another person. Management believes that as of December 31,2005, the Group is in compliance with all existing covenants. Each tranche isredeemable in four equal installments within a year after the signing date. Asof December 31, 2005, the outstanding balances under the loan were $103.0million and $97.0 million, respectively.

In March 2006, MTS OJSC guaranteed theamount outstanding under the second tranche and the lenders agreed to reducethe interest rate applicable to it to LIBOR+0.75% per annum.

***HSBCBank plc and ING BHF BANK AG******—***In October 2004, MTS OJSC entered into two credit facilityagreements with HSBC Bank plc and ING BHF-BANK AG for the total amount $121.4million. The facilities also allow uncommitted additional borrowing up to $36.5million. In April 2005, the lenders agreed to increase the amount ofavailable credit facility by $28.3 million. The funds received under thefacilities were used to purchase telecommunication equipment and software fromSiemens AG and Alcatel SEL AG for technical upgrade and expansion of network.The facility bears interest at LIBOR+0.43% per annum. A commitment fee of 0.20%per annum and an arrangement fee of 0.25% will be paid in accordance with theloan agreement. The principal and interest amounts are to be repaid in seventeenequal half year installments, starting July 2005 for the first agreement andSeptember 2005 for the second one. The debt issuance costs in the amountof $25.9 million were capitalized. As of December 31, 2005 and 2004,the outstanding balances under these agreements were $171.8 million and$77.0 million, respectively. The facilities mature in July and September 2013and are subject to certain restrictive covenants, including, but not limitedto, covenants restricting the Group’s ability to convey or dispose itsproperties and assets to another person. Management believes that as of December 31,2005, the Group is in compliance with all existing covenants. The availablecredit facility as of December 31, 2005, was $3.8 million.

F-40

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**11.          DEBT (Continued)**

***ING BankN.V.******—In*********November 2005,MTS Finance entered into a credit facility agreement with ING Bank N.V. which allows it to borrow up to $150.0million. These funds will be used for general corporate purposes. The loanbears interest of LIBOR+0.75% per annum. The arrangement fee totaled$0.8 million. The loan is subject to certain restrictive covenantsincluding, but not limited to, certain financial ratios. Management believesthat as of December 31, 2005, the Group is in compliance with all existingcovenants. The facility matures in 6 months after the first utilization ofavailable loan amount. As of December 31, 2005, $150.0 million wasoutstanding under the facility.

***CitibankInternational plc and ING Bank N.V.******—In*** December 2005, MTS OJSC signed anagreement with Citibank International plc and ING BankN.V. for a $130.8 million committed credit facility and a $36.6 million uncommitted additionalfacility. These funds will be used to purchase telecommunication equipmentfrom Ericsson AB. The loan bears interest of LIBOR+0.30% per annum. Anarrangement fee of 0.20% of the original facility amount and agency fee of$0.01 million per annum will be paid in accordance with the agreement. The commitmentfee is 0.10% per annum on the undrawn facility. The loan is subject to certaincovenants, including, but not limited to, covenants restricting the Group’sability to convey or dispose its properties and assets to another person. Managementbelieves that as of December 31, 2005, the Group is in compliancewith all existing covenants. The facilities are repayable on a biannual basisin equal installments over 9 years. As of December 31, 2005, the balanceoutstanding under the loan was $111.0 million. The available creditfacility as of December 31, 2005, was $19.7 million.

***EBRD******—In*** December 2004, MTS OJSC enteredinto a credit facility agreement with European Bank for Reconstruction andDevelopment (“EBRD”) for the total amount of $150.0 million. The facility bears interest atLIBOR+3.10% per annum. A commitment fee of 0.50% per annum should be paid in accordance withthe credit agreement. The final maturity ofthis agreement is December 15, 2011. The debt issuance costs in the amount of $1.5 million were capitalized. As of December 31, 2005 and 2004, thebalances outstanding under the loan were $138.5 million and $150.0 million, respectively. The loan is subject to certainrestrictive covenants including, but not limited to, certain financial ratios. Managementbelieves that as of December 31, 2005,the Group is in compliance with all existing covenants.

***CommerzbankAG, HSBC Bank plc and ING Bank Deutschland AG******—***In October 2005, MTS OJSC entered into an agreement withCommerzbank AG, HSBC Bank plc and ING Bank Deutschland AG for a $125.8 millioncommitted credit facility. The agreement also allows the Company to borrow upto $28.3 million under an uncommitted additional facility. These fundswill be used to purchase telecommunication equipment from Siemens AG. The loanbears interest of LIBOR+0.30% per annum. An arrangement fee of 0.20% of theoriginal facility amount and $0.01 million per annum will be paid in accordancewith the agreement. The commitment fee is 0.10% per annum on the undrawn facility.The loan is subject to certain covenants, including, but not limited to,covenants restricting the Group’s ability to convey or dispose its propertiesand assets to another person. Management believes that as of December 31,2005, the Group is in compliance with all existing covenants. The facilitiesare repayable on a biannual basis in equal installments over 9 years. As of December 31, 2005, the balance outstanding under the loanwas $92.8 million. The available credit facility as of December 31, 2005,was $33.0 million.

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**11.          DEBT (Continued)**

***ABN AMRON.V.******—In*** November 2004, MTS OJSC signed a loan agreement with ABN AMROBank N.V. for $56.6 million and EUR 8.4 million ($9.9 million as of December 31,2005). In March 2005, the agreement was amended to expand the EUR facilityup to EUR 31.3 million ($37.2 million as of December 31, 2005).These fundswere used to acquire telecommunication equipment from Ericsson AB to expand thenetwork. The loan is repayable on a biannual basis in equal installments over 9years and has an interest rate of USD LIBOR/EURIBOR+0.35% per annum. The debtissuance costs in the amount of $9.8 million have been capitalized. The loan issubject to certain covenants, including, but not limited to, covenantsrestricting the Group’s ability to make any substantial change to generalnature or scope of its business. Management believes that as of December 31,2005, the Group is in compliance with allexisting covenants. As of December 31, 2005 and 2004, $83.2 millionand $nil, respectively, were outstanding under the facility.

***BarclaysBank plc******—***In February 2005, MTS OJSC entered into a credit facility withBarclays Bank plc to finance the acquisition of equipment from MotorolaLimited. The facility allows borrowing up to $25.7 million and uncommittedadditional borrowing of up to $64.3 million. In December 2005, theagreement with Barclays Bank plc was amended to increase the amount ofavailable uncommitted additional facility by $23.3 million. The originalfacility bears interest of LIBOR+0.15% per annum and additional uncommittedfacility bears interest of LIBOR+0.13% per annum. An arrangement fee of 0.4% ofthe original facility amount and of 0.4% of each additional commitment facilityamount will be paid in accordance with the agreement. The commitment fee is0.175% per annum. The debt issuance costs in the amount of $10.4 million havebeen capitalized. The facilities are redeemable in equal semi-annualinstallments by January 31, 2014. The loan is subject to certaincovenants, including, but not limited to, covenants restricting the Group’sability to convey or dispose its properties and assets to another person. Managementbelieves that as of December 31, 2005, the Group is in compliance with allexisting covenants. As of December 31, 2005, the outstanding balance under the facility was $80.1million. The available credit facility as of December 31, 2005, was$31.7 million.

***HSBCBank plc, ING Bank Deutschland AG and Bayerische Landesbank******—***In November 2005, MTS OJSC entered into credit facility withHSBC Bank plc, ING Bank Deutschland AG and Bayerische Landesbank for up to$123.8 million and  up to $17.3 million of uncommitted additionalborrowing. The funds received will be used to finance the acquisition oftelecommunication equipment from Alcatel SEL AG. The loan bears interest ofLIBOR+0.30% per annum. An arrangement fee of 0.20% of the original facilityamount and agency fee of $0.01 million per annum will be paid in accordance withthe agreement. The commitment fee is 0.10% per annum on the undrawn facility.The debt issuance costs in the amount of $19.3 million were capitalized. Theloan is subject to certain covenants, including, but not limited to, covenantsrestricting the Group’s ability to convey or dispose its properties and assetsto another person. Management believes that as of December 31, 2005, theGroup is in compliance with all existing covenants. The facilities arerepayable on a biannual basis in equal installments over 9 years. As of December 31, 2005, the outstanding amount under the loan was$63.3 million. The available credit facility as of December 31, 2005, was$60.5 million.

F-42

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**11.**   DEBT (Continued)

***ING BHFBank and Commerzbank AG***—On December 30,2003, UMC entered into a credit facility with ING BHF Bank and Commerzbank AGto finance the acquisition of telecommunication equipment from Siemens AG. Theaggregate amount available under this credit facility is EUR 47.4 million($56.3 million as of December 31, 2005). In 2004, the agreement wasamended to increase the amount availableunder the facility by EUR 9.2 million ($10.9 million as of December 31,2005). The loan is guaranteed by MTS OJSC and bears interest at EURIBOR+0.65%per annum. The amount outstanding is redeemable in 10 equal semi-annualinstallments starting on July 31, 2004. At December 31, 2005 and2004, the amounts outstanding under the loan were $43.2 million and $63.9 million,respectively.

***ING Bank(“Eurasia”)***—In September 2003, UMC entered into a $60.0 million syndicatedcredit facility with ING Bank (“Eurasia”) ZAO, ZAOStandard Bank and Commerzbank AG with an interest rate of LIBOR + 2.25%–4.15%per annum. The loan is guaranteed by MTS OJSC. The proceeds were used by UMC torefinance its existing indebtedness. The loan is payable in 8 equal quarterlyinstallments starting from September 2004. As of December 31, 2005and 2004, $20.0 million and $46.7 million were outstanding, respectively, underthis credit facility.

***CommerzbankBelgium S.A./N.V.******—***In October 2004, MTS OJSC entered into a loan agreement withCommerzbank Belgium S.A./N.V. The aggregate amount under the agreement is $18.3million. The loan proceeds were used to finance the purchase oftelecommunication equipment from Alcatel Bell N.V. and bears interest ofLIBOR+0.4% per annum. A commitmentfee at rate of 0.225% per annum and flat management fee of 0.25% on the loanamount should be paid in accordance with the terms of agreement. Related debtissuance costs amounted to $1.3 million were capitalized. As of December 31,2005 and 2004, the outstanding balances were $13.3 million and $nil, respectively. The available credit facility as of December 31, 2005 was $5.0million.

***HSBCBank LLC***—In October 2003,TAIF Telcom entered into a $25.0 million credit facility with HSBC Bank LLC,which is guaranteed by MTS OJSC. The facility bears interest at LIBOR+2.75% per annum and is redeemable in ten equal quarterlyinstallments commencing on June 2004. The funds were used topurchase telecommunication equipment and general corporate purposes. The loanis subject to certain restrictive covenants including, but not limited to,restriction on the Group’s ability to encumbrance on its properties and assets.Management believes that as of December 31, 2005, the Group is in compliance with all existing covenants. As of December 31,2005 and December 31, 2004, the outstanding balances under the creditfacility were $7.5 million and $17.5 million, respectively.

***West LBInternational***—In July 2002,MTS-P entered into a credit facility agreement with West LB International S.A.Amounts outstanding under this agreement bear interest of EURIBOR+2.00% perannum for the first two years for each advance and 4.00% per annum for theremaining interest periods for each advance until maturity. The final maturityof this agreement is December 28, 2006. The loan is guaranteed by MTSOJSC. The balance outstanding under the loan was $4.0 million as of December 31,2005 and 2004.

***NordeaBank Sweden***—In September 2003,Primtelefon entered into a long-term loan facility with Nordea Bank Sweden forthe total amount of $9.8 million. Amounts outstanding under the loan agreementbear interest at LIBOR+0.40% per annum and mature in October 2006. Theloan is guaranteed by MTS 

F-43

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**11. DEBT (Continued)**

OJSC. As of December 31,2005 and 2004, the amounts outstanding under the loan were $3.2 millionand $6.5 million, respectively.

***Ericsson debt restructuring***—In December 1996, Rosico, a wholly-owned subsidiary mergedinto MTS OJSC in June 2003, entered into a credit agreement with EricssonProject Finance AB (“Ericsson”) thatprovided for a credit facility with an aggregate principal amount of $60.0million and had a maximum term of five years (the “Ericsson Loan”). Theloan was repayable in ten equal consecutive quarterly payments of $6.0 millioncommencing in 1999. On July 24, 2001, MTS, Rosico and Ericsson signed an amendment to the credit agreement reschedulingRosico principal payments in nineteen consecutive quarterlyinstallments. The amounts advanced under the agreement bear interest of LIBOR +4.00%. If Rosico fails to pay any amount under this facility, the overdueinterest would bear interest at a rate of additional 6.00% per annum. Thecredit agreement contains covenants restricting Rosico’s ability to encumberits present and future assets and revenues without the lender’s expressconsent.

Concurrent with the Group’s acquisition ofRosico, Sistema agreed to fund the full and timely repayment of the EricssonLoan and to indemnify Rosico and MTS for any costs incurred by either Rosico orMTS in connection with the repayment of theEricsson Loan. During 2000, Sistema and MTS agreed on a method that would allowSistema to fund its obligation in a manner that minimizes the total costs ofmeeting this obligation (including related tax costs). Under this method, MTSenters into a long-term, ruble-denominated promissory notes with 0%interest and maturities from 2049 to 2052 torepay a portion of the funding from Sistema. The carrying value of these notesis insignificant at December 31, 2005 and December 31, 2004.The Group records interest expense on these notes over the term such that thefull amount of the obligation will be reflected as a liability at the date ofrepayment. Through December 31, 2005, Sistema has made payments under thisobligation in the amount of $60.0 million, $56.9 million of which arerepayable in the form of long-term, ruble denominated promissory noteswith 0% interest. Amounts receivable from Sistema under this indemnificationare recorded as shareholder receivable in the accompanying consolidated balancesheets.

On February 25, 2003, Ericsson assignedall of its rights and obligations under the Ericsson Loan to SalomonBrothers Holding Company, Inc.

As of December 31, 2005 and 2004, $3.2million and $14.9 million were outstanding, respectively, under theEricsson Loan.

***CSFB***—In October 2004, MTS Finance entered into a short-term loanfacility with CSFB for the total amount of $140.0 million. Amounts outstandingunder the loan agreement bore interest at LIBOR+2.20% per annum. The debt wasfully repaid in April 2005.

***KFW***—On December 21, 1998, UMC entered into two loan agreementswith KFW, a German bank, for EUR 1.9 million and EUR 10.9 million. These loansbore interest at EURIBOR+0.95% per annum and matured on March 31, 2004 andFebruary 28, 2005, respectively. As of December 31, 2005,the debt was fully repaid.

F-44

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**11. DEBT (Continued)**

The followingtable presents aggregate scheduled maturities of debt principal outstanding asof December 31, 2005:
| Payments due in the year ended December 31, |   |    |      |
|--------------------------------------------------|--------|---------|-----------|
| 2006                                             |   | $       | 765,881   |   |
| 2007                                             |   | 290,815 |      |
| 2008                                             |   | 510,693 |      |
| 2009                                             |   | 104,526 |      |
| 2010                                             |   | 498,359 |      |
| Thereafter                                       |   | 674,562 |      |
|                                             |   | $       | 2,844,836 |   |

 

In December 2004,the Group entered into two variable-to-fixed interest rate swap agreements withABN AMRO Bank N.V and with HSBC Bank PLC to hedge MTS’ exposure to variabilityof future cash flows caused by the change in LIBOR related to the syndicatedloan. MTS agreed with ABN AMRO to pay a fixed rate of 3.27% and receive avariable interest of LIBOR on $100.0 million for the period from October 7,2004 up to July 27, 2007. MTS agreed with HSBC Bank PLC to pay a fixedrate of 3.25% and receive a variable interest of LIBOR on $150.0 million forthe period from October 7, 2004 up to July 27, 2007. Theseinstruments qualify as cash flow hedges under the requirements of SFAS No. 133as amended by SFAS No. 149. As of December 31, 2005, the Grouprecorded a asset of $3.6 million in relation to these contracts in theaccompanying consolidated balance sheet and an income of $2.8 million, net oftax of $0.8 million, as other comprehensive income in the accompanyingconsolidated statement of changes in shareholders equity in relation to thechange in fair value of these agreements. In 2005 there were no amountsreclassified from other comprehensive income to income due to hedgeineffectiveness.

**12.**   CAPITAL LEASE OBLIGATIONS

The following table presents future minimum lease payments undercapital leases together with the present value of the net minimum leasepayments as of December 31, 2005:
| Payments due in the year ended December 31, |   |   |   |
|--------------------------------------------------|--------|--------|--------|
| 2006                                             |   | $      | 3,413  |   |
| 2007                                             |   | 2,484  |   |
| 2008                                             |   | 676    |   |
| 2009                                             |   | 7      |   |
| 2010                                             |   | 5      |   |
| Thereafter                                       |   | 2      |   |
| Total  minimum lease payments (undiscounted)     |   | 6,587  |   |
| Less  amount representing interest               |   | (866   | )      |
| Present  value of net minimum lease payments     |   | 5,721  |   |
| Less  current portion of lease payable           |   | (2,793 | )      |
| Non-current  portion of lease payable            |   | $      | 2,928  |   |

** **

F-45

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**12. CAPITAL LEASE OBLIGATIONS (Continued)**

For a scheduleby years of future minimum lease payments under capital leases toInvest-Svyaz-Holding, a related party, together with the present value of thenet minimum lease payments as of December 31, 2005, see Note 17 RelatedParties.

**13.**   ACCRUED LIABILITIES

Accrued liabilities at December 31, 2005 and 2004 comprised thefollowing:
|                                    | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Accrued  payroll and vacation      |       |                        | $          | 60,732                      |       |   |   | $ | 44,673 |   |   |
| Interest  payable on debt          |       |                        | 51,403     |                        |       |   | 31,177 |   |   |
| VAT                                |       |                        | 34,139     |                        |       |   | 32,174 |   |   |
| Taxes  other than income           |       |                        | 28,553     |                        |       |   | 23,706 |   |   |
| Accruals  for advertising services |       |                        | 6,728      |                        |       |   | 4,782 |   |   |
| Other  accruals                    |       |                        | 94,736     |                        |       |   | 44,165 |   |   |
| Total accrued  liabilities         |       |                        | $          | 276,291                     |       |   |   | $ | 180,677 |   |   |

 

**14.**   INCOME TAX

MTS’ provision for income taxes was as follows for the year ended December 31,2005, 2004 and 2003:
|                                     | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Current  provision for income taxes |       |                        | $          | 475,549                     |       |                        |       | $ | 430,687 |   |   |   | $ | 285,481 |   |   |
| Deferred  income tax benefit        |       |                        | (64,959    | )                           |       |                        | (76,023    | ) |   |   | (43,001 | ) |   |
| Total  provision for income taxes   |       |                        | $          | 410,590                     |       |                        |       | $ | 354,664 |   |   |   | $ | 242,480 |   |   |

 

The statutory incometax rate in Russia in 2003-2005 was 24%. From January 1, 2004, UMC statutory income tax rate changed from 30% to 25% as a result ofchanges in Ukranian tax legislation.

The statutory income tax rate reconciled to MTS’ effective income taxrate is as follows for the year ended December 31, 2005, 2004 and 2003:
|                                                  | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  200**3 | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Statutory  income tax rate for year              |       |                        | 24.0       | %                           |       |                        | 24.0       | % |   |   | 24.0 | % |   |
| Adjustments:                                     |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Expenses not deductible for tax purposes         |       |                        | 3.0        |                        |       |                        | 1.0        |   |   |   | 2.3 |   |   |
| Effect of higher tax rate of UMC                 |       |                        | 0.3        |                        |       |                        | 0.2        |   |   |   | 0.9 |   |   |
| Currency exchange and transaction gains (losses) |       |                        | (0.8       | )                           |       |                        | 1.2        |   |   |   | 1.6 |   |   |
| Other                                            |       |                        | (0.2       | )                           |       |                        | (0.6       | ) |   |   | 0.4 |   |   |
| Effective  income tax rate                       |       |                        | 26.3       | %                           |       |                        | 25.8       | % |   |   | 29.2 | % |   |

 

F-46

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**14.          INCOME TAX**

Temporarydifferences between the tax and accounting bases of assets and liabilities giverise to the following deferred tax assets and liabilities at December 31,2005 and 2004:
|                                                   | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Assets/(liabilities)  arising from tax effect of: |       |                        |       |                        |       |   |   |   |   |
| **Deferred tax assets**                           | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Depreciation of property, plant and equipment     |       |                        | $          | 64,113                      |       |   |   | $ | 48,829 |   |   |
| Deferred connection fees                          |       |                        | 24,784     |                        |       |   | 22,598 |   |   |
| Subscriber prepayments                            |       |                        | 23,153     |                        |       |   | 18,151 |   |   |
| Accrued expenses                                  |       |                        | 33,803     |                        |       |   | 18,934 |   |   |
| Allowance for doubtful accounts                   |       |                        | 7,027      |                        |       |   | 5,220 |   |   |
| Inventory obsolescence                            |       |                        | 7,122      |                        |       |   | 2,759 |   |   |
| Loss carryforward (Rosico and MSS)                |       |                        | —     |                        |       |   | 7,171 |   |   |
| Other                                             |       |                        | 8,013      |                        |       |   | 4,328 |   |   |
|                                              |       |                        | 168,015    |                        |       |   | 127,990 |   |   |
| Valuation allowance                               |       |                        | —     |                        |       |   | (7,171 | ) |   |
| Total deferred tax assets                         |       |                        | 168,015    |                        |       |   | 120,819 |   |   |
| **Deferred tax liabilities**                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licenses acquired                                 |       |                        | $          | (140,167                    | )          |   |   | $ | (160,358 | ) |   |
| Depreciation of property, plant and equipment     |       |                        | (42,394    | )                           |       |   | (31,429 | ) |   |
| Customer base                                     |       |                        | (7,584     | )                           |       |   | (10,746 | ) |   |
| Other intangible assets                           |       |                        | (20,428    | )                           |       |   | (20,226 | ) |   |
| Debt issuance cost                                |       |                        | (17,836    | )                           |       |   | (3,829 | ) |   |
| Other                                             |       |                        | (14,684    | )                           |       |   | (4,771 | ) |   |
| Total deferred tax liabilities                    |       |                        | (243,093   | )                           |       |   | (231,359 | ) |   |
| Net deferred tax liability                        |       |                        | (75,078    | )                           |       |   | (110,540 | ) |   |
| Net deferred tax assets, current                  |       |                        | $          | 83,336                      |       |   |   | $ | 49,850 |   |   |
| Net  deferred tax liability, long-term            |       |                        | $          | (158,414                    | )          |   |   | $ | (160,390 | ) |   |

 

As of December 31, 2004, the Group hadtaxable loss carryforward in the amount of $29.9 million related tooperations of Rosico, that resulted in deferred tax assets in the amountsof $7.2 million. While Rosico wasmerged into MTS OJSC in June 2003, the Group recorded a valuationallowance for the entire amount of the available tax loss carryforward relatedto Rosico as of December 31, 2004, as MTS OJSC had not yet performed all proceduresnecessary to determine what amounts will be available for deductions in thefuture as of that date. As of December 31, 2005, the possibility of theclaim for the tax loss carryforward was assessed as remote and therefore nodeferred tax asset was recorded.

The Group doesnot record a deferred tax liability related to undistributed earnings of UMC,Uzdunrobita and BCTI, as it intends to permanently reinvest these earnings. Theundistributed earnings of 

F-47

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

UMCamounted to $994.0 million (unaudited) and $559.5 million as ofDecember 31, 2005 and 2004, respectively.

**15.**   SHAREHOLDERS’EQUITY

In accordancewith Russian laws, earnings available for dividends are limited to profitsdetermined in accordance with Russian statutory accounting regulations,denominated in rubles, after certain deductions. Net income of MTS OJSC for theyears ended December 31, 2005, 2004 and 2003 that is distributable underRussian legislation totaled 12,544 million rubles ($444.4 million), 15,209million rubles ($527.9 million) and 13,423.0 million rubles ($437.4million), respectively.

**16.**   STOCK BONUSAND STOCK OPTION PLANS

In 2000 MTSestablished a stock bonus plan and stock option plan (“the Option Plan”) forselected officers, key employees and key advisors. During its initial publicoffering in 2000 (see Note 1) MTS allotted 9,966,631 shares of it commonstock to fund the Option Plan.

Since 2002, MTS made several grants pursuant to its stock option planto employees and directors of the Group. These options generally vest overa two year period from the date of the grant, contingent on continuedemployment of the grantee with the Company. A summary of the status of theGroup’s Option Plan is presented below:
|                                        | ** ** | **Shares** | ** ** | **Weighted  average exercise  price, U.S. dollar** | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------------------------------------------------|------------|
| Outstanding  at December 31, 2002 |       | 4,648,421  |       |                                                              | 1.42       |   |   |
| Granted                                |       | 1,952,632  |       |                                                              | 2.43       |   |   |
| Exercised                              |       | (37,557    | )          |                                                              | 1.31       |   |   |
| Exchanged for cash award               |       | (1,746,310 | )          |                                                              | 1.31       |   |   |
| Forfeited                              |       | (19,776    | )          |                                                              | 1.31       |   |   |
| Outstanding  at December 31, 2003 |       | 4,797,410  |       |                                                              | 1.87       |   |   |
| Granted                                |       | 1,665,256  |       |                                                              | 5.95       |   |   |
| Exercised                              |       | (2,726,966 | )          |                                                              | 1.49       |   |   |
| Forfeited                              |       | (204,730   | )          |                                                              | 1.92       |   |   |
| Outstanding  at December 31, 2004 |       | 3,530,970  |       |                                                              | 4.09       |   |   |
| Granted                                |       | 1,778,694  |       |                                                              | 6.89       |   |   |
| Exercised                              |       | (1,801,622 | )          |                                                              | 2.43       |   |   |
| Forfeited                              |       | (320,802   | )          |                                                              | 5.25       |   |   |
| Outstanding  at December 31, 2005 |       | 3,187,240  |       |                                                              | 6.47       |   |   |

 

F-48

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**16.**   STOCK BONUS AND STOCK OPTION PLANS (Continued)

As ofDecember 31, 2005, the Group had the following stock options outstanding:
| Exercise prices | ** ** | **Number of shares** | ** ** | **Remaining weighted  average life (years)** | ** ** |
|----------------------|------------|--------------------------------|------------|-------------------------------------------------------------|------------|
| 5.95                 |       |                           | 1,417,546  |                                                        |       |   | 0.54 |   |   |
| 6.89                 |       |                           | 1,769,694  |                                                        |       |   | 1.54 |   |   |
|                 |       |                           | 3,187,240  |                                                        |       |   |   |   |   |

 

None of the options granted in 2004 and2005 outstanding at December 31, 2005 were exercisable.

According to the terms of the Option Plan,the exercise price of the options equals the average market share price duringthe hundred day period preceding the grant date. The difference in the exerciseprice of the option and market price at the date of grant is shown as unearnedcompensation in the consolidated statements of changes in shareholders’ equityand is amortized to expense over the vesting period of two years. This amounthistorically had been insignificant to the consolidated financial statements.

The Group’s OptionPlan does not routinely allow a grantee to receive cash in lieu of shares,however due to the lack of liquidity for the Group’sstock in the Russian market, 1,746,310 options were cancelled by MTS in 2003and exchanged for a cash award of $2.9 million.

The fair value of options granted during the three years in the periodended December 31, 2005 were estimated using the binomial option pricingmodel using the following assumptions:
|                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk  free rate                    |       | 4.7      | %          | 4.5      | %          | 5.2      | %          |
| Expected  dividend yield           |       | 3        | %          | 3        | %          | 3        | %          |
| Expected  volatility               |       | 40.0     | %          | 48.8     | %          | 40.0     | %          |
| Expected  life (years)             |       | 2        |       | 2        |       | 2        |       |
| Fair value of  options (per share) |       | $        | 1.74       |     | $          | 2.36     |       | $ | 1.02 |   |
|                                    |            |          |            |          |            |          |            |  |  |  |

 

In accordancewith the Russian legislation, MTS Board members and key employees may beconsidered insiders with respect to the Group and thus may be restricted fromselling their shares.

F-49

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**17.**   RELATED PARTIES

Related party balances as of December 31, 2005 and 2004 comprisedthe following:
|                                                 | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Accounts  receivable:                           |       |                        |       |                        |       |   |   |   |   |
| Rosno for insurance                             |       |                        | $          | 3,663                       |       |   |   | $ | 9,065 |   |   |
| Maxima for advertising                          |       |                        | 1,689      |                        |       |   | 884 |   |   |
| Mediaplanning for advertizing                   | ** ** | ** **                  | 1,400      | ** **                  |       |   | — | ** ** | ** ** |
| MTT for interconnection                         |       |                        | 862        |                        |       |   | 1,497 |   |   |
| Kvazar-Micro for information systems consulting |       |                        | —     |                        |       |   | 2,161 |   |   |
| T-Mobile for roaming                            |       |                        | —     |                        |       |   | 1,198 |   |   |
| Receivables from investee companies             |       |                        | —     |                        |       |   | 2,963 |   |   |
| Other                                           |       |                        | 47         |                        |       |   | — |   |   |
| Total accounts receivable, related parties      |       |                        | $          | 7,661                       |       |   |   | $ | 17,768 |   |   |
| Accounts  payable:                              |       |                        |       |                        |       |   |   |   |   |
| Strom Telecom for software                      |       |                        | $          | 25,378                      |       |   |   | $ | 7,070 |   |   |
| Kvazar-Micro for information systems consulting |       |                        | 6,564      |                        |       |   | — |   |   |
| MTT for interconnection                         |       |                        | 4,262      |                        |       |   | 2,964 |   |   |
| MTU-Inform for interconnection                  |       |                        | 2,430      |                        |       |   | 2,398 |   |   |
| Maxima for advertising                          |       |                        | 1,082      |                        |       |   | — |   |   |
| MGTS for interconnection                        |       |                        | 588        |                        |       |   | 607 |   |   |
| T-Mobile for roaming                            |       |                        | —     |                        |       |   | 1,580 |   |   |
| Other                                           |       |                        | 525        |                        |       |   | 2,390 |   |   |
| Total  accounts payable, related parties        |       |                        | $          | 40,829                      |       |   |   | $ | 17,009 |   |   |

 

Transactions with major related parties aredescribed below.

***MoscowBank of Reconstruction and Development (“MBRD”)***—Starting August 2000, MTS has been maintaining certainbank and deposit accounts with MBRD, whose major shareholder is Sistema. As of December 31, 2005 MTS’ cash positionat MBRD amounted to $18.0 million in current accounts. As of December 31,2004, MTS’ cash position at MBRD amounted to $72.0 million in current accounts.The related interest accrued and collected on the deposits for the yearsended December 31, 2005 and 2004 amounted to $5.4 million and $6.8,respectively, and was included as a component of interest income in theaccompanying consolidated statements of operations.

Borrowing transactions with MBRD aredescribed in Note 11.

***RosnoOJSC (“Rosno”)***—MTS arrangedmedical insurance for its employees and property insurance with Rosno, whose significantshareholder is Sistema. Insurance premium paid to Rosno forthe years ended December 31, 2005, 2004 and 2003amounted to $12.6 million, $7.6 million and $16.9 million, respectively.Management believes that all of the insurance contracts with Rosno have beenentered into at market terms.

F-50

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**17. RELATED PARTIES (Continued)**

***MaximaAdvertising Agency (“Maxima”)***—In2005, 2004 and 2003, MTS Group had agreements for advertising services withMaxima, a subsidiary of Sistema. Advertising costs related to Maxima for theyears ended December 31, 2005, 2004 and 2003 amounted to $58.6 million, $48.9million and $23.7 million, respectively. Management believes that these agreements are atmarket terms.

***Kvazar-MicroCorporation (“Kvazar”)***—Kvazar, aUkrainian based company providing solutions, services, and business consultingin the field of information and communication technologies. Since July 2004,Sistema is a controlling shareholder in Kvazar. In 2004, MTS signed agreementsfor software implementation services with Kvazar. Pursuant to agreementswith Kvazar, in year 2005 and 2004 MTSpurchased software systems and related equipment in total amount ofapproximately $62.0 million and $9.7 million, respectively. Management believesthat these agreements are at market terms.

***Telmos***—In 2005,2004 and 2003, MTS had interconnection arrangementswith, and received domestic and international long-distance services fromTelmos, a subsidiary of Sistema. Interconnection and line rental expenses for the years 2005, 2004 and 2003comprise $1.2 million, $1.6 million and $1.6 million, respectively. Management believes thatthese arrangements are at market terms.

***MoscowCity Telephone Network (“MGTS”)***—In2005, 2004 and2003, MTS had line rental agreements with MGTS andrented a cable plant from MGTS for the installation of optic-fiber cable. MTSalso rented buildings for administrative office as well as premises forswitching and base station equipment. Rental expenses for the years 2005, 2004 and 2003 amounted to $8.3 million$5.9 million and $4.5 million, respectively. Managementbelieves that all these transactions were made at market terms. Sistema is themajority shareholder of MGTS.

***MTU-Inform***—In 2005, 2004 and 2003, MTS had interconnection and line rentalagreements with MTU-Inform, a subsidiary of Sistema. Interconnection and rentalexpenses for the years 2005, 2004 and 2003, were $24.0 million $25.7 millionand $23.3 million, respectively. In 2003 MTS also purchased telephone numberingcapacity from MTU-Inform for $2.0 million. Management believes that theseagreements are at market terms.

***Comstar***—In 2005, 2004 and 2003, MTS hadinterconnection and line rental agreements with Comstar, a subsidiary of Sistema. Cost of interconnecton and line rentalservices rendered by Comstar for the years 2005, 2004 and 2003 amounted to $4.7million, $3.1 million and $3.6 million, respectively. Management believes thatthese agreements are at market terms.

***T-Mobile***—In 2005T-Mobile ceased to be a related party (see Note 1).******In2004 and 2003, the Group had non-exclusive roaming agreements with T-Mobile, ashareholder of the Group. Roaming expenses for the years ended December 31,2004 and 2003 amounted to $6.1 million and $1.7 million,respectively. Management believes that these agreements are at market terms.

***Invest-Svyaz-Holding***—In 2005 and 2004, MTS entered intoagreements with Invest-Svyaz-Holding, a shareholderof MTS and a wholly-owned subsidiary of Sistema, for leasing of networkequipment and billing system. These leases were recorded as capital leases incompliance with requirements of SFAS No. 13, “Accounting for Leases.” Thepresent value of future lease payments due within one year are 

F-51

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**17. RELATED PARTIES (Continued)**

classified as current liabilities and the remaining balance as long-termliabilities. The interest rate implicit in these leases varies from 14% to 44%,which management believes are market terms.

The following table summarizes the future minimum lease payments undercapital leases to Invest-Svyaz-Holding together with the present value of thenet minimum lease payments as of December 31, 2005:
| Payments due in the year ended December 31, |   |   |   |
|--------------------------------------------------|--------|--------|--------|
| 2006                                             |   | $      | 3,233  |   |
| 2007                                             |   | 653    |   |
| 2008                                             |   | — |   |
| Total  minimum lease payments (undiscounted)     |   | 3,886  |   |
| Less  amount representing interest               |   | (540   | )      |
| Present  value of net minimum lease payments     |   | 3,346  |   |
| Less  current portion of lease obligations       |   | (2,740 | )      |
| Non-current  portion of lease obligations        |   | $      | 606    |   |

 

In addition to the above leasetransactions, the Group guarantees debt of Invest-Svyaz-Holding in the amountof $3.5****million to a third party,which is used by Invest-Svyaz-Holding primarily to finance its leases to theGroup (see Note 22 Commitments and contingencies).

For the year ended December 31, 2005 principaland interest paid to Invest-Svyaz-Holding were $6.1 million and $2.0million, respectively. Principal and interest paid to Invest-Svyaz-Holding forthe year ended December 31, 2004 were $6.4 million and $4.1 million,respectively. Principal and interest paid for the year ended December 31,2003 were $5.4 million and $3.3 million, respectively. Management believes thatthese agreements are at market terms.

***StromTelecom***—During 2005, 2004 and2003 the Group entered into a number of agreements with Strom Telecom, ansubsidiary of Sistema for a total amount up to $166.5 million, $116.5 millionand $32.3 million, respectively.Pursuant to these contracts, the Group purchased in 2005, 2004 and 2003 billingsystems and communication software support systems for approximately$179.2 million, $9.1 million and $23.7 million, respectively. Advancespaid under these agreements and outstanding as of December 31, 2005 and2004 amount to $45.7 million and $51.0 million, respectively.

***Mediaplanning*******—During 2005and 2004,  MTS entered into a number ofagreements to purchase advertising services with Mediaplanning,a subsidiary of Sistema. Related advertising costs recorded for the yearended December 31, 2005 and 2004 amounted to $21.5 million and $11.3million, respectively.****

***MTT***—In 2005 and 2004, MTS had interconnection and line rentalagreements with MTT, a subsidiary of Sistema. Interconnection expenses for the year 2005 and2004 amounted to $41.1 million and $16.1 million, respectively. Management believes that these agreements are at market terms.

F-52

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**18.**   GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the years ended December 31,2005, 2004 and 2003, consisted of the following:
|                                      | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Salaries  and social contributions   |       |                        | $          | 336,203                     |       |                        |       | $ | 256,989 |   |   |   | $ | 156,808 |   |   |
| General  and administrative          |       |                        | 100,257    |                        |       |                        | 72,586     |   |   |   | 42,530 |   |   |
| Repair  and maintenance              |       |                        | 90,609     |                        |       |                        | 81,538     |   |   |   | 39,406 |   |   |
| Rent                                 |       |                        | 79,869     |                        |       |                        | 54,054     |   |   |   | 31,968 |   |   |
| Taxes  other than income             |       |                        | 62,102     |                        |       |                        | 50,033     |   |   |   | 40,432 |   |   |
| Billing  and data processing         |       |                        | 37,287     |                        |       |                        | 28,238     |   |   |   | 22,067 |   |   |
| Consulting  expenses                 |       |                        | 26,486     |                        |       |                        | 19,694     |   |   |   | 11,361 |   |   |
| Insurance                            |       |                        | 16,804     |                        |       |                        | 7,554      |   |   |   | 7,351 |   |   |
| Inventory  obsolescence expense      |       |                        | 9,112      |                        |       |                        | 4,610      |   |   |   | 3,307 |   |   |
| General and  administrative expenses |       |                        | $          | 758,729                     |       |                        |       | $ | 575,296 |   |   |   | $ | 355,230 |   |   |

 

**19.**   INVESTMENTS IN AND ADVANCES TO ASSOCIATES

At December 31, 2005 and 2004, the Group’s investments in andadvances to associates comprised the following:
|                                                  | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| MTS  Belarus—equity investment              |       |                        | $          | 66,288                      |       |   |   | $ | 27,699 |   |   |
| MTS  Belarus—loans receivable               |       |                        | 41,341     |                        |       |   | 51,894 |   |   |
| Receivables  from other investee companies       |       |                        | 330        |                        |       |   | 1,642 |   |   |
| Total  investments in and advances to associates |       |                        | $          | 107,959                     |       |   |   | $ | 81,235 |   |   |

 

***MTSBelarus***—As of December 31,2005 and 2004, the Group provided MTS Belarus with a total of $41.3 million and $51.9 million in loans,respectively. These loans bear interest at 3.00% to 11.00% per annum. Inaddition, the Group guarantees the debt of MTS Belarus in the amount of $9.0****million to Citibank International plc(see Note 22 Commitments and contingencies).

The Company’sshare in net income of associates is included in other income in theaccompanying consolidated statements of operations. For the years ended December 31,2005, 2004 and 2003, this share amounted $42.4 million, $24.1 million and $2.7million, respectively.

**20.**   OTHER INVESTMENTS

In December 2005, MTS acquired a 51%stake in Tarino Limited (“Tarino”) for $150.0 million in cash. Tarino wasat that time the indirect owner, through its wholly-owned subsidiaries,of Bitel LLC, a Kyrgyz company holding a GSM900/1800 license for the entire territory of Kyrgyzstan.

F-53

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**20. OTHER INVESTMENTS** (Continued)

Concurrently with the purchase of 51.0% stake, theGroup entered into a put and call option agreement with the shareholder ofTarino to acquire the remaining 49.0% interest in Tarino. The call option isexercisable by the Group from November 22, 2005 to November 17, 2006,and the put option is exercisable by the seller from November 18, 2006 to December 8, 2006. The call and put option price is $170.0 million. The put and calloption was recorded at fair value, which approximated $nil at December 31, 2005, in the consolidated balance sheet.

After a decision of the Kyrgyz Supreme Courton December 15, 2005, Bitel’s offices were seized. The Group could notre-gain operating control over Bitel’s operations in 2005 and thereforeaccounted for its 51.0% investment in Bitel at cost as at December 31,2005.

On March 3, 2006, Mr. Glenn Harrigan,the court-appointed receiver of Fellowes International Holdings Limited (“Fellowes”),a  British Virgin Islands corporation, which alleges rights on Bitel, fileda claim with the Supreme Court of the Kyrgyz Republic seeking areview and reversal of the Supreme Court’s ruling of December 15,2005, in favor of Fellowes upholding a first instance court’sdecision, whereby the shares in Bitel were transferred to Fellowes. Mr. Harriganseeks a reversal of the Kyrgyz Supreme Court ruling on thegrounds that the persons who had represented Fellowes before the Kyrgyz SupremeCourt were not authorized to represent Fellowes. Fellowes is notaffiliated with MTS. MTS will continue to vigorously assert itsrights with respect to Bitel in the courts of Kyrgyzstan.

Currently, MTS is working withTarino Limited’s 49% shareholder to recover ownership and operationalcontrol of Bitel. Also, there is on-going litigation in theBritish Virgin Islands and arbitration in the United Kingdom relatedto Tarino’s ownership of Bitel. These matters are likelyto be subject of continued and/or new legal disputes andlitigation, including concerning the agreements with respect to TarinoLimited. It is not possible at this time to predict theoutcome or resolution of any such disputes or litigation;however, MTS believes that its position is meritorious. The Group’smanagement believes that no impairment of its investment in Bitel has occurredas at December 31, 2005.

F-54

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**21.**   OPERATING LICENSES

In connection with providing telecommunication services, the Group hasbeen issued various operating GSM licenses by the Russian Ministry ofInformation Technologies and Communications. In addition to the licensesreceived directly from the Russian Ministry of Information Technologies andCommunications, the Group was granted access to various telecommunicationlicenses through acquisitions. In foreign subsidiaries the licenses are grantedby the local Communication Ministries. At December 31, 2005 and 2004,recorded values of the Group’s telecommunication licenses were as follows:
|                                                           | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Moscow  license area                                      |       |                        | $          | 258,226                     |       |   |   | $ | 255,812 |   |   |
| Krasnodar  and Adigeya regions                            |       |                        | 124,396    |                        |       |   | 124,396 |   |   |
| Tatarstan  Republic                                       |       |                        | 104,159    |                        |       |   | 104,159 |   |   |
| Five  regions of Asian Russia                             |       |                        | 91,202     |                        |       |   | 91,202 |   |   |
| North-Western  region                                     |       |                        | 74,639     |                        |       |   | 74,639 |   |   |
| Seven  regions of European Russia                         |       |                        | 62,266     |                        |       |   | 19,503 |   |   |
| Ukraine                                                   |       |                        | 61,717     |                        |       |   | 56,322 |   |   |
| Krasnoyarsk  region, Taimyr region and Khakassia Republic |       |                        | 52,625     |                        |       |   | 52,625 |   |   |
| Turkmenistan                                              |       |                        | 50,503     |                        |       |   | — |   |   |
| Tomsk  region                                             |       |                        | 49,282     |                        |       |   | 49,282 |   |   |
| Bashkortostan  Republic                                   |       |                        | 48,932     |                        |       |   | 48,932 |   |   |
| Far  East                                                 |       |                        | 48,107     |                        |       |   | 48,107 |   |   |
| Uzbekistan                                                |       |                        | 40,861     |                        |       |   | 40,861 |   |   |
| Other                                                     |       |                        | 97,338     |                        |       |   | 107,096 |   |   |
| Licenses,  at cost                                        |       |                        | 1,164,253  |                        |       |   | 1,072,936 |   |   |
| Accumulated  amortization                                 |       |                        | (561,137   | )                           |       |   | (385,664 | ) |   |
| Licenses, net                                             |       |                        | $          | 603,116                     |       |   |   | $ | 687,272 |   |   |

 

Amortization expense for the years ended December 31,2005, 2004 and 2003, amounted to $194.3 million, $151.9 million and $105.7million, respectively.

Based on the amortizable operating licensesexisting at December 31, 2005, the estimated future amortization expensesare $207.8 million during 2006, $163.1 million during 2007, $102.0 millionduring 2008, $41.8 million during 2009, $37.4 million during 2010 and $51.0million thereafter. Actual amortization expense to be reported in futureperiods could differ from these estimates as a result of newintangible assets acquisitions, changes in useful lives and other relevantfactors.

F-55

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**21. OPERATING LICENSES (Continued)**

Each of the Group’s licenses, except thelicenses covering the Moscow license area and Uzbekistan, contains arequirement for service to be commenced and for subscriber number andterritorial coverage targets to be achieved by a specified date. The Group hasmet these targets or received extensions to these dates in those regionallicense areas in which the Group has not commenced operations. Managementbelieves that the Group is in compliance with all material terms of itslicenses.

The Group’soperating licenses do not provide for automatic renewal. The Group has limitedexperience with the renewal of its existing licenses. Management believes thatlicenses required for the Group’s operations will be renewed upon expiration.

**22. COMMITMENTS AND CONTINGENCIES**

***Capitalcommitments***—As of December 31,2005, the Group had executed non-binding purchase agreements in the amount ofapproximately $388.2 million to subsequently acquire property, plant andequipment.

***Operating leases***—The Group has entered into lease agreements of space fortelecommunication equipment and offices, which expire in various years up to2054. Rental expenses under these operating leases of $73.2 million, $54.0million and $32.0 million for the years ended December 31, 2005, 2004 and 2003, respectively, are included in operatingexpenses in the accompanying statements of operations. Future minimum leasepayments due under non-cancelable leases at December 31, 2005 are asfollows:
| Payments due in the years ended December 31, |   |   |    |
|---------------------------------------------------|--------|--------|---------|
| 2006                                              |   | $      | 54,155  |   |
| 2007                                              |   | 23,780 |    |
| 2008                                              |   | 19,782 |    |
| 2009                                              |   | 16,311 |    |
| 2010                                              |   | 11,722 |    |
| Thereafter                                        |   | 34,308 |    |
| Total                                             |   | $      | 160,058 |   |

 

***Operatinglicenses******—***Since the commencement of MTS’ operations in 1994, a number of telecommunicationlicenses for the Russian Federation were issued to MTS and its consolidatedsubsidiaries. These license agreements stipulated that certain fixed “contributions”be made to a fund for the development oftelecommunication networks in the Russian Federation. According to theterms of licenses, such contributions were to be made during the license periodupon the decision and as defined by the Board of Directors of the Associationof GSM-900 Operators (“the Association”). The Association is a nongovernmental, not-for-profit association, and theirBoard of Directors comprises representatives of the major cellularcommunications companies, including MTS. On January 1,2004, a new Federal Law on Communications came into effect in the RussianFederation. According to the Law the Group was required to updateoperating licenses as requirements to make certain fixed contributionsdiscussed above has been abandoned with the new Law on Communications. As af December 31,2005 MTS’ 

F-56

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**22. COMMITMENTS AND CONTINGENCIES (Continued)**

potential liability according to the terms of licenses,that still provide for the payment of such fees, could total approximately$18.1 million.

The Association has not adopted anyprocedures enforcing such payments and no such procedures have beenestablished by Russian legislation. To date, MTS has not made any such paymentspursuant to any of the current operating licenses issued to MTS and itsconsolidated subsidiaries. Further, the management of MTS believes thatMTS will not be required to make any such payments in the future. Inrelation to these uncertainties, MTS has not recorded a contingent liability inthe accompanying consolidated financial statements.

***Issuedguarantees***—As of December 31, 2005, the Group hasissued guarantees to third party banks for the loans taken byInvest-Svyaz-Holding, a shareholder of the Group for a total amount of$3.5 millions (see also Note 18). The guarantees expire by May 2006.The Group issued additional guarantees on behalf of MTS-Belarus, an equityinvestee, for the total amount of $9.0 million. The guarantees expire by April 2007.The issued guarantees are recorded at fair value in the accompanyingconsolidated balance sheet.

As of December 31, 2005, no event ofdefault has occurred under any of the guarantees issued by the Group.

***Contingencies***—The Russian economy, while deemed to be of market status beginningin 2002, continues to display certain traits consistent with that of anemerging market. These characteristics have in the past included higher thannormal inflation, insufficient liquidity of the capital markets, and theexistence of currency controls which cause the national currency to be illiquidoutside of Russia. The continued success andstability of the Russian economy will be subject to the government’s continuedactions with regard to supervisory, legal, and economic reforms.

The new Federal Law on Communications setsthe legal basis for the telecommunications business in Russia and defines thestatus that state bodies have in the telecommunications sector. In addition,the law created a universal service fund (“USF”) charge, which became effectiveMay 3, 2005, calculated as 1.2% of revenue from services provided tocustomers, excluding interconnection and other operators’ traffic routingrevenue. The Company has incurred approximately $30.3 million in USF chargesfor May through December 2005 which is recorded in other operatingexpenses. In addition, a recent amendment to the Federal Law on Communicationswhich is planned to become effective July 1, 2006 will implement the “callingparty pays,” or CPP, principle prohibiting mobile operators from charging theirsubscribers for incoming calls. Generally operators charge subscribers forincoming calls. Under the new system, fixed line operators will begin chargingtheir subscribers for such calls and transfer a percentage of the charge to mobileoperators terminating such calls while mobile operators will not. Theintroduction of CPP may have a negative impact on the Group’s service revenuesdepending on the settlement rate between mobile and fixed line operators set bythe government. While the impact of this regulatory change at this point isuncertain due to the insufficient information made available to the market bythe regulator, management believes it will not have a material adverse effectfor the Group.

F-57

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**22. COMMITMENTS AND CONTINGENCIES (Continued)**

Russia currently hasa number of laws related to various taxes imposed by both federal and regionalgovernmental authorities. Applicable taxes include value added tax (“VAT”),corporate income tax (profits tax), a number of turnover-based taxes, andpayroll (social) taxes, together with others. Laws related to these taxeshave not been in force for significant periods, in contrast to more developedmarket economies; therefore, the government’s implementation of theseregulations is often inconsistent ornonexistent. Accordingly, few precedents with regard to tax rulings have beenestablished. Tax declarations, together with other legal compliance areas (forexample, customs and currency control matters), are subject to review andinvestigation by a number of authorities, which are enabled by law to imposeextremely severe fines, penalties and interest charges. These facts create taxrisks in Russia that is more significant than typically found in countries withmore developed tax systems.

In March 2005, the Russian taxauthorities audited MTS OJSC’s compliance with tax legislation for the yearended December 31, 2002. Based on the results of this audit, the Russiantax authorities assessed that 372,153 thousand rubles (approximately $12.9 millionas at December 31, 2005) of additional taxes, penalties and fines werepayable by the Group. The Group has prepared and filed with the Arbitrary Courtof Moscow a petition to recognize the tax authorities’ resolution to bepartially invalid. The amount of disputed taxes and fines equals281,504 thousand rubles (approximately $9.8 million). The Group hasalready passed three court hearings which resulted in court judgments in favourof the Group , while one sitting remains. Generally, tax declarations remain open and subject toinspection for a period of three years following the tax year. As of December 31, 2005, tax declarations of the Groupfor the preceding three fiscal years were open for further review.

There are regulatory uncertainties inUkraine related to treatment for VAT purposes of contributions payable to theUkrainian pension fund (“Pension Fund”) in respect of the consumption oftelecommunication services by customers. The additional VAT calculated on thePension Fund contribution could be up to $38.1 million as of December 31, 2005.This amount includes $13.5 million which was claimed by the tax authoritiesduring their recent tax audit. In 2005, UMC initiated a litigation case inrespect of this issue against the tax authorities, and has received favorablerulings from the courts of two instances, which are expected to become subjectto further appeal from the tax authorities. Management believes that VAT wasnot applicable to the Pension Fund contribution during the period underreview.  Further, management believesthat UMC is in line with industry practice and intends to defend its position.As of December 31, 2005, no VAT in relation to the above had been accrued inthe Group’s consolidated financial statements or paid to the tax authorities. 

During 2005, a number of amendments to theLaw on VAT were introduced, which resulted in uncertainty in respect oftreatment of Pension Fund charges for the purposes of VAT and corporate incometax. As a result of this uncertainty, the accompanying consolidated financialstatements reflect a provision for VAT charges of $6.0 million, which isincluded within accrued liabilities. The maximum exposure of this risk on UMC’sincome tax position as of December 31, 2005, amounts to $7.5 million pluspenalties of up to 100% of tax liability. No provision was created in theaccompanying consolidated financial statements as a result of this risk.

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**22. COMMITMENTS AND CONTINGENCIES (Continued)**

In the ordinary course of business, MTS maybe party to various legal and tax proceedings, and subject to claims,certain of which relate to the developing markets and evolving fiscal and regulatoryenvironments in which MTS operates. In the opinion of management, the MTS’sliability, if any, in all pending litigation, other legal proceeding orother matters will not have a material effect upon the financial condition,results of operations or liquidity of MTS.

Management believesthat it has adequately provided for tax liabilities in the accompanyingconsolidated financial statements; however, the risk remains that relevantauthorities could take differing positions with regard to interpretive issuesand the effect could be significant.

The Group’s operations in Turkmenistan are subject to certainrestrictions in accordance with local regulatory environment including, but notlimited to, hard currency sale on the local market and hard currencyrepatriation. The effect of those restrictions on the financial statements isnot material.

**23. SEGMENT INFORMATION**

SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information”, established standards forreporting information about operating segments in financial statements.Operating segments are defined as components of an enterprise engaging inbusiness activities about which separate financial information is availablethat is evaluated regularly by the chief operating decision maker or group indeciding how to allocate resources and in assessing performance.

As a result of reorganization of the Group’smanagement structure started in 2004 there was created a new intermediatemanagement level named macro-regions, which is intended to replace the legalentities-based management structure. Each macro-region (“MR”) consists of 3 to8 operational regions, excluding macro-region Moscow, that consists of oneregion. Commencing January 2005, the Group’s business is organizedand managed by ten Russian macro-regions and foreign subsidiaries. Managementof the Group regularly reviews certain operational and financial information bymacro-regions, therefore segment information below is presented onmacro-regional basis. Discrete financial information on this basis is availablestarting from 2005. The Group has restated the corresponding items of segmentinformation for the year 2004, however it is impracticable to do so forthe year 2003.

Intercompany eliminations presented belowconsist primarily of the following items: intercompany sales transactions,elimination of gross margin in inventory and other intercompany transactionsconducted under the normal course of operations.

F-59

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**23. SEGMENT INFORMATION (Continued)**

At December 31,2005, the Group has several operating segments, of which six are reportablesegments macro-regions Moscow, North-West, South, Siberia, Far East andUkraine.
|                                                                 | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Revenue:                                                        |       |                                       |       |   |   |
| MR Moscow                                                       |       | $                                          | 1,867,435  |   | $ | 1,693,685 |   |
| MR Ukraine                                                      |       | 1,201,827                                  |       | 832,313 |   |
| MR North-West                                                   |       | 384,743                                    |       | 347,881 |   |
| MR South                                                        |       | 347,819                                    |       | 260,173 |   |
| MR Siberia                                                      |       | 296,353                                    |       | 225,188 |   |
| MR Far East                                                     |       | 282,925                                    |       | 110,562 |   |
| Other                                                           |       | 1,054,871                                  |       | 810,855 |   |
| Intercompany  eliminations                                      |       | (424,955                                   | )          | (393,663 | ) |
| Total revenue                                                   |       | $                                          | 5,011,018  |   | $ | 3,886,994 |   |
| Depreciation and amortization:                                  |       |                                       |       |   |   |
| MR Moscow                                                       |       | $                                          | 224,653    |   | $ | 194,873 |   |
| MR Ukraine                                                      |       | 153,795                                    |       | 124,935 |   |
| MR North-West                                                   |       | 86,244                                     |       | 64,036 |   |
| MR South                                                        |       | 91,407                                     |       | 81,749 |   |
| MR Siberia                                                      |       | 54,846                                     |       | 39,548 |   |
| MR Far East                                                     |       | 42,776                                     |       | 15,572 |   |
| Other                                                           |       | 257,944                                    |       | 158,333 |   |
| Intercompany eliminations                                       |       | (4,552                                     | )          | (3,317 | ) |
| Total depreciation and amortization                             |       | $                                          | 907,113    |   | $ | 675,729 |   |
| Operating income:                                               |       |                                       |       |   |   |
| MR Moscow                                                       |       | $                                          | 630,300    |   | $ | 585,735 |   |
| MR Ukraine                                                      |       | 431,292                                    |       | 317,860 |   |
| MR North-West                                                   |       | 131,397                                    |       | 126,791 |   |
| MR South                                                        |       | 80,929                                     |       | 67,209 |   |
| MR Siberia                                                      |       | 71,376                                     |       | 71,437 |   |
| MR Far East                                                     |       | 78,510                                     |       | 37,856 |   |
| Other                                                           |       | 213,861                                    |       | 217,021 |   |
| Intercompany  eliminations                                      |       | (5,634                                     | )          | (4,846 | ) |
| Total  operating income                                         |       | $                                          | 1,632,031  |   | $ | 1,419,063 |   |
| Total operating income                                          |       | $                                          | 1,632,031  |   | $ | 1,419,063 |   |
| Currency exchange and transaction gains                         |       | (10,319                                    | )          | (6,529 | ) |
| Interest income                                                 |       | (24,828                                    | )          | (21,792 | ) |
| Interest expense                                                |       | 132,474                                    |       | 107,956 |   |
| Equity in net income of associates                              |       | (42,361                                    | )          | (24,146 | ) |
| Other expenses/(income)                                         |       | 13,211                                     |       | (9,310 | ) |
| Income before provision for income taxes  and minority interest |       | $                                          | 1,563,854  |   | $ | 1,372,884 |   |

 

F-60

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**23. SEGMENT INFORMATION (Continued)**
|                                      | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Additions  to long-lived assets:     |       |                                       |       |   |   |
| MR Moscow                            |       | $                                          | 632,659    |   | $ | 493,086 |   |
| MR Ukraine                           |       | 719,279                                    |       | 303,761 |   |
| MR North-West                        |       | 150,570                                    |       | 158,494 |   |
| MR South                             |       | 144,449                                    |       | 198,287 |   |
| MR Siberia                           |       | 112,062                                    |       | 90,277 |   |
| MR Far East                          |       | 90,326                                     |       | 241,716 |   |
| Other                                |       | 488,891                                    |       | 343,529 |   |
| Total additions to long-lived assets |       | $                                          | 2,338,236  |   | $ | 1,829,150 |   |
| Goodwill:                            |       |                                       |       |   |   |
| MR Moscow                            |       | $                                          | —     |   | $ | — |   |
| MR Ukraine                           |       | 8,000                                      |       | 8,000 |   |
| MR North-West                        |       | —                                     |       | — |   |
| MR South                             |       | 26,302                                     |       | — |   |
| MR Siberia                           |       | —                                     |       | — |   |
| MR Far East                          |       | 33,494                                     |       | 30,590 |   |
| Other                                |       | 87,425                                     |       | 69,739 |   |
| Total goodwill                       |       | $                                          | 155,221    |   | $ | 108,329 |   |
| Long-lived  assets:                  |       |                                       |       |   |   |
| MR Moscow                            |       | $                                          | 1,855,619  |   | $ | 1,434,101 |   |
| MR Ukraine                           |       | 1,390,966                                  |       | 838,020 |   |
| MR North-West                        |       | 398,739                                    |       | 344,691 |   |
| MR South                             |       | 430,197                                    |       | 362,772 |   |
| MR Siberia                           |       | 294,195                                    |       | 227,112 |   |
| MR Far East                          |       | 292,414                                    |       | 248,566 |   |
| Other                                |       | 1,306,951                                  |       | 1,024,597 |   |
| Intercompany eliminations.           |       | (47,040                                    | )          | (37,408 | ) |
| Total long-lived assets              |       | $                                          | 5,922,041  |   | $ | 4,442,451 |   |
| Total assets:                        |       |                                       |       |   |   |
| MR Moscow                            |       | $                                          | 2,729,964  |   | $ | 2,348,288 |   |
| MR Ukraine                           |       | 1,560,762                                  |       | 993,997 |   |
| MR North-West                        |       | 458,829                                    |       | 418,131 |   |
| MR South                             |       | 491,352                                    |       | 498,695 |   |
| MR Siberia                           |       | 448,320                                    |       | 307,408 |   |
| MR Far East                          |       | 384,020                                    |       | 303,384 |   |
| Other                                |       | 1,934,150                                  |       | 1,172,691 |   |
| Intercompany eliminations            |       | (461,617                                   | )          | (461,407 | ) |
| Total assets                         |       | $                                          | 7,545,780  |   | $ | 5,581,187 |   |

 

F-61

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**23. SEGMENT INFORMATION (Continued)**

For comparative purposes thesegment information is presented below on a prior years basis.
|                                                                 | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue:                                                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| MTS  OJSC                                                       |       | $                                          | 2,360,542  |   | $ | 2,129,544 |   | $ | 1,471,198 |   |
| UMC(1)                                                          |       | 1,201,827                                  |       | 832,313 |   | 394,038 |   |
| Telecom  XXI(2)                                                 |       | 382,897                                    |       | 297,194 |   | 210,460 |   |
| Kuban  GSM(2)                                                   |       | 270,157                                    |       | 225,350 |   | 168,401 |   |
| Other                                                           |       | 1,220,550                                  |       | 796,256 |   | 432,770 |   |
| Intercompany  eliminations                                      |       | (424,955                                   | )          | (393,663 | ) | (130,669 | ) |
| Total  revenue                                                  |       | $                                          | 5,011,018  |   | $ | 3,886,994 |   | $ | 2,546,198 |   |
| Depreciation and amortization:                                  | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| MTS  OJSC                                                       |       | $                                          | 331,642    |   | $ | 253,485 |   | $ | 199,946 |   |
| UMC                                                             |       | 153,795                                    |       | 124,935 |   | 66,392 |   |
| Telecom  XXI                                                    |       | 86,138                                     |       | 57,265 |   | 36,782 |   |
| Kuban  GSM                                                      |       | 67,927                                     |       | 68,140 |   | 32,299 |   |
| Other                                                           |       | 272,163                                    |       | 175,221 |   | 82,185 |   |
| Intercompany  eliminations                                      |       | (4,552                                     | )          | (3,317 | ) | (1,688 | ) |
| Total  depreciation and amortization                            |       | $                                          | 907,113    |   | $ | 675,729 |   | $ | 415,916 |   |
| Operating income:                                               |       |                                       |       |   |   |   |   |
| MTS OJSC                                                        |       | $                                          | 672,666    |   | $ | 728,101 |   | $ | 527,837 |   |
| UMC                                                             |       | 431,292                                    |       | 317,860 |   | 131,704 |   |
| Telecom  XXI                                                    |       | 131,318                                    |       | 104,936 |   | 80,632 |   |
| Kuban  GSM                                                      |       | 99,904                                     |       | 74,622 |   | 74,599 |   |
| Other                                                           |       | 302,485                                    |       | 198,390 |   | 123,577 |   |
| Intercompany  eliminations                                      |       | (5,634                                     | )          | (4,846 | ) | (15,751 | ) |
| Total  operating income                                         |       | $                                          | 1,632,031  |   | $ | 1,419,063 |   | $ | 922,598 |   |
| Total  operating income                                         |       | $                                          | 1,632,031  |   | $ | 1,419,063 |   | $ | 922,598 |   |
| Currency  exchange and transaction gains                        |       | (10,319                                    | )          | (6,529 | ) | (693 | ) |
| Interest  income                                                |       | (24,828                                    | )          | (21,792 | ) | (18,076 | ) |
| Interest  expense                                               |       | 132,474                                    |       | 107,956 |   | 106,551 |   |
| Equity  in net income of associates                             |       | (42,361                                    | )          | (24,146 | ) | (2,670 | ) |
| Other  expenses/(income)                                        |       | 13,211                                     |       | (9,310 | ) | 6,090 |   |
| Income  before provision for income taxes and minority interest |       | $                                          | 1,563,854  |   | $ | 1,372,884 |   | $ | 831,396 |   |
| Additions to long-lived assets:                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| MTS  OJSC                                                       |       | $                                          | 760,471    |   | $ | 679,023 |   | $ | 389,446 |   |
| UMC(1)                                                          |       | 719,279                                    |       | 303,761 |   | 900,465 |   |
| Telecom  XXI                                                    |       | 214,207                                    |       | 62,333 |   | 174,128 |   |
| Kuban  GSM                                                      |       | 50,570                                     |       | 69,689 |   | 172,949 |   |
| Other                                                           |       | 593,709                                    |       | 714,344 |   | 393,526 |   |
| Total  additions to long-lived assets                           |       | $                                          | 2,338,236  |   | $ | 1,829,150 |   | $ | 2,030,514 |   |

----

(1)           Acquired in March 2003.

(2)           merged with MTS OJSC onJuly 1, 2005

F-62

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Amounts in thousands of U.S. dollars, except share and per share amounts or if otherwise stated)**

**23. SEGMENT INFORMATION (Continued)**
|                                                                                                                                   | ** ** | **December, 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                        | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Long-lived assets:                                                                                                                |       |                  |       |   |   |
| MTS OJSC                                                                                                                          |       | $                     | 2,371,664  |   | $ | 1,891,869 |   |
| UMC,  including goodwill in the amount of $8,398 as of December 31, 2005 and  2004        |       | 1,390,966             |       | 838,020 |   |
| Telecom XXI                                                                                                                       |       | 398,217               |       | 295,505 |   |
| Kuban GSM                                                                                                                         |       | 263,684               |       | 279,883 |   |
| Other,  including goodwill in amounts of $146,823 and $100,329 as of  December 31, 2005 and 2004, respectively               |       | 1,544,550             |       | 1,174,582 |   |
| Intercompany  eliminations                                                                                                        |       | (47,040               | )          | (37,408 | ) |
| Total  long-lived assets                                                                                                          |       | $                     | 5,922,041  |   | $ | 4,442,451 |   |
| Total assets:                                                                                                                     |       |                  |       |   |   |
| MTS OJSC                                                                                                                          |       | $                     | 5,224,821  |   | $ | 2,717,814 |   |
| UMC                                                                                                                               |       | 1,560,762             |       | 993,997 |   |
| Telecom XXI                                                                                                                       |       | 456,469               |       | 363,888 |   |
| Kuban GSM                                                                                                                         |       | 317,841               |       | 393,656 |   |
| Other                                                                                                                             |       | 447,504               |       | 1,573,239 |   |
| Intercompany  eliminations                                                                                                        |       | (461,617              | )          | (461,407 | ) |
| Total assets                                                                                                                      |       | $                     | 7,545,780  |   | $ | 5,581,187 |   |

 

**24. SUBSEQUENTEVENTS**

***Merger******—***On March 31, 2006, the Russian registration authority approvedthe merger of nine wholly-owned MTS subsidiaries in Russia into MTS OJSC. Thesesubsidiaries are Gorizont RT, TAIF Telcom, MTS-RTK, Sibchallenge, Tomsk Cellular Communications (“TSS”), BM Telekom, FarEast Cellular Systems-900 (“FECS—900”), Siberian Cellular Systems—900 (“SCS-900”)and Uraltel. The merger was completed in line with the Group’s strategy toconsolidate administratively all its majority-owned subsidiaries and improvemanagement efficiency.

***HSBC Bank plc******—***In January 2006, MTS OJSC entered into a credit facilityagreement with HSBC Bank plc. The facility allows borrowing of up to $100.0million. The funds received will be used for general corporate purposes. Theloan bears interest of LIBOR+0.75% per annum. An arrangement fee in the amountof $0.6 million should be paid in accordance with the agreement. The facilityshould be repaid by July 2006.

***Syndicatedloan******—***On April 21, 2006, MTS OJSC signed a syndicated loanfacility with international financial institutions: The Bank ofTokyo-Mitsubishi UFJ, Ltd., Bayerische Landesbank, HSBC Bank plc, ING BankN.V., Raiffeisen Zentralbank Oesterreich AG, Sumitomo Mitsui BankingCorporation Europe Limited. The facility allows the Group to borrow up to a$1,330.0 million and is available in two tranches of $630.0 million and $700.0million. The proceeds will be used by OJSC MTS for general corporatepurposes, including acquisitions and refinancing of existing indebtedness. Thefirst tranche bears interest of LIBOR+0.80% per annum and matures in 3 years.The second tranche matures in April 2011, bears interest of LIBOR+1.00%per annum within the first three years and LIBOR+1.15% per annum thereafter andis repayable in 13 equal quarterly installments, commencing in April, 2008. Thesenotes are subject to certain restrictive covenants, including, but not limitedto, certain financial ratios, limitations on dispositions of assets andlimitations on transactions with associates.

F-63

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